Yesterday at the end of the evening the story broke that the family controlling Sapec want to take the company private at €60/share after the payment of the €150 special dividend. This is great news, because I would have happily sold my shares for a lot less after receiving the dividend. Sapec has a book value per share of €41.60, and as you can see here I was doing my math with €30/share valuation for the stub. The book value doesn’t ascribe any value to the €36 million Sapec has provided for the Novo Bank guarantee. While the market has been skeptical about a recovery of this it could be worth up to €27/share, so the offer price of €60/share seems pretty fair. I think there is a very low risk that this deal will fall through. After the special dividend the family obviously has the liquidity to buy out minority shareholders, the fund that controls 15% of the outstanding shares has agreed to tender at €60/share and the family already controls 55% of the outstanding shares.

The timing of the announcement is a little bit unfortunate for me. The stock is scheduled to trade ex-dividend tomorrow with the payable date being Friday at the end of the week, and I thought it would be a good idea to substantially increase my position. With the majority of the cash coming back super fast the internal rate of return is pretty good, even when it would take five or six years to utilize the tax deductible this trade would generate. Yesterday the stock was halted, and today the price is of course up significantly. Luckily the math still works for me, and while it hurts to buy the stock so much higher I did execute the plan and increased my position from 5% to almost 50%!

It’s a big bet, but in my mind not as big as it sounds. I see it more as a roughly 15% position in the stub and a 5% position in a Belgium tax receivable while the Dutch tax credits provide lots of almost free upside. After the special dividend I think the stub should trade close to €60/share so I would be able to close out that part of the trade fast as well, and if it doesn’t it will probably be an attractive merger arb play.

Disclosure

Author is massively long Sapec

Sapec SA is a Belgian holding company that sold their main asset last year, and is going to pay out the majority of the proceeds using a dividend of €150/share. After the dividend is paid some additional cash and some small stakes in various businesses will remain in the holding company with a total book value of €41.60/share. Assuming a 30% holding company discount the stub should be worth roughly €30/share. So if there wouldn’t be dividend taxes you would expect that Sapec would currently be trading at roughly €180/share.

Unfortunately for many investors there are dividend taxes, and in case of Belgium these are a hefty 30 percent. Because of that the stock is trading at just €152.50/share which offers an opportunity for investors who can reclaim some of these taxes and/or use paid dividend taxes as a tax deductible. The author of the “value and opportunity” blog who has been following this situation for some time, discusses here how German investors can get around the tax issue.

Dutch investors have a similar opportunity. There is a double taxation treaty with Belgium that makes it possible to reclaim 15% of the dividend taxes from Belgium (I think most countries have this, but reclaiming the tax might not be equally easy for all countries). From what I have read the procedure isn’t that complicated, although it requires some paperwork and patience. Apparently it can take more than a year before Belgium repays the 15% of the dividend taxes. The other 15% of the dividend taxes can be used as a tax credit against the annual Dutch wealth tax. So you have to be careful not to buy a too big position because then can’t fully deduct it from your Dutch taxes (it’s possible to carry the remaining tax forward to the next year, but this add some complications that makes it not attractive for me). So the trade would look like this:

As you can see the internal rate of return of this trade is more than excellent! It’s a bit sad though for Belgium investors. Sapec is a Belgium company, and they are the ones who have no way to avoid paying the tax. The company promised to research options to return capital in a tax efficient manner for small shareholders (the big holders don’t have to pay dividend taxes), but in they end they choose the worst option possible for retail investors.

Disclosure

Author is long Sapec SA