A Dividend Too Far
We have sold a long-standing position in D’Ieteren, the Belgian family controlled holding company. The most successful asset within the group has been Belron, the windscreen repair company trading as Autoglass in the UK. It has been a successful consolidator of this segment in many countries and is now by far the dominant player in a market where economies of scale have offered excellent economics to the holders. Belron grew to c.70% of D’Ieteren NAV.
A change in the ownership structure of Belron a few years ago brought in private equity investors into the shareholder structure. Operationally and financially, this has been highly rewarding for other co-investors and Belron has paid significant dividends. The ownership changes also brought a change in attitude to leverage at both the operating companies as well as the listed holding company we invest in. We have enjoyed this journey as the shares have increased 4-fold since purchase over 5 years ago.
The company announced (10/9) that as part of a re-organisation of family shareholdings, Belron is to leverage up to 5.5x net debt/ebitda so that large dividends can be paid to investors including D’Ieteren. D’Ieteren the holding company we invest in is also to leverage up to enable this dividend (yield of c.30%) to be paid. D'ieteren has hitherto operated with a very significant net cash balance sheet, counterbalancing the leverage in its operating companies - this protection will now disappear.
The net result of this is that our investment is now in a (newly) leveraged holding company owning stakes in a number of leveraged operating companies. Our assessment is that ‘look-through’ leverage will be between 3x and 4x geared.
Readers will be aware that we have a zero-tolerance approach to Balance Sheet risk, especially around these levels. We have sold our position and have re-invested the proceeds in existing holdings.