Mittleman Value Partners' commentary for the fourth quarter ended December 31, 2024, highlights their new holding, Fresenius Medical Care (NYSE: FMS, $23).
To the clients of Mittleman Value Partners:
We underperformed the major market averages again in 2024, with our representative account gaining just 8.65% net of fees, vs. total returns of 25% for the S&P 500, 18% for the MSCI ACWI, and 11.52% for the Russell 2000. We slightly outperformed the Russell 2000 Value Index, which was up 8.03% in 2024. It’s now been three years in a row since we last outperformed any of the major averages back in 20211. (1 in 2021 at prior firm, Mittleman Investment Mgmt., accounts gained 23.47% vs. 28.71% S&P 500, 14.82% R2000, and 19.05% MSCI ACWI.)
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The portfolio remains highly concentrated in unpopular segments of the public markets: small vs. large, foreign vs. U.S., and value vs. growth. But the hindrance from those factors should not be perpetual.
There were eight new holdings added in 2024, which occupied 26.4% of the representative account value as of 12/31/24, and 35.7% as of 2/15/25, out of eighteen positions currently held in total.
The biggest change to the portfolio most recently was the addition of the dialysis services giant Fresenius Medical Care AG ADR (NYSE: FMS, $23.44) in late Q4 2024, a position I’ve increased substantially thus far in Q1 2025, making it our 3rd largest investment now at just over a 10% weighting.
That was funded by a sale of our previously largest position, Greatview Aseptic Packaging (HK: 468), which we recently sold entirely at HKD 2.63 (USD 0.338) against a tender offer of HKD 2.65, and my estimate of fair value at HKD 4.50 (10x EBITDA, 14x FCF). Since we first bought Greatview in March 2015 at around HKD 3.50, it has paid out cumulative cash dividends of HKD 1.82 (USD 0.234) per share, and we sold some of the position between HKD 5.00 and HKD 6.00 in late 2017 / early 2018, and bought back those shares at much lower prices years later, so it has been a modest long-term winner despite the low outcome of this recent M&A, which did help Greatview to a 46.4% total return in 2024.
Despite my expectation to the contrary, the hostile takeover offer by Greatview’s smaller competitor, the mainland China-listed Xinjufeng (301296 CH), was successful in garnering over 90% of Greatview’s shares at HKD 2.65, at a mere 5x EBITDA (Xinjufeng’s own shares trade at 12x EBITDA). That outcome implies Greatview’s co-founders must have agreed to sell much if not all of their combined 15% stake, which was a surprising turnabout. The acquiror plans to keep Greatview listed in Hong Kong, which will require them to sell down their stake from 97% to less than 75% (to meet Hong Kong’s minimum free float requirement of 25%). Once it became clear that the new group had over 90%, it behooved us to sell before the tender offer expired at the end of last week, lest we’d risk a lengthy suspension of trading. We may revisit Greatview at the likely lower prices such sales by the 97% owner may produce.
New holding thesis
Our most recent new buy is Fresenius Medical Care AG ADR (NYSE: FMS, $23.44), which I began buying in late Q4 2024 into mid-Q1 2025; our 3rd largest holding now at a 10% weighting.
European stocks are cheap. Healthcare stocks are cheap. Fresenius Medical is a German healthcare company at 6.5x EBITDA and 8x FCF, but with 70% of sales in the U.S., and a scale-derived moat in a duopolized industry with nearly 40% market share, up from 25% market share 25 years ago. It also has a classic spin-off playbook in progress, albeit with an unusual start as this spun-off company has traded separately from the parent since 1996 but was legally deconsolidated and self-directed only since 2023. FMS also has good liquidity at a large $13.8B market cap. ($9B float) compared to our median holding which is small cap ($818M).
The Fresenius Medical ADR (NYSE: FMS) that we own represents 0.50 shares of the Germany-listed common shares (FME GR, €45), which on 12/27/24 regained membership in the DAX Index (40 stocks). It is the largest provider globally of kidney dialysis services for patients with end-stage renal disease (ESRD) which requires 3 treatments per week (3 to 4 hours each session) for the rest of a patient’s life (except for the few who can get a kidney transplant), and is roughly the same size in that business line (which FMS calls their “Care Delivery” segment at 80% of sales) as DaVita (DVA $157) in the U.S., where each company has roughly 40% market share. DVA recently hit an all-time high, while FMS is 60% off its $57.94 ATH of March 2018. That’s not just symptomatic of a U.S vs. Europe valuation disparity; DVA has crushed FMS in business performance and capital allocation over the past 25 years. That is partially because…
… FMS also has a lower margin, more capital-intense med-tech manufacturing business which they call their “Care Enablement” segment (20% of sales), which has a major new product set to launch in the U.S. in 2026. As home dialysis (currently 14% of patient population) is increasing more rapidly, FMS should benefit from increased sales of equipment and consumables. DaVita is the market leader in providing home dialysis services (with FMS at #2 in home service), but DVA buys equipment from FMS and others. The equipment group has been a long-term drag for FMS but seems to be turning up now.
Fresenius Medical is at EV of 6.5x est. 2025 EBITDA (€3.7B) (19% EBITDA margin), and 8x FCF (€1.6B) (43% of EBITDA), with net debt/EBITDA of 2.7x (below their target leverage range of 3.0x to 3.5x). I estimate a minimum fair value for FMS at $35 (+50%), which would be 8x EBITDA, and 12x FCF. DaVita (DVA $157) is currently valued at EV of 8.4x est. 2025 EBITDA ($2.77B) (21% EBITDA margin), and mkt. cap 11.3x FCF ($1.1B) (40% of EBITDA), with net debt/EBITDA of 3.2x.
The recent (Nov. 30, 2023) legal separation / deconsolidation of Fresenius Medical (FMS) from its parent company, Fresenius SE (FRE GR, €37), which retained a 32% stake in FMS, offers a textbook post spin-off playbook: new management, improving profitability, divesting low margin operations, and improved capital allocation, which should ultimately result in a sale that maximizes value for the parent company’s retained stake in FMS. In 2023 FMS established their “FME25” transformation program with a goal of €650M in cost savings, of which they’ve already achieved €519M as of Q3 2024.
Demand growth is driven by an ageing population. There are 36M Americans living with Chronic Kidney Disease (CKD), of which 808,000 have progressed to End-stage Renal Disease (ESRD), of which 68% are on dialysis (550,000). Roughly 135,000 Americans are newly diagnosed and start dialysis each year, which usually more than offsets the number of dialysis patients who die or get a transplant.
Covid-19 killed many dialysis patients, which caused an unusual decline in revenues, but patient numbers have been rebounding, although above average mortality among dialysis patients lingers on. The average ESRD patient lives about 7 years (84 months) on dialysis, but that average includes many who die in their first year on dialysis (roughly 15% to 20%), and many who live more than 15 years.
Commercial payor insurance covers 30 to 33 months of dialysis (at 3x the reimbursement rate of Medicare) while Medicare kicks in after 30 to 33 months, regardless of age (usually Medicare is available only for 65-year-olds and older, except for dialysis (as of 1972) and ALS). In the U.S., dialysis providers lose money on Medicare patients, with commercial pay producing all of their profit; a very unusual situation. Even though Medicare reimbursement rates don’t cover the cost of care, dialysis still represents a very large 7% of Medicare’s budget.
Study data showing that new anti-obesity drugs might reduce demand for kidney dialysis has occasionally (on 10/11/23 and 10/30/24) slammed the stock prices of DVA and FMS. But those drugs are deemed by many to be a net neutral factor, as Patrick Wood, Morgan Stanley’s medical technology analyst states, “The outlook for the kidney dialysis sector is less clearcut: Reducing obesity levels may mean there are fewer patients requiring dialysis, but increasing longevity could have a paradoxical effect of extending dialysis time for those patients that still require the treatment.”
So, while there is a risk that those new drugs do result in a secular decline in demand for dialysis, my guess is that partially because of that countervailing effect it would take a number of years for that to become apparent. Also, some recent studies show a very high rate of discontinuance with these drugs, apparently due to the side effects:
DaVita (DVA $157) has vastly outperformed Fresenius Medical (FMS) over the past 25 years. Ted Weschler bought DVA somewhere between $1 and $2 in early 2000 (down from $12 in 1998) and got Berkshire Hathaway into it right after he joined in 2012. Berkshire now owns 45% of DVA, with a cost basis likely under $50. Jim Chanos was vocally short DVA around $60 from 2017 and recommended as a short again in Sept. 2019 but covered in 2020, presumably at a loss.
FMS was weighed down by the low margin and capital-intense products manufacturing (med-tech), their “Care Enablement” business (20% of sales), and by a low margin non-U.S. segment (30% of sales), and poor capital allocation (overpaying for acquisitions, not buying back shares).
That is all beginning to change now. They have been selling their low margin non-U.S. businesses and aggressively fixing margins on the med-tech division. I think on or before their June 17 Capital Markets Day in London, FMS will begin a significant share buyback, as CEO Helen Giza seemed to be hinting at that during Q&A after their presentation at the J.P. Morgan Healthcare Conference on 1/13/25.
Fresenius Medical was created in 1996 when WR Grace merged their scandal-ridden National Medical Care (NMC) dialysis business with the dialysis business of Fresenius SE, which was mainly a renal products manufacturing business. The pitch then was that being uniquely vertically integrated would be a benefit, but that proved false in this case. DaVita is the biggest external customer of FMS med-tech products, but DVA understandably seeks alternative suppliers and sometimes funds such competition as an investor. I think FMS would be better off selling their med-tech manufacturing business, which should be entering into a period of higher growth from a new product line and higher margins, making for a good exit valuation, but they have not indicated any such consideration.
While DVA was buying back its own stock in huge amounts at less than 7x EBITDA in the early 2000s, and acquiring smaller regional players at 5x to 6x EBITDA, FMS bought back none of its own stock and paid 11.8x EBITDA for Renal Care Group (RCGI) in 2005, a $3.9B deal.
FMS also overpaid for NxStage (NXTM) in a deal initiated in 2017 to expand in home dialysis products, paying $1.95B, 5x sales of $394M in 2017, 98x EBITDA of $20M. Although NxStage revenue now was $913M in 2024 (12.8% CAGR over 7 years) and home dialysis is growing fast so maybe that investment will soon pay off.
While FMS has been barely profitable in their med-tech (Care Enablement) manufacturing overall, operating profit margin has been improving from less than 2% over the past couple of years to just under 6% in Q3 2024, and they are targeting 8% to 12% near-term and 15%+ in the long term. I think that business would do better if owned by a strategic buyer like Baxter that wouldn’t be selling products to a competitor, but again, it has not been discussed as non-core or up for sale so for now the idea of selling their Care Enablement division is just my sense of what should happen.
Perhaps a good reason for not selling that division just yet is that they’ve invested hundreds of millions into a new product line which will roll out in the U.S. in 2026. Here’s the CEO of FMS discussing it at the J.P. Morgan Healthcare Conference on 1/13/25:
“…to talk about high-volume hemodiafiltration or HDF. It has grown substantially over the last 10 years and has become the standard of care in our clinics in Europe. The findings of the European Union's CONVINCE study as well as our real-world experience in EMEA demonstrate a 23% reduction in mortality for patients treated with HDF versus standard hemodialysis. This could equate to an additional statistical average of 18 months of life. However, HDF has not been available in the U.S. before now. And as I mentioned earlier, our 5008X machine was the first HDF-capable machine to receive FDA approval. And in June, the first U.S. patients were treated with the 5008X system in our clinics. To our knowledge, there is no further FDA approval for an HDF machine in progress. We believe that this modality, which is fundamentally different than standard highflux hemodialysis, is an opportunity to take a leap forward in providing more innovative therapy in the United States. And as you can imagine, we saw strong interest at the American Society of Nephrology Congress at the end of October. As a vertically integrated business with considerable market share, we are uniquely positioned to bring this innovation to the U.S. market and set a new standard of care, like we have done in the past with single-use dialyzers. We are currently detailing a holistic plan for the United States rollout, optimizing the potential returns across Care Delivery and Care Enablement. And beyond HDF capabilities, the 5008X is a much more modern, more efficient, user-friendly machine that can also be used for regular dialysis treatments. It will not need bags with IV solutions for priming of the machine, and the machine performs self-cleaning during treatments, and so does not require a 45-minute break between treatments. Also, training time is expected to be significantly lower than with the current 2008 system. We are fully on track with our preparations for the launch of the 5008X machine in the U.S. at the end of this year, with a broad, full-scale commercial launch being planned for 2026.”
So maybe FMS will hold on to their med-tech business, at least until next year, but overall it’s pretty clear that the former parent company doesn’t want to keep so much capital (€4.4B at current price, nearly 14% of FRE’s enterprise value) tied up in a passive 32% stake in FMS, so maybe they’ll sell the whole thing to private equity and then the PE firm can sell the med-tech business later.
When Ted Weschler bought DaVita in early 2000, the stock had vastly under-performed FMS over the prior 18 months, with DVA’s stock down from $12 in June 1998 to $2 on 12/31/99, while FMS was up from $10 to $14 over the same time frame. As of 12/31/99, DVA was over-leveraged with net debt to EBITDA of 7.2x, and trading at 10x a depressed EBITDA (13% margin, down from 25% in 1998). FMS had only 2.8x net debt to EBITDA and was trading at 11.5x EBITDA (22% margin) on 12/31/99. It clearly wasn’t just about getting into the cheaper of the two, it was mostly about the subsequent business performance and the massive buyback of shares that DVA completed. DVA’s shares outstanding on 12/31/99 were 243.1M; reduced to only 82M now. FMS ADRs (expressed as underlying FME GR shares) outstanding on 12/31/99 were 237.1M, and as of today they’ve increased to 293.4M.
I think it’s likely that FMS will improve margins and capital allocation and ultimately valuation, maybe not enough to replicate DVA’s performance from 12/31/99 to now (18.5% CAGR vs. 7.8% S&P 500 and 3.6% from FMS), but enough to significantly outperform DVA and the market averages over the next 1 to 3 years. The main risk of adverse trends in reimbursement rates seems likely to be mitigated by the mission critical nature of the service, and the concentration of market share (80%) with FMS & DVA.
Fresenius Medical (FMS) has some similarities to Spanish firm Grifols SA ADR (NYSE: GRFS, $7.32), our 2nd largest holding which we acquired earlier in 2024 and represents just over a 10% weighting as well. Both are domiciled in Europe but get most of their sales from the U.S., which belies the argument that slower growth in Europe justifies the pan-European valuation discount vs. U.S. stocks. And both are semi-dominant providers of mission critical healthcare services and products with FMS #1 in dialysis services globally, and GRFS at #2 globally in biological products derived from blood plasma. And both companies have a 32% shareholder (FMS has Fresenius SE (FRE GR), and GRFS has the Grifols family).
Recent industry results from CSL Ltd., (ASX: CSL), #1 in market share, and #3 competitor Takeda Pharmaceuticals (JP: 4502) imply that the industry has continued to heal from the post-pandemic supply chain disruption which had weighed heavily on Grifols as the most leveraged player in the field. Grifols will report their results for Q4 2024 on February 26, 2025.
As stated in my letter of September 8, 2024, which introduced the Grifols investment thesis, I continue to believe that the minimum fair value for the GRFS ADRs we own is $13 (+78%) at 10x EBITDA of €1.7B and 16x FCF of €500M. With that in mind, I was not at all unhappy to see the low-ball bid by Brookfield (aligned with the Grifols family), which emerged after we had bought our initial position, abandoned in late November 2024 after the GRFS board rejected it, despite the depressing effect on the share price at the time. We bought a bit more GRFS shares after that price drop.
With roughly 10% of the portfolio now in Grifols (Spain), and 10% in Fresenius Medical (Germany) and 5% in Bayer AG (Germany), we’ve got 25% invested in unusually cheap European shares, which likely won’t stay so cheap forever. We own all of those through U.S.-listed ADRs (GRFS, FMS, BAYRY).
A recent note from Jefferies on their outlook for European shares in 2025 comports with my view:
The only region where the portfolio has more exposure than the 25% we have in Europe is Canada, where the weighting totals just over 29% spread out over 5 of our 18 holdings. I’ve thus taken to calling myself “Mr. Canada” with some of my Canadian friends, albeit with some self-deprecation as my affinity for shares listed there has not been rewarding of late, with a possible idiotic trade war looming.
The fear of tariffs has added pressure to an already weakening Canadian Dollar, which lost 7.9% against the USD in 2024, shaving about 2 percentage points of performance from our portfolio results in 2024 on that effect alone. And the perceived risk of tariffs seemed to weigh heavily on our major holding in bus manufacturer NFI Group (TSX: NFI) which had peaked +38% YTD in 2024 on 8/31/24, before ending the year -6.1% in USD, and dropping another 15.5% in 2025 through 2/15/25. That is despite the fact that NFI manufacturers most (70%+) of the value of its buses in the U.S., its largest end market by far.
NFI (New Flyer) has some real problems with ongoing supply chain issues, most pressingly a bottleneck in bus seats built by supplier American Seating based in Grand Rapids, Michigan. But those are curable and in the process of being resolved, albeit much more slowly than originally estimated. Yet NFI’s backlog continues to grow, breaking new records at now over $12B (vs. $3.1B in TTM sales), and large new orders like this one from New York’s MTA are coming in regularly: https://www.nfigroup.com/news-releases/news-release-details/new-yorks-mta-further-electrifies-fleet-order-265-battery
One additional concern weighing on NFI’s share price recently has been that the U.S. government will withdraw funding that has incentivized municipalities to purchase NFI’s clean energy / zero-emission transit buses (NFI’s fastest growing segment). It’s hard to imagine how that could be done legally for funds already committed (and underpinning NFI’s $12B+ backlog). But there is a risk that future funding might not be there, in which case NFI claims it would shift back to selling its traditionally powered vehicles, although demand for those might be diminished as well in such an environment.
NFI’s zero-emission transit buses notably improve the quality of life in the cities which use them. I can attest to that as a resident of New York City, as the decline in exhaust smoke from city buses is very noticeable over the past 20 years, although some of that is due to clean diesel technology as well, which NFI also makes: https://www.masstransitmag.com/bus/vehicles/gas-diesel-cng-lng/press-release/53074545/nfi-group-new-flyer-awarded-two-year-contract-by-houston-metro
So despite the risk of tariffs and supply chain issues, with NFI’s roughly 50% market share in the U.S., as one of only two surviving players in the industry (privately held Gillig LLC of Hayward, California being the other part of that duopoly), NFI is well situated to supply whatever type of transit buses will be ordered to replace the aging fleet of transit buses throughout the U.S. and Canada.
NFI does have a highly leveraged balance sheet, with net debt of 4.9x TTM EBITDA of USD 183M. But EBITDA is expected to grow substantially over the next two years. Based on consensus estimates for EBITDA for 2025 (USD 339M) net debt to EBITDA drops to 2.6x, and for 2026 EBITDA (USD 405M) it would be 2.2x. I think fair value for NFI is likely around 7.5x EBITDA, which would be CAD 20 per share (+76%) on 2025 estimates, and CAD 25 per share (+120%) on 2026 estimates. NFI’s EBITDA generally converts to Free Cash Flow at about a 40% ratio, so 7.5x EBITDA (CAD 20 per share) would be about 12.4x FCF of USD 136M in 2025, and 13x FCF of USD 160M in 2026 (at NFI price of CAD 25 per share).
Coliseum Capital Management (“CCM”), a long-term (since 2011) owner of NFI Group, currently owns 19.9% of the shares which makes NFI their 2nd largest publicly disclosed holding at about USD 200M out of $1.4B in reported holdings. CCM has proven to be a very supportive shareholder during times of financial stress, providing both equity and debt capital financing to NFI, as recently as during the post-Covid crisis. I feel that having such a strategic shareholder somewhat mitigates the balance sheet risk.
I also believe that Coliseum was very likely behind the appointment in January 2025 of three new high-quality directors to the board of NFI, including a new Chairman, Chan Galbato, formerly of Cerberus, with extensive experience related to NFI such as having served as Executive Chair at school bus manufacturer Blue Bird (NASDAQ: BLBD). It’s clear that the board has been infused with supply-chain management know-how that will help NFI surmount the ongoing supply chain constraints that have plagued their industry since the pandemic. https://www.nfigroup.com/news-releases/news-release-details/nfi-enhances-board-accelerate-growth-and-industry-leadership
While NFI Group has been frustrating, with huge demand for what they produce, but constrained by suppliers and now pressured by uncertainty over potential tariffs, our larger position in Canada, and after the sale of Greatview Aseptic now our largest position overall at an 11% weighting, Aimia Inc. (TSX: AIM), has been a truly torturous experience thus far, and particularly so for me personally.
Aimia fell in ‘24 for the 3rd year in a row, -22.6% in USD, after losing -12.4% in ‘23, and -30.9% in 2022. That’s a cumulative drop of -53.1% over those 3 years, vs. a 12.7% gain from the TSX Index (in USD).
Over the longer term, we’ve been investors in Aimia since late May 2017, for 7.75 years, and with an average cost of roughly C$2.50, against a current price of C$2.38 (2/14/25). Although we did collect one cash dividend of C$0.20 per share paid in 2019, this has clearly been an abysmal result.
Aimia began as a passive investment, but I had an idea that Aimia, like the public holdcos of prior loyalty firms such as Sperry & Hutchinson (S&H Green Stamps- owned by Leucadia from 1986-1999) and Blue Chip Stamps (merged into Berkshire Hathaway in 1983), could become a great permanent capital / investment vehicle, so I began an activist campaign in Mar. 2018 in part to make that happen.
I had a strong start, as shown in the table below, Aimia’s net worth went from negative -C$295M on 12/31/18 to C$777M on 12/31/22 in 4 years. That was almost entirely due to the increase in valuation that I fought for from Air Canada on Aeroplan ( https://www.prnewswire.com/news-releases/mittleman-brothers-llc-open-letter-to-the-board-of-directors-of-aimia-inc-300692437.html ), which cannot be deemed as anything less than the C$191M difference between their exploding offer of C$325M (increased from C$250M) to the C$516M we ultimately got, and the bigger boost I helped obtain from Aeroméxico in their buying out Aimia’s 49% stake in their loyalty company, Premier Loyalty and Marketing (“PLM”) for C$570M in 2022, which was a +C$400M difference versus the USD 180M (CAD 245M) that they were literally about to sign it away for when I met with them in March 2018 in Montreal, including nearly C$100M in cash dividends received. So roughly C$600M in value was added to Aimia from my activist intervention over those first four years, more than the entirety of Aimia’s shareholder equity today.
Despite those foundational contributions, I was forced out as CIO of Aimia in 2022, and off the board of directors as well, removed somehow by those I had empowered and trusted most to help me govern the entity. Since then, Aimia’s net worth has declined sharply, from C$777M on 12/31/22 to C$542M as of 9/30/24, a loss of C$235M, or 30%, which makes the loss in share price over the past 3 years somewhat understandable. And some of that was my fault, for example, an investment Aimia made at my behest in 2020 for a 10.85% stake in Chinese outdoor advertising firm Clear Media costing C$77M, has been marked down to C$28M (a loss of C$49M) due to poor results from that business thus far.
But there were also gains that I had wanted to pursue that were inappropriately missed. For example, a C$100M investment that I had urgently recommended near the March 2020 Covid-crash lows was rejected by Aimia’s “ad hoc investment committee” and would have been worth C$336M a year later.
And a successful activism campaign that I led with Village Roadshow (ASX: VRL) later in 2020 which led to a 36% increase in takeover price from A$2.20 to A$3.00, was downsized to less than half of the dollar amount that I had recommended for Aimia to invest, which prevented us from establishing a true blocking position that I believe would have led to substantially greater value realization: https://en.prnasia.com/releases/global/mittleman-brothers-releases-presentation-noting-concerns-about-proposed-bgh-capital-led-management-buy-out-of-village-roadshow-ltd--300331.shtml
Also, a significant sum (albeit much less than I requested) that Aimia invested in some Japanese stocks at my behest in 2020 and 2021 was sold (after I was forced out) just before the Japanese stock market, and those stocks even more so, soared in 2023. Those investments, via two SPVs, were meant to provide footholds in potential activism candidates in Japan alongside a reputable and highly experienced lead partner, at extraordinarily low valuations for targets with net cash balance sheets. That lead partner I’d chosen has gone on to do great things in Japan recently, with other partners. Alas…
So why do we still own stock in Aimia? Because I still think it’s worth maybe double the current price, and with a longer-term opportunity for much larger gains. Basically, the risk/reward ratio remains very appealing, and it seems likely the assets Aimia owns now will be sold, which should lift the share price.
And while the major assets that Aimia has acquired are not what I had wanted, they appear to be high-quality, market-leading businesses which have grown significantly over the past 10 years and should continue to grow at a satisfactory rate going forward, if they somehow cannot be sold for a satisfactory valuation in the near term.
New director Rhys Summerton, CIO of Milkwood Capital in London, bought 233,000 shares of Aimia at an average price of C$2.64 in December 2024. Despite owning Aimia, Rhys was up 35.4% in 2024.
TD Cowen report of 2/5/25 estimates AIMIA’s NAV per share at C$4.96, +108% from last trade C$2.38 (2/14/25):
Assuming that TD Cowen is being optimistic at C$4.96, and Aimia’s actual NAV is only C$4.00 per share, implying upside of 68% from the current price of C$2.38. That would likely represent a reasonable estimate of liquidation value, given the tax loss carryforwards would shelter any gains. So, C$4.00 per share would be about C$384M in cash with which to start over, with C$772M in tax loss carryforwards from NOLs (C$480M) and capital loss carryforwards (C$292M) in both the U.S. and Canada, making a reboot focused on the original gameplan (control investments in Canada and the U.S.) very appealing.
I had opposed both of Aimia’s core acquisitions, Tufropes (closed 2/17/23 for C$235M) in India, and Bozzetto Group (closed 5/9/23 for C$258M) in Italy, but I have always acknowledged that both were high quality, market-leading businesses with good growth profiles. They are not melting ice cubes.
I opposed Aimia’s acquisition of Tufropes for three reasons:
- buying a company in India broke Aimia’s (my) promise to focus control investments on Canada and the U.S., where Aimia’s tax assets reside, and thus where free cash flow could be up-streamed to the Holdco without taxes due. And while I was OK pursuing potential LBOs in Japan, that was a special geographic carve out for the extraordinarily low valuations and high cash-on-cash returns available in the public markets of Japan.
- the valuation was not appealing on an absolute basis, despite appearing cheap on a relative basis against highly valued Indian public equities. Aimia thought it was paying roughly 11x EBITDA for Tufropes (which turned out to be over 16x actual EBITDA produced) but justified it by citing the relatively high valuation of more than 20x EBITDA for Tufropes’ primary comp in India (Garware) and the Indian public market in general. That was not the value-oriented discipline to which I had promised Aimia would adhere.
- Aimia broke another promise; making sure the key sellers retained a stake. Aimia cashed out the Tufropes founding Goel family, entirely, and the business immediately missed forecast, blaming Red Sea transit issues when their comp Garware had no such issues, despite manufacturing in India while exporting globally. So Aimia’s explanation for Tufropes’ weakness is hard to believe. Cashing out the founding family who ran the business for 30 years to replace with new management was the height of hubris.
But the IPO market in India is hot now which may provide Aimia with an attractive exit for Tufropes. ( https://economictimes.indiatimes.com/markets/ipos/fpos/ipo-mania- investment-bankers-pocketed-1-3-billion-in-fees-last-year/articleshow/116913965.cms?from=mdr ) And Garware (GTFL IN, INR 735) is trading at 5x sales and 24x EBITDA right now, and stocks in India trade at a median 20.7x EBITDA: ( Country Averages ). I’ve seen recent IPOs in India for companies of similar size to Tufropes with worse fundamentals garnering such valuations, so pursuing a dual track IPO/sale process with a major local IB there like Kotak, ICICI, or Axis might be productive while that market remains hot.
At a 15x EBITDA multiple on the combined Tufropes/Cortland business (for which Aimia paid a combined C$262M (C$235M for Tufropes + C$27M for Cortland), on trailing 12 months EBITDA of C$16M, would be C$240M which is significantly more than the C$150M value estimated in the TD Cowen sum of the parts valuation summary I’ve shared on the prior page.
And 15x EBITDA would be less than the 16.7x EBITDA of another public market competitor, Hampidjan (HAMP IR, ISK 110) of Iceland, which has an EV of €619M against TTM EBITDA of €37M.
Tufropes is a good business, with #2 global market share (5%) in aquaculture (fish farming) netting (#1 is Garware at 20% global market share), where market growth is driven by growth in aquaculture in conjunction with the growing demand for fish protein worldwide. Tufropes also has high market share in ropes, which is benefitting from a secular trend of synthetic fiber ropes replacing steel wire but with synthetic ropes still only 20% of the global rope market.
So, despite Aimia having overpaid upfront for Tufropes, and all of the other mistakes made in how that deal was done, there appears to be real value there, and that value is highly likely to be retrievable at some point in the not-too-distant future.
I had also opposed Aimia’s acquisition of Bozzetto Group in Italy, again because buying it broke Aimia’s (my) promise to focus control investments on Canada and the U.S., where our tax assets reside. And I also thought paying 8x EBITDA was less opportunistic than I would have preferred, especially given the Italian domicile of the entity and lack of ability for Aimia to easily access its cash flow. But Bozzetto is a fine company with an attractive niche as one of the world’s largest ESG-focused providers of specialty sustainable chemicals, serving over 1,500 clients with a portfolio of over 2,000 products. One example of what they mean by pro-ESG: https://www.bozzetto-group.com/magazine/low-temperature-bleaching/
“Founded in 1919 and headquartered in Filago, Italy, Bozzetto is a leading ESG-focused provider of specialty chemicals, manufacturing over 2,000 proprietary chemicals to service its core textile, water solutions, and dispersion end markets. With a product portfolio comprised of over 75% ESG-focused chemicals, Bozzetto has built a strong reputation as a pioneer of developing ESG-focused solutions that align with secular purchasing criteria trends and key customers' stated sustainability initiatives, including the benefits of a circular economy, and reduction in water, energy, and hazardous chemicals.”
Encouragingly, Bain is reportedly about to sell Italian specialty chemical firm Italmatch Chemicals for €1.5B ( https://www.akm.ru/eng/news/bain-capital-plans-to-sell-italian-italmatch-chemicals-for-1-5-billion-euros/ ) which would be 11x TTM EBITDA of €136M (20% EBITDA margin on €695M sales). Not a perfect comp for Bozzetto but a somewhat similar profile. Maybe a 17% EBITDA margin Bozzetto (TTM C$56M on C$332M sales) could get 9x EBITDA (EV C$504M) which is C$350M equity or so to Aimia.
Lastly on Aimia, I’ll leave you with an encouraging precedent to help explain my tenacity (obstinance?) with Aimia. My investment in Danielson Holdings (DHC) in 1998, which became Covanta (CVA) in 2004, from a $3.75 initial entry in 1998, to a $0.30 low in 2003, to an exit as high as $15 in 2005. A loss of 91% over the first 5 years, into a gain of roughly 5x over a total of 7 years on a lowered average cost.
Marty Whitman, of Third Avenue Value Fund, was 65 years old when he got control of Danielson Holdings (DHC) in 1990, but it took 13 years until he finally found a good deal for DHC, in late 2003, at age 79. In 1990 DHC was a tiny holding company with a market cap. of around $35M and shareholder equity of $70M, with one operating sub, a tiny specialty insurance underwriter, and about $1B in NOLs.
In early 1996, after six years of searching, DHC announced its first deal, buying publicly traded Midland Financial Group of Tennessee for $79M in cash, but the deal was nixed months later when three of Midland’s top execs died in the TWA Flight 800 explosion in July 1996. DHC dropped from $7 to $5.00.
Then in early 1997, a deal to sell a 42% stake in DHC at $6.60 per share ($73M) to Progressive Insurance was announced, sending the stock up to nearly $14 on the news, only to have it crash back to $5 when Progressive calls off the deal a couple of months later for “internal corporate reasons.”
The stock dropped further to $3.50 in late 1998 as I first began buying for my clients at PaineWebber.
August 1999: a deal is announced in which Sam Zell will buy 2 million shares of newly issued DHC at $4.50 per share (above DHC’s NAV) with a warrant to purchase an additional 2 million shares, which is exercisable at $4.75 per share for a total stake of just under 20%, through Zell’s Equity Group (EGI). Zell was named non-executive Chairman of the Board of Danielson, while Marty Whitman continued as Chief Executive Officer and Chief Investment Officer. In addition, it was announced that an acquisition committee of the Board would be created with Marty Whitman as the Chairman of the committee.
"EGI's infrastructure and contacts will bring an enormous benefit to Danielson and we believe that together we can consummate a suitable transaction for Danielson in short order that is in the best interest of shareholders," said Martin J. Whitman, Chief Executive Officer. Like all holders of 5% or more of Danielson's common stock, the EGI affiliate will be subject to Danielson's charter restrictions, which limits transfers by 5% shareholders and prohibits parties from acquiring 5% of Danielson's common stock without its consent.”
So, Marty Whitman attracted the great Sam Zell to help him finally do a deal to take advantage of DHC’s $1B in NOLs, in August 1999. But it takes 3 years for a deal to happen. And their first deal failed miserably. They bought in-land barge transport company ACL (American Commercial Lines) in a pre-pack bankruptcy in March 2002 for $55M and it was bankrupt again by January 2003 and worth $0. That was almost DHC’s entire net worth, and all of their cash, completely wiped out in just over 1 year.
The stock price bottomed out at $0.30 in early 2003 (-91% in 5 years). But by year-end they found another deal, the buy-out of a waste-to-energy company Covanta in a bankruptcy auction, funding the $30M in equity with a rights offer at $1.53 into which I lowered our average cost from $3.75 to less than $2.00. Zell also provided key debt financing outside of DHC. We sold for as high as $15 less than 2 years later, so what was a -91% loser over 5 years became more than a 5x return over the entire 7-year holding period. The tax losses fueled the tenacity of Sam Zell and Marty Whitman to keep DHC alive until the right deal could be done. Danielson’s free cash flow went from -$23M in 2003 to +$96M in 2004. Sam was 62 in 2003 and died at 81 in 2023. Marty was 79 in 2003 and died at 93 in 2018.
The point is, permanent capital vehicles of decent scale with big tax assets are rare, and so it would be a tragic thing to waste this opportunity any more so than has already occurred. The mistakes Aimia made thus far are less deadly than what Danielson endured initially. Aimia's cash in Bozzetto and Tufropes and Clear Media should be retrievable, whereas Danielson's cash was all gone after their first deal (ACL) blew up in one year and they had to raise new funds via a rights offer which Sam Zell backstopped to fund the second and immensely successful Covanta deal.
As JFK said in 1963, “Things do not happen, things are made to happen.” I am confident that the major private placement investors who put C$32M into Aimia at C$3.10 per share in October 2023, including Jefferies LLC Vice-Chair Andrew Whittaker, and MassMutual CEO Roger Crandall, and the rest of the Jefferies / MassMutual team on board now with Aimia, in collaboration with our friends in Saudi Arabia (Mithaq) and the U.K. (Milkwood), can find a way to make something good happen for Aimia, just like the unlikely duo of Marty Whitman and Sam Zell did for Danielson Holdings.
And what the Danielson example shows is that a very smart investor like Sam Zell, was willing to pay much more than book value, and more than ostensible NAV per share back in 1999, and then to re-up after losing his initial equity in 2003, all to take advantage of the tax assets that the vehicle retained.
The Danielson Holdings (DHC) / Covanta (CVA) experience:
Having over 80% of our portfolio invested in stocks deemed non-U.S., and unhedged exposure to foreign currencies like the CAD and EUR, has not been helping our investment performance over the past few years. U.S. stocks and the USD have crushed just about everything else out there. At some point that headwind is likely to become a tailwind, but as the recent portfolio changes show, I’m not counting on that reversion to the mean to lift us out of the performance basement. In such a highly concentrated portfolio like ours, the idiosyncratic factors should far outweigh the macro stuff over time in driving performance.
In other news:
AMA Group (ASX: AMA, A$0.052, US$0.033) continues to see its share price wallow and I continue to view it as deeply undervalued. Australian investor Alex Waislitz of Thorney Investment Group appears to agree as he filed on Jan. 31, 2025, that he had increased his stake in AMA Group from 11.5% to 14.9%. AMA also announced on Feb. 17th a refinancing of their bank credit line of A$110M for 3 years at an interest rate savings of at least 300 bps. Earnings for their H1 ended 12/31/24 will be reported tonight. My thesis remains that as the #1 collision repair chain in Australia and New Zealand, and being 5x the size of their next largest competitor, AMA should be able to garner a more normal 10% EBITDA margin, comparable to pre-pandemic levels and large global peers, versus barely 5.8% recently. The stock trades at 5x EBITDA.
Cineplex (TSX: CGX, C$11.26, US$7.95) which had 73% market share of the Canadian movie theater box office in 2024, now earns nearly as much in EBITDA from its media/advertising and LBE (Location-Based Entertainment) venues as it does from its movie theater business (admissions, food & beverage). They reported results on Feb. 11th for Q4 and FY 2024, with box office receipts down for the year on the aftermath of strikes which reduced finished content to exhibit. 2025 should benefit from those delayed releases. Cineplex believes it will regain its pre-pandemic EBITDA level soon even at only 75% to 80% of 2019’s attendance level. I see fair value at nearly double the current price of only 7x FCF of C$100M https://mediafiles.cineplex.com/investor-relations/presentations/Q4%202024%20Investor%20Presentation.pdf
International Game Tech (NYSE: IGT, US$17.43) has 77% market share of the U.S. lottery business (37 of 48 state lotteries) nationwide (Megamillions, Powerball, etc.) and is similarly dominant in the lottery business in Italy, but is trading at a valuation that is far too low for the annuity-like and recession-proof cash flows of this very high barrier to entry business. But the stock does not screen as cheap as it really is because they’ve yet to close the sale of their gaming (slot machines) ops to Apollo, but once that happens, they will use $2B of the proceeds to pay down debt such that net debt will only be $3.156B or 2.6x EBITDA of $1.2B. Minus stock-based comp and minority interest it’s really EBITDA of $1B, and it should trade at 10x EBITDA, which would be $34 per share (17x FCF of $400M), roughly double the current price. Light & Wonder (formerly Scientific Games) sold their lottery business to Brookfield for 12x EBITDA, and in Australia The Lottery Corporation (ASX: TLC, A$5.13) trades at 17x EBITDA. 30% of IGT’s EBITDA comes from a JV in Italy that manages a huge lottery contract which IGT has serviced for 30+ years and which is up for renewal this year. There is a lot of fear priced into the stock that they might lose that contract this year, as new bidders like Flutter have recently shown up. I think the very high renewal rate of incumbents in these circumstances argues for sticking with IGT. And if they did lose the contract, the stock is already down to a valuation that would be about 8x EBITDA even without the EBITDA from the Italy contract.
Nexxen International Ltd. (NASDAQ: NEXN, US$10.30) which is an ad-tech business (formerly known as Tremor International) based in Tel Aviv, Israel, recently dropped their London AIM listing and converted their US ADRs into common shares in hopes of improving valuation and liquidity. Stock trades at just over 5x EBITDA (excluding stock-based comp) with a net cash balance sheet, and they have been buying back shares in the open market. The stock performed very well for us in 2024, +98%, but not hard to imagine further upside given the still very low valuation. For example, the ad-tech industry giant The Trade Desk (NYSE: TTD $80) recently reported slowing revenue growth and the stock dropped sharply from $122 to $80 (-34%) in one day last week, but it is still valued at 31x EBITDA. Other peers like Magnite (MGNI $19) at 12x EBITDA and PubMatic (PUBM $15) at 6x EBITDA. NEXN is likely worth at least 7.5x EBITDA of $100M (ex-SBC), which would be about $14 per share, up 40% from the current price.
Alibaba Group Holding Ltd. (NYSE: BABA, US$124.73) produced a decent return for us from our Q1 2024 purchase at just over $74 in the rep account through its year-end close at $84.79, up roughly 17% with dividends. The stock has gained another 47% YTD through 2/15/25, closing at $124.73, as the détente between the Chinese government and Alibaba’s founders increasingly seems to have solidified. If you recall from my previous note on BABA, I was triggered to finally buy this name (owned by almost all of my peers in the value community already) by the massive (USD 200M) insider buying of BABA’s stock by its co-founders during Q4 2023. Which seemed like a real all-clear signal in that regard.
https://finance.yahoo.com/news/200-million-insider-bet-massive-130146819.html
I reviewed my investment thesis on BABA in my 2023 Investment Review letter dated Feb. 12, 2024, and my estimate of fair value remains the same at $126 which would be 10x EBITDA (USD 25B, excludes $3B Stock Based Comp), and 15x FCF (USD 16B, excludes $3B SBC), but I’m in no rush to sell given BABA’s push into AI and other initiatives beyond retail may garner the shares a valuation well above my view of fair.
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On a personal note, my father, Philip Mittleman Sr., passed away on February 2, 2025, at the age of 88, after a long battle with the aftermath of a slip and a fall and a bang to the head back in August of 2023, which led to multiple brain surgeries and a lengthy period of increasing incapacitation. He was a good man, and a great father. His life was a case study in resilience, a triumph of hard work and faith. I will miss his middle of the night text messages, “Tesla up big, Aimia DOWN, again!” and our almost daily talks. He was a true family man, despite his relentless work ethic, he was always there for us when we needed him, as children and as adults. I will miss him terribly, as will his grandchildren.
Sincerely, Chris
Christopher P. Mittleman
Chief Investment Officer
Mittleman Value Partners LLC
422 East 72nd St., 25E, New York, NY 10021
Office: 212-535-0415 | Mobile: 917-951-1782
www.mittlemanvalue.com
