Former Mutual Series Vet Sees Value in Europe

Russel Kinnel
January 4, 2014

We caught up with David Marcus, manager of Evermore Global Value (EVGBX), to see where he finds values today. Marcus made a good call on Europe when crises had pushed stocks there down sharply. He was bullish and that call has worked well, though the fund's record prior to Europe's rally was weak because of that Europe bias. Marcus managed funds for Mutual Series in the 1990s and posted a solid record there. His approach is clearly influenced by Mutual Series, but he's modified it a bit over time.

1) What's the strength of the Mutual Series approach that you were a part of in the 1990s, and how have you modified that strategy since leaving the firm?

The lessons I learned from working at Mutual Series under Michael Price are the foundation of what we do here at Evermore Global Advisors. The strength of Michael's approach was that it was straightforward and focused on undervalued companies where catalysts for value creation existed. We have built upon that underlying strategy by taking a private equity approach to investing in public companies. This approach leverages the business operating experience I gained after leaving Mutual Series, during which period I sat on a number of boards and helped set strategy and led major restructurings, recapitalizations, asset sales, and mergers. We believe this practical experience helps us in evaluating investment opportunities.

Additionally, while a number of the Mutual Series funds had hundreds of positions, at Evermore we have 40 or so concentrated positions.

2) More than a year ago you said Europe was the buying opportunity of a lifetime, but now that it has rallied sharply, has that opportunity gone?

Not at all. We strongly believe the opportunity is as good as or better than it was a year ago. While Europe's markets have bounced, the underlying companies are really just beginning to scratch the surface of their transformations. The prolonged and stagnant recovery means that the companies who have started to restructure can and must do more. Meanwhile, the companies who thought they could avoid restructuring now understand that the circumstances are not improving as quickly as they had counted on. These factors may create more spin-offs, breakups, and restructurings, which are the types of special situations that we look for at Evermore.

I've confirmed this perspective with a number of European CEOs, so we believe that the opportunity is still alive. In fact, we believe it could be even better than before because the companies are now taking the actions we had expected given the environment. When we discussed this a year ago, they had not yet begun--but now we are seeing layoffs, plant closures, spin-offs, and refocusing. This opportunity is still in the early innings, and we believe that now is the time for investors to get in the game.

In addition, in a low- or no-growth environment, the conditions are ripe for an increase in M&A activity as companies start to buy growth. Companies can add extensions onto existing businesses and also expand into related areas. Companies may be in a position to bid a significant premium to their target's current price and still may be only paying a "fair" price. When situations like this happen, both the buyer and seller (public shareholders) can walk away happy.

3) Where are the most attractive opportunities?

We believe the most attractive opportunities remain in the developed European markets. We generally shy away from Eastern Europe, as we spend more time on Germany, France, Italy, Spain, and Portugal than anywhere else. What makes them attractive is the fact that they were impacted the most by the crisis; therefore, we feel that those are the markets that have the most disconnect between price and value. Additionally, most investors do not realize all that is going on, and that is a major factor that creates value opportunities. We also believe there are significant opportunities in the Nordic markets as they, too, have embarked on a process of streamlining and refocusing.

4) Are emerging-markets stocks showing up on your radar?

True emerging markets are not an area on which we are focused directly. Our primary focus is Europe and the U.S., but we are now shifting some focus to parts of Asia. We have about 10% of our portfolio in Asia today, which is up from zero a year and a half ago. Our focus is on unique special situations as opposed to a particular market, and in parts of Asia we are beginning to see the things that we look for--restructurings, breakups, turnarounds, hostile bids--things we are traditionally not used to seeing in that region, which makes that part of the world intriguing and more interesting than it was historically for us.

With that said, we like to sneak into emerging markets by owning companies in developed markets that have businesses or exposures in emerging markets. This provides us with emerging-markets assets at a distressed developed-markets price. For example, we own a French company that controls a significant number of ports, container terminals, and other businesses throughout Africa. In owning this company, investors are buying a French business that's 190 years old with a huge exposure to Africa at what we believe is a terrific value and a compelling margin of safety. This is how Evermore likes to look at emerging markets. If you go in the front door, you may often pay a higher multiple, but if you "sneak in" through the back door, you may pay a much lower multiple. That is how we want to do it.

5) You own some stocks with complicated overlapping ownership. Don't they present a problem in unlocking shareholder value?

Not if you have the right leadership at the helm. In fact, we believe that, in certain cases, the interlocking ownerships can provide a real benefit. For example, in the case of certain companies, we have a high conviction in the management and the quality of their leadership and ability to promote change. The interlocking ownerships may be very helpful in boosting the company's value.

6) Speaking of challenging issues for shareholders, you own shares of JSFC Sistema (SSA), a Russian conglomerate. How did you get comfortable with investing in one of the less-shareholder-friendly nations?

In Russia, it is critical to gain an understanding deeper than the business itself. We need to understand who the main shareholder is, who is on the board, and who the management is--and you need to develop a real comfort with those people. We accomplished that by going to Russia, meeting with the participants, and doing our homework.

JSFC Sistema is our sole Russian holding today. This stock is controlled by one of the Russian oligarchs. We spent a lot of time getting to know him, how he thinks, how he invests, and how he has treated shareholders in the past. We found that they treated their shareholders well, and they've created a lot of value. This is the holding company that he uses to make investments, and we see this as our opportunity to ride along with the oligarch. Where most of the Russian oligarchs have a private holding company through which they own public companies, this is the only one where that holding company is a public company.

We expect to be very well positioned in the country to take advantage of the privatizations that are on the cusp of happening because we believe that Sistema is well positioned and perceived there. Sistema has all the things we look for in an investment opportunity--significant discount to net asset value, catalysts, and good management--but because it is in Russia, we needed a bigger discount to take on the additional risk. We feel we were able to get that with Sistema.

7) You've owned a French conglomerate named Bollore (BOL) since the beginning of the fund. What's its appeal?

We believe Bollore is a very misunderstood company, as many European conglomerates are. With the broad range of assets from media to industrial businesses to transportation systems and so on, it looks like an amalgamation of businesses with no real focus. But we believe that is just a complete misperception. Our view was that this company is led by one of the most creative and aggressive value investors in Europe and possibly throughout the entire global business community. We were able to buy into this company at a remarkable discount to our estimate of its net asset value. We got in early, and we continue to believe there is still more value there. We view Bollore as a long-term holding where the company can continue to create value for themselves (chairman and CEO Vincent Bollore controls over 70% of the company), and all public shareholders can ride his coattails and participate. This is a classic compounder, where we were able to buy an undervalued stock and believe that the company will continue to be an attractive holding as a result of the quality of the underlying businesses, assets, and, especially, management.

8) When we spoke before, you made the case for two U.K. industrials names, Vesuvius (VSVS) and Alent, which are the result of Cookson's split. Do you still like them?

We are very confident in these holdings. For us, the first phase of this investment was buying Cookson last year in anticipation that it would split into these two companies. Now that they are completely separate businesses, not only have we maintained our ownership, but we have added to each position over the course of the year. We've continued to have confidence in them since the spin-off, but we think the next phase of their transformation is in the operational improvements. We believe both of them have room to improve by increasing their profit margins, streamlining their businesses, and creating more value for shareholders.

9) The average front-load world-stock fund charges 1.4%. Do you think Evermore's expenses can get down to there with asset growth?

Our goal is to increase fund assets, which we believe will reduce the fund's overall expense ratio and get us closer to the average world-stock fund expense ratio over time.