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Sapec - A Belgian Dividend Tax Arbitrage (14% - 36% Absolute Return)

Key facts:

Sapec, a Belgium listed company, recently concluded sale of subsidiary for 318m euro (net of debt). The company is currently trading at market cap of 218m euro with a share price of 160euro.

Sapec is majority owned by the Velge family (>50%). The second largest shareholder Cobepa has 15% ownership and acts in concert with the Velge family. Free float of the company is ~25%.

The sale of the subsidiary was first announced in November 2016, which caused the share price to have more than quadripled.

Due to the size of the company (<40m euro before November last year) and the size of the float, the company has historically had little / no institutional investors.

As a result of the sale, Sapec announced that it would seek to return 200-220m euro to shareholders (~150euro / share), although "the modalities of this distribution are not yet defined".

What is left in the company, after distributing 150euro / share cash back to shareholders? Sapec will be holding ~85euro / share cash from the sale and some businesses in industrial chemicals and logistics industries.

In addition, the Company has 43m euro extra debt, and 20m euro cash on its balance sheet.

Taking all cash & debt positions into account, Sapec has net 295m euro on its balance sheet, which translates to 218euro / share.

The issue with the left-over businesses is that they are declining YoY and operating in more opaque markets. For sake of simplification and conservatism, let's assume they are worth 0.

So where is the disconnect between 218euro cash / share vs. its current trading price of 160euro?

The answer lies in the fact that "the modalities of this distribution are not yet defined". In Belgium, normal dividend is taxed at income level, while a capital gain results in no tax.

Assuming that the left-over businesses have 0 value, the market is currently slashing a~30% tax rate to the 150euro / share dividend to be returned.


The market is assuming the worst (company issues regular dividend and no institutional investor comes in). Here are a few other possibilities:

1) The company may choose to instead return capital via tender offer, letting local investors take advantage of the zero capital gain treatment.

2) The company may structure its dividend distribution as "capital dividend", essentially allowing companies to return capital without incurring any tax on the shareholders' part.

3) Instituions with non-profit LPs (endowments, pension funds) will come in and start buying shares off the market from individuals to take advantage of the different tax treatment. For US-based Pension Funds, the US-Belgium tax treaty allows for reduced tax rate of 15% (further lowered to 5% if the institution owns 10% or more of the company).

As explained earlier, historically there has been little to no institutional attention paid due to the size of the company. With market value having quadripled to over 200m euro (still tiny, but at a size where smaller institutions will pay attention), and a spread of 14% - 36% absolute return, a valuation-rich and unstable market in the US, this market-neutral position is very attractive for professional investors looking to exploit market inefficiency.

Strategy For Individual Investor

1) Tender offer: Buy now and tender your shares

2) Capital dividend: Buy now and get the dividend (stock price will rise as a result of no expected tax associated with capital dividend)

3) Institution steps in: Buy now and sell the stock before dividend is issued (stock price will rise as a result of institutional investors taking advantage of the difference in tax treatment)

One of the above three is extremely likely to happen. It is a no brainer for institutions with reduced tax rate status to get in and exploit this opportunity.

4) What if none of the above happens?

We have been conservative in assuming that the existing business is valued at 0 and the market is currently assuming an average of 30% tax rate. People who are currently in this trade have already self-selected based on their own tax status. Therefore a possibility of significant downside is very minimal.

In summary, buying Sapec now provides a potential 14 - 36% upside in the next coming months with limited downside. For this reason, I have established a full position (10%) for the portfolio. This is a significant position but I believe the risk/return profile is attractive enough to warrant some level of concentration.

Supporting Documents

  1. 2016_Interim_Financial_Report_of_the_Sapec_Group.p...
  4. 20161125_Shareholder_actionnoriat_structure.pdf

Disclosure: I am/we are long EBR:SAP.