I have recently been thinking about European holding companies. With the U.S. markets focusing on whether the Fed will taper its quantitative easing program and other such silliness, bargains have become harder to find. However, when the subject of the large European companies came up not long ago, I realized that I find them fascinating and, potentially, incredibly profitable investments.
There are a few U.S. holding companies ¿ such as Berkshire Hathaway (BRK.A, BRK.B) and Leucadia National (LUK) -- but the structure is used a lot more in Europe that it is here. In fact, it is often the major investment vehicle for the wealthy families there. They invested directly in businesses and have large shareholdings in publicly traded companies. They often have rather complex ownership structures for reasons that I expect have to do with taxes and regulatory issues. They are managed to protect and grow the assets of their primary shareholders, which would seem to be in line with almost any reasonable person's investment goals. Best of all they can usually be purchased at a pretty good discount from their Net Asset Value (NAV).
Pargesa Holding Company (PRGAF) can give us an idea of the complexity of these shares. The company owns 50% of Groupe Bruxelles Lambert (GLBLF). Through this structure, Pargesa owns 4% of oil-and-gas giant Total SA (TOT), 21% of cement and aggregates giant LaFarge (LRGFY), 5% of energy generation and natural gas concern GDF Suez (GDFZY), 8% of leading spirits and wine company, Pernod Ricard (PDRDY), 7% of water and waste management name Suez Environmental (SZEVY) and 50% of Imreys, a large building materials concern. It's a nice mx of businesses, all of which are themselves reasonably priced in the current market.
So when you buy shares of Pargesa at 85% of book value, you are buying 50% ownership of Groupe Bruxelles at about 85% of book. You are buying the underlying businesses at about $0.72 on the dollar. The bonus is that this is fantastic collection of businesses that will have huge upside potential during a strong global recovery. Taking a long-term view, it's clear that being in the building materials, cement and infrastructure industry may not be so great right now, but, over the next decade, it should be fantastic.
You will also have a stake in one of the better booze lineups in the world. Pernod's spirits brand portfolio includes Absolut vodka, Chivas Regal, Kahlúa, Malibu, Ricard, Ballantine's, Beefeater, Havana Club, Jameson, Martell Cognac and The Glenlivet. The wine lineup includes G.H. Mumm, Perrier-Jouët, Royal Salute, Jacob's Creek and Brancott Estate.
Digging deeper, we find that the whole shooting match is 50% owned by a company called Parjointco, which is owned by the family of Albert Frère, the richest man in Belgium and the family of André Desmarais, the current President of Canada's Power Corporation (POW.TO), a $500 billion Canadian holding company. The company exists to hold the family assets, grow them at an above average rate and protect them from inflation. The shares pay an annual dividend that last year was almost 4%. Buying into the shares of either Pargesa or of Groupe Bruxelles Lambert aligns your interest with some of the richest families in the world.
There are a bunch of these holding companies in Europe that own large stakes in some of the world's biggest companies. The downside of these holding companies is that although they are easy enough to buy in Europe, they trade a little thinly in the U.S. markets. Investors will need to place their orders with some care and be patient. Over time, you should be able to accumulate a decent position.
My other thought on the European holding companies is that, much like I have done with Berskshire and Leucadia, I would be a down market buyer most of them time. You can buy some shares at current levels and add to your positions over the years -- whenever a nasty decline creates an extreme bargain situation. Doing that should enable you to build a portfolio that can grow your wealth at a strong pace over the rest of your lifetime.
