Very long time, no post! Funny how time flies when you’re building a business, helping run a household and chasing a toddler around. But I’ve had some investing thoughts tumbling around my brain for some time, and I’m glad I still have this blog to record them. Today’s topic is on one of my specialties: a deeply-discounted, well-run, family-controlled European conglomerate. Next week, or perhaps the week after (no promises!) I will profile one of Alluvial’s newest and largest holdings.

Long-time readers may remember how much I liked Moleskine SpA, the Italian luxury notebook manufacturer. The company boasted huge margins and was experiencing rapid growth with a long runway ahead of it. I owned the stock and hoped to own it for many years, but my plans were interrupted by a Belgian company, D’ieteren SA. Moleskine’s large private equity shareholders sold their holdings to D’ieteren, which then acquired the rest of the company. I made a very good return on Moleskine, but I believe I could have made much more had I been able to remain an owner. A few weeks ago I was wondering how Moleskine’s business had performed post-acquisition. So I pulled up D’ieteren’s financial statements to have a peek. Turns out, D’ieteren itself is worth a look!

D’ieteren’s roots reach back to 1805, when the company manufactured horse-drawn coaches. With the advent of the automobile, the enterprise transitioned to automobile manufacturing, then automobile rental and sales. In 1999, D’ieteren purchased Belron and entered the automotive glass replacement and repair market. Today, D’ieteren Auto is a major distributor of Volkswagen group vehicles in Belgium, with over 20% market share. Belron operates worldwide under a variety of brand names. North American readers will likely be familiar with Safelite, as in “Safelite repair, Safelite replace!” With the additional of Moleskine, the company now operates in the consumer goods market.

Let’s take a closer look at D’ieteren’s three major segments.

D’ieteren Auto manages 125 Belgian auto dealerships and owns an additional 21 locations. The company is responsible for putting 1.2 million vehicles on the road. D’ieteren Auto’s activities also include auto financing and rentals. D’ieteren Auto is consistently profitable, but is not a growing business. As a highly developed nation with a low rate of population growth, Belgium’s auto market is saturated. Unit volume for D’ieteren Auto has not grown in a decade. In 2016, the segment earned €86.7 million. Results weakened slightly through the first half of 2017.

Valuing D’ieteren Auto is an interesting exercise. On one hand, the company enjoys high market share and a strong incumbent position through its relationship with Volkswagen and extensive dealership network. On the other hand, the number of vehicles on Belgian roads is not likely to grow. If anything, it will likely begin to shrink as self-driving cars and ridesharing services develop. Personally, I am quite bearish on the idea of personal auto ownership in the medium to long term. Were I an acquirer, I would not pay more than 9-10x trailing earnings for the segment. That works out to €720-800 million for D’ieteren Auto. That’s a nice conservative figure because the segment also bears some of D’ieteren’s corporate costs which could be removed by an acquirer.

Belron is D’ieteren’s largest segment in terms of revenues and profits. Belron has a global presence with operations on five continents. Belron offers automotive glass repair and replacement under various brand names. Belron’s revenues grew at a healthy 5.7% annual rate from 2007 to 2016. Unfortunately, profits did not grow at the same rate as margins compressed.

Putting a valuation on Belron is easy for one important reason: D’ieteren has just closed on the sale of a 40% stake in Belron to Clayton, Dubilier & Rice, a European private equity firm with an impressive pedigree. The deal was done at at equity valuation of €1,550 million, netting D’ieteren €620 million from the sale. Prior to the sale, Belron also distributed a dividend of €453 million. Prior to the sale, D’ieteren held 94.85% of Belron, so they received €430 million from the dividend. Using the €1,550 million equity valuation for Belron, the 54.85% ownership that D’ieteren has retained is worth €850 million. It’s important to do a reality check on that €1,550 million valuation, but it does appear reasonable. The transaction with Clayton, Dubilier & Rice was done at an enterprise value of €3 billion, which is about 15x trailing EBIT. Perhaps a higher ratio than I like to pay, but fairly normal for a global business with decent growth potential that can fund itself at attractive rates.

Last, there is Moleskine. Recent reports from D’ieteren show Moleskine continuing to grow at a healthy pace, though profits have declined. This is consistent with D’ieteren’s stated policy of making large investments in logistics and IT, positioning the brand for long-term growth. D’ieteren took Moleskine private at a valuation of €500 million. I think it’s fair to use that valuation even though the company’s revenues have grown. Personally, I believe Moleskine can be much more valuation over the next decade with proper management. Against this €500 million valuation, Moleskine has net debt of €300 million for a net value of €200 million.

Using the €720 million value for D’ieteren Auto results in equity value for the three segments (54.85% for Belron) of €1,770 million. To that we can add the €430 million D’ieteren received as a dividend from Belron, and the €620 million that D’ieteren received for the sale of 40% of Belron. Finally, D’ieteren group has loaned €330 million to its operating businesses, €150 million to Moleskine and the balance to Belron. Adding this loan asset creates total value for D’ieteren of €3,150 million. D’ieteren’s market capitalization is €2,190 million, a discount of more than 30%.

Following the sale of a partial stake in Belron, D’ieteren will likely owe some taxes on the gain. But the fact remains that D’ieteren trades at a distinct discount to the value of its assets. Why? I think the usual suspects are in play. D’ieteren’s float is small and the D’ieteren family is firmly in control. Only €876 million worth of shares are publicly-traded. The company defies easy categorization. Auto services and pricy Italian notebooks together? Strange. The company is also undergoing a generational transition. After 40 years as chairman, Roland D’ieteren has stepped aside in favor of his son, Nicolas. Finally, there is the issue of reinvestment. Following the sale of a sizable stake in Belron, the company is sitting on €1 billion or more of cash. What will the company buy next? It has indicated it wishes to expand its activities to new areas, but that invites the possibility of “diworsification.”

Still, I believe D’ieteren could be very attractive to the patient investor who is willing to trust the D’ieteren family to continue doing what they have done thus far: build the company in a judicious fashion, always taking the long-term view.

Alluvial Capital Management, LLC does not hold shares of D’ieteren SA/NV. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.