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Value Investing In Europe: Growth And Value Joined At The Hip

Listed in Belgium, majority-owned and run by Luc Tack, the turnaround artist of Picanol fame, Tessenderlo Group is a diversified industrial conglomerate with the bulk of its business in Europe and the United States.

Interestingly, Berkshire Hathaway director Meryl Witmer counts among minority shareholders, albeit in marginal proportions. The connection may come from the long-standing business relationship between Tessenderlo and Phillips 66, the refining giant part of Berkshire’s investment portfolio.

Mr. Tack seized control of mismanaged Picanol in 2009 as it stood on the verge of collapse. Since then its share price has appreciated thirtyfold, and now there’s a new kind of problem to deal with: the company made so much money that it doesn’t know what to do with it.

In 2014, Tack rolled out a carbon copy of his Picanol’s playbook within a new target cut from the same cloth: Tessenderlo, a formerly state-owned chemical company brought to its knees by inept management after years of debt-funded dividends, restless diworsification and extravagant salaries.

A no-nonsense capital allocator who cuts costs as he breathes and likes to fly under the radar, Tack has once again proven himself shrewd at skating where the puck is going. Assisted by his loyal right-hand men, he recapitalized the company – now sheltered by a rock-solid financial position – and magnificently turned it around.

Yet the market failed to catch up. Tessenderlo remains undervalued on a conservative sum-of-the-parts assessment (see page 92 in the latest annual report) and trades for 10x-12x its current cash earnings, which are soon expected to rise as new plants come online and the agriculture business recovers – among other call options.

The company sports well-entrenched competitive positions in each of its operational segments – agriculture, industrial, biovalorization – and has plenty of leeway to grow, especially in Europe where management is building up an operation modeled after the highly successful North-American subsidiaries.

Tarred with the wrong brush, Tessenderlo has already hit the inflection point and should soon reap the benefits of its investments. Luc Tack thinks no less, as he is feverishly buying shares every week in the open market.

(Long TESB at an average price of €25 a share.)

In Switzerland, recently incorporated Idorsia stands out as one of the most promising ventures in the pharmaceutical industry. Headed and majority-owned by accomplished scientists Jean-Paul and Martine Clozel, the company was spun-off from Actelion and listed shortly afterwards.

Focused on drug discovery, the Clozels founded Actelion twenty years ago as a garage business, before they turned it into the largest biotech in Europe, with 2,4 billion francs in sales and one billion in operating profit. They resisted countless buyout offers along the way – as well as a brutal activist push – yet finally had to give in under the pressure of other shareholders.

Actelion was thus sold to Johnson & Johnson for thirty billion dollars – a hefty multiple of 12x revenue – but the Clozels managed to have its research pipeline spun-off into a new company as part of the deal. J&J will hold an initial 16% stake in the latter, plus the rights to get a further 16% via a convertible debt issue.

Indeed, in Martine’s words, there’s material to build a second Actelion – and even “a better Actelion” – in this pipeline and its eleven compounds – four of them already in late-stage development – so the Clozels would not let go of it. And they do walk the talk, as they are actively buying shares in the open market since the listing begun.

Idorsia employs a highly regarded team of scientists and draws upon unmatched research infrastructures in Europe. Management is first-class, between the Clozels, chairman Jean-Paul Garnier – a former head of GSK – and chief financial officer Andre Muller, as usual masterful at keeping costs in check and arranging favorable financing terms.

The company starts with one billion francs in cash – a cushion that should cover three years of expenses – and has already struck promising partnerships to help it fund its research efforts. Management plans to deliver three products to the market and develop a pipeline with a sales potential of 5 billion francs over the next five years.

Should that happen, the value of the company would grow at least tenfold from now. Obviously, there’s no guarantee that Idorsia will become another Actelion – smooth sailing is out of the picture in business – but there’s nevertheless a very tangible likelihood of that prospect to happen given the fantastic teams and assets in place.

Charlie Munger once said that if he had to start over, he would look for some “Sam Walton in the early days of Wal-Mart” type of entrepreneur to put his money at work. That’s precisely what an investment in Idorsia is about.

(Long IDIA at an average price of CHF15 a share.)

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