Current idea

Tcairman of L’Occitane has been in discussions to take the company private at a share price of up to HK$35.00 with an implied upside to the reported potential offer price of ≈25%.

Update: September 18, 2023

After the take-private of the company as outlined in the pitch did not materialize, shares have recovered significantly since the initial -30% drop. Since publishing the idea, shares have now lost -9% following the cancelled take-private. Given the significant discount (company trading at half the multiples of its peers) and the strong rebound since the initial sell-off, I am keeping the idea online with good chances that losses can be fully recovered.  

Company Profile

L’Occitane International S.A. is a well-known global luxury cosmetics company. The company listed in Hong Kong in 2010 at a time when China seemed to be the new frontier for luxury products. The company likely hoped that listing in Hong Kong would result in a premium valuation over more traditional listing venues such as New York, Paris, or Milan. Other Western (luxury) firms that had similar thinking include luggage maker Samsonite S.A. (HKEX:1910), Italian luxury fashion house Prada S.p.A. (HKEX:1913) and Italian luxury yacht builder Ferretti S.p.A. (HKEX:9638).

Hopes for a premium valuation were never fulfilled and L'Occitane now trades at a significant discount to the multiples of its peer group whose members are listed in Paris, Tokyo or New York.

Michael Fritzell of Asian Century Stocks (Link) published a detailed write-up on the company recently should one be more interested in the details of the firm. This note solely focuses on a potential take-private transaction.

The Bloomberg article last week speculated that Chairman and largest shareholder Reinold Geiger was planning on taking the company private with the plan to then re-list it in Europe or the US next year. This is a very interesting arbitrage idea for the majority owner, although at a fairly large scale, given the substantial discount to Western listing destinations.

The stock was halted on Wednesday, August 11, 2023, at the request of the company following the rumors but resumed trading on Monday, August 14, 2023, with the stock gaining a further 8.8% closing at HK$27.75.

The company issued a “trading update” to the HKEX in which it commented on the rumors (more on that in a bit). In the update, the company requested the trading halt to be lifted.

Ownership structure

L’Occitane’s ownership structure makes a take-private relatively easy, with below 30% of shares in free-float. The public entity is majority owned by its parent – a private entity named L’Occitane Group S.A. – that holds 72.5% of the shares in the public entity. The parent is owned by its management team with Chairman Mr. Geiger holding about 60% of the parent. A decision to take the company private could be made by the parent in unison.

Conflicting reports around offer price

In its article, Bloomberg reported that people familiar with the matter said that conversations between Mr. Geiger and financing partners went around a potential take-private at HK$35.00/share.

In the market update released by the company to the Hong Kong Stock Exchange, it addressed the rumors around a potential transaction. In the update, it disputed parts of the Bloomberg report but confirmed the main parts to the story, in that it’s

• parent is indeed looking at the option to take it private, and

• that an offer would be made at a minimum of HK$26.00/share.

What I found quite interesting in that market update (Link) was the harsh wording regarding a HK$35.00/share price for a take-out and the reference to a potential timeline (“thinking about re-listing the company in Europe as soon as next year”).

“Misleading” and “baseless” sounds pretty aggressive and such wording is usually heard from companies under attack from some short seller. I could imagine that the team is simply frustrated and just very angry over the fact that the story leaked, the share price climbed and that they are trying to extinguish euphoria.

Essentially, by confirming a HK$26.00/share minimum takeout price, they have put a floor under the share price in the case that they will go forward with their plan of taking the company private and listing it in Europe or NY again.

Say that the transaction works out at a take-out price of HK$35 and a re-listing happens somewhere close to 30x NTM EPS, the arbitrage works out to a 40% gain for Mr. Geiger, resulting in a US$740m windfall. Not too bad for an arbitrage trade in shares you already hold and likely want to keep holding.

Alignment of interests

Bidder: The apparent brain behind the situation, Mr. Geiger, would profit nicely from this move should it be completed as illustrated above. He personally could make over US$500m in a conservative scenario from completing this deal. Also, the bidder would need to purchase only the minority shares while could theoretically list all shares in a re-listing, creating asymmetric upside. Minorities: For minorities, selling the shares for an attractive price in the region of HK$35 would let them sell at an all-time-high, making the transaction quite attractive. As it is unlikely that the valuation gap to Western-listed peers will be closed without some corporate action, I'd argue that a de-listing would create most value for shareholders in the current listing set-up.

Price: Obviously, the bidder would want to pay as little as possible for the outstanding shares of the minority shareholders. The fact that the news about a potential transaction leaked and pushed up the share price would make me angry, too, which could explain the harsh wording in the market update. However, should the bidder want to go forward with the transaction, it'd likely have to offer something above the self-imposed floor of HK$26 to make it attractive enough for existing and fair-enough looking for potential new shareholders in case of a re-listing next year. I would guess that the HK$35 rumor would be quite feasable from a financial point of view for the bidder and enough of an argument for minorities to sell their shares.

EDIT I: August 22, 2023: Additional info on HK takeover code and treatment of minorities:

The Hong Kong Take-over code states that “Rights of control should be exercised in good faith and the oppression of minority or non-controlling shareholders is always unacceptable“ (Link).

Law firm Baker McKenzie provides an extensive resource collection on Hong Kong M&A rules (as well as for other markets) on their website (Link).

Particularly important in this situation set-up are the rules around treatment of minority shareholders and the potential of squeezing them out at an unfavorable price. Essentially, the rules in Hong Kong state that an offeror needs to hold at least 90% of all outstanding shares to give a squeeze-out notice to minority shareholders.

The private parent of L’Occitane International S.A. currently holds “just” 72.5% of shares. Hong Kong securities law also gives certain rights to shareholders owning specific hurdle rates of stock; The private parent, should it be able to collect another 2.5% of shares, would be eligible to approve a take private, however would need approval from then still >40% of remaining minority shareholders (as at least 90% of all shareholders would have to agree to the transaction). I believe this is quite relevant as it makes it unlikely that they will try to lowball an offer to minority shareholders. Should they be serious about going through with the transaction, they’d likely face resistance from minorities or potentially some activist with a low offer at or around just HK$26/share.

However, if the plan is to re-list the company within a year, as management I would surely want to avoid screwing over minority investors now as that would not be such a pretty look for potential new shareholders in the near future.

Minorities would also get paid at an all-time high of the stock, making this an attractive proposal.

EDIT II: August 22, 2023: Additional information on timeline

In Hong Kong, the local takeover code gives market participants a written timeline upon which they shall act when making a move on another company.

As straightforward as that is, however, the timeline or rather the question of whether it already applies in this case is a bit confusing.

In that August 11 market update, L’Occitane’s parent confirmed that it was contemplating a potential offer to take the company private at a price not lower than HK$26/share. Under the section “Dealing Disclosures” it is stated that the “offer period commenced”, which leads me to believe that the timeline as stated in the takeover code may have already begun.

The takeover code states that a bidder is required to make an announcement of a possible offer if the target company is subject to rumors or speculation about a possible move. Clearly, the Bloomberg article was such an instance upon which its parent then made the market update on August 11.

According to the takeover code, the offer period begins as of an announcement even of just a possible offer. What is unclear to me here, is whether only more strict and detailed disclosures around related and associated parties of the bidder are now required (given that only an announcement regarding the rumors was made) or whether the timeline of making a firm bid has begun.

As of this due diligence edit, I am leaning towards that the offer period has begun, but that the parent is not under obligation to make a formal offer within 21 days but rather that all involved parties are now just required to make additional dealings disclosures as stated in rule 22 of the takeover code.

To my understanding under the timeline, L’Occitane’s private owners would need to file a formal offer to acquire the remaining shares within 21 days of making an announcement of an offer. What is confusing is that in their market update they have already made one condition, in that an offer would not come in under HK$26/share. One could theoretically see this as the outline of an offer. But again, I am interpreting the filing simply as a comment on the rumors that the bidder was required to make.

Risks

Obviously, taking a position after a 45% run-up is more risky than it was about a month ago. The deal could fall apart and shares would likely re-rate lower. However, the company is still trading at a significant discount to its peers (for numerous valid reasons of course: Hong Kong-Listing, minority stake as free float) and is still attractively priced for what it is.

I can see an immediate downside to somewhere in the range of HK$20-24/share of news of the deal falling apart, which would result in a downside in the range of -20%. The bet is not asymmetric on an immediate time horizon, but the discount to peers does give some comfort.

Should Mr. Geiger & Co. decide to make a low-ball offer, this would likely be at a minimum of HK$26 as they said in their trading update with minimal downside.

But the risks are two ways here: One can also argue that the risk of missing out on a large gain in re-listing the company is actually a major risk for Mr. Geiger and his management colleagues; not going through with the move might actually cost them more in opportunity cost than not spending a couple more HK-bucks for the buyout at an attractive price for minorities.

Conclusion

Put together, I’d say that the maneuver makes a lot of sense for the potential bidder and the logic behind the potential transaction is quite clear. The interests are aligned and the valuation, although surely not as cheap as it was just a month ago, offers some degree of a margin of safety, given the large discount to its peer group and the company already confirming that an offer would be made at least at HK$26/share.

Regarding a potential timeline, one could imagine that they’d want to move in a more or less timely fashion. A further re-rating would make the case void. Shares could potentially re-rate higher but not to a level of their European / US / Japanese peers, posing a risk by not extending a formal de-listing offer over the short term. Same goes the other way obviously with them hoping that prices fall again and that they can lowball their offer.

Quick note on trading in HK

Shares of companies listed on the Hong Kong Stock Exchange are traded in lot sizes of 100 shares.