Bought Bouygues

I finally took the plunge and started a position in Bouygues. This is a small position of 50 shares and I will add if/when prices fall.

Bouygues has 30% shareholding in Alstom, 43.6% in Television Francais and 89.5% in Bouygues Telecom. It is also active in construction through its (almost-)wholly owned subsidiaries Colas (96.5% holding), B/CW and Bouygues Immobilier.

Bouygues is run by the Martin Bouygues and can be seen as a family owned enterprise, in the sense that Martin and his brother Olivier hold 21.5% of the share capital. Another 23.33% is owned by the Bouygues employees. Together they have nearly 59% of the voting rights. This lets the management, in essence, think really long term.

If you read the most recent quarterly report and the presentations, Bouygues is concentrating on increasing sales — not a very good variable to aim at, in my opinion. The trouble with the company is that the highly profitable construction business (and Alstom) are being dragged down by the very capital intensive Telecom business. When Martin was asked about the sale of Bouygues Telecom, he observed that this was not a correct time to do so. Meanwhile, this segments continues to suck money out of the rest. The competition between Bouygues, Vivendi (SFR), France Telecom (Orange) and Illiad (free) has seen Illiad gaining at the expense of the rest. The margins have shrunk and the profitability has suffered.

Nevertheless, the company remains cheap on a sum by part basis with an excellent balance sheet. According to 31 Mar, 2013 figures Bouygues has €3.9 bn in cash, €8.4 bn in LT+ST debt, and €600 mn in pension liabilities. At current market cap of €6.2 bn, the EV is €11.3 bn.

Colas, Alstom and TF1 are listed companies. Their value adds up €8 bn at current market prices. We are getting the rest for only €3 bn. Notice that Bouygues Telecom has sales of more than €4 bn. The rest i.e., Immobilier and B/CW we are getting for free.

A very good valuation of the company can be found here [valueandopportunity] — which arrives at a 67% upside at current prices.


Why I have decided to get out of Alcoa (AA)

I hold both Alcoa (AA) and ArcelorMittal (MT).

Both of them sell a commodity product and are effected by the vagaries of the world economy. There is not much pricing power and the only difference a great management makes is surviving when things are really bad and performing well when they are better.

I admire both Klaus Kleinfeld (the CEO of Alcoa) and Laxmi Niwas Mittal (the CEO of ArcelorMittal).

I do not see why I should hold both these companies. So, I have decided to cut Alcoa loose. Mr. Mittal has built his business from scratch and has seen a lot worse than the current situation. There was a time in the 2000s when the stock price of Mittal Steel touched $1.

I do not doubt the ability of Mr. Kleinfeld. I admire the work he did at Siemens (SIE) and the integrity he showed there. But I will choose Mr. Mittal over him. In this kind of businesses – where history and knowledge of cycles play a major role – experience can mean a difference between success and bankruptcy.

I have hence decided to sell Alcoa and add the proceeds of the sale to ArcelorMittal. This will reduce my work load a bit by removing Alcoa from the list of companies I keep track of.