Pair Trades

A recent autistic investing obsession of mine has been pair trades of holding companies. Often times, obscure holding companies trade at discounts to their underlying equity holdings. These holdings can be public companies, meaning the book value of these holdings is 100% visible. You can go long shares of a holding company and short its equity holdings to synthetically extract whatever is left over at the holding company. Sometimes, it's a lot. I especially like when you get an underlying business for free, because there is no guarantee the holding co discount closes, but there is a strong chance an operating business generates unexepcted shareholder returns. It's like cigar butt investing, except you get the whole cigarette. I have four examples to share today, with positions in each of them. Almost all the companies below also have active plans to reduce the discount via buybacks, dividends, etc. **1) Long $NPSNY Naspers Short $TCEHY Tencent** This is probably the best known pair trade of the bunch. The thesis is simple. Naspers owns about 1/3 of prosus, which owns about 1/4 of Tencent. Prosus trades at a \~50% discount to its tencent holding alone, and Naspers trades at a slight discount to its Prosus holdings (\~10%). Meanwhile, Naspers and Prosus owns several other businesses in media, ecommerce, and food delivery privately valued in the tens of billions that aren't included in this at all. By going long Naspers and short Tencent, you can extract the massive discount that prosus trades to the tencent holding, and get their private businesses valued at half the market cap essentially for free. Despite the massive remaining discount, it was worse in 2020-2021. The discount has shrunk considerably and is still large. Because of the discount compression, Naspers outperformed Tencent by 40% over the past 5 years. **2) Long $IMMR Immersion Short $BNED Barnes & Noble Education** At \~200M market cap, IMMR owns 33% of BNED at \~300M market cap, so 100M of BNED. The remaining "stub" of Immersion is thus worth \~100M. For that 100M stub you get 90M net cash, 64M in bonds, and an extra 45M in other public marketable securities. An immediate \~50% discount to **tangible** book value. But you also have a revenue stream. IMMR does about \~20-40M of royalty income from haptic technology royalties. By going long IMMR and short BNED, for 200M market cap, you get about \~300M of book value, and \~20-40M of operating income. Pretty good deal to me. **3) Long $ODET Short $UMG $VIV $HAVAS $ALHG $CAN Bollore Holdings** These next two are more complicated. Compagnie l'Odet is a holding company that owns \~70% of Bollore ($BOL). The company trades at a 30% discount to its holding in Bollore, but that's not what's interesting. The company is a russian nesting doll. Bollore itself is yet another holding company and operating business. Bollore trades at the same market cap (\~$12B) as the total value of its public equity holdings (\~$12B). The remaining "stub" of Bollore/Odet is \~5B in net cash on 12B in market cap. Bollore also has two private operating businesses, Bollore Energy, France's second largest oil distributer with \~200M of EBITDA, and Bollore Industry, battery producer with \~50M of EBITDA. So, for $12B market cap, you get $12B of public equities, 5B of cash, and 250M of ebitda. Not bad. The structure is more difficult though. Bollore's public holdings are expansive. You have to go long $ODET and short $UMG, $VIV, $HAVAS, $ALHG, and $CAN at various ratios. **4) Long $EXO Exor Short $RACE $STLA $CNH $PHG $IVG** Also complicated and similar to ODET. Exor holds a basket of companies and trades at a discount to them. At 22B market cap, the company has 23B in public securities, so not a massive discount to book value. But the underlying holdings you get for free are awesome. They have a stake in Lingotto investment management valued at \~3B, and stakes in Christian Louboutin, Via Transportation, The Economist, and others valued at another \~3B. By going long $EXO and short the basket of holdings, you are essentially "paid" $1B to own $6B in private assets.