There is an idea that the value of a brand is measured in the extent to which the consumer associates a relationship with the product or service. There are some distinctly Northern European brands that I feel like I have a relationship with, including Royal Copenhagen, Skovby, Georg Jensen, and Bang & Olufsen (B&O). Notably absent for me, I suppose, are Lego and Carlsberg.
I view these brands as being sophisticated and of high quality, threads in the fabric of a unique, Danish style of metropolitan elegance. I have always associated these brands as being part of metropolitan Denmark. I was quite surprised last year (2019) when I discovered that B&O is based in Struer, just a few miles from where I studied as a young man, near my aunt and uncle’s home in Bur. During our Easter visit to Bur, our family embarked to check out the B&O facility, which my uncle shared was “up for sale” as a consequence of some challenging business conditions.
Upon returning home to Pennsylvania, I spent some time researching B&O. The ADR for B&O ended 2018 at a per share value of USD $20.62 while, by April 10, it had fallen to USD $9.01. As I read more about the firm, I found stories of challenges with logistics, repeated changes to brand strategy, externalized value in the automotive market to HARMAN, a focus on entering an ultra-high end television in partnership with LG, and a stock buy-back program, resulting in declining cash balances. (The buy-back program was terminated on 3/26/19, after the price collapsed by approx. 50%.) There was an effort by a Chinese firm, Sparkle Roll, to take control of B&O, which failed.
The entire fact pattern seemed to me to reflect questionable strategy and poor execution. I pulled out some old corporate finance notes from an M&A class taught by Mark Sirower and estimated in May ’19 that the market was applying a negative growth value to the firm. It seemed to me that this was likely a function of insane product marketing (i.e. BeoHarmony TV priced at USD $15k in partnership with LG) matched with questionable product marketing (e.g. entry into crowded earset market positioned at the high end of the market). What could go wrong?!
| Item | DKK |
| Capital deployed | 1,600 |
| Enterprise Value | 1,287 |
| NOPAT | 132 |
| Rough WACC | 10% |
| Capitalized EVA | -280 |
| Current Operations Value | 1320 |
| Future Growth Opportunities inferred | -33 |
I developed a thesis: a) the company had a poor strategy, b) the brand had meaningful value, c) the pricing of the equity appropriately reflected the bad results, and c) the pressure on feckless management would support a sale of the business. I imagined that, presented with an opportunity to buy the assets of B&O, a strong management connected to either a legit global firm (e.g. Apple), a nascent firm (e.g. Sonos), or a niche player with capital and strong knowledge of a growth market (e.g. the Chinese group, Sparkle Roll LTD), could find a place to incorporate the assets and capabilities of B&O into their existing, and perhaps expanded, product mix, and thus create value. The market would view B&O’s value as being greater in new hands and, consequently, justify takeover at a premium to the recently depressed price.
So, I bought a modest amount of the US ADR. Our average cost was USD $6.83. My lack of conviction, not having previously considered a catalyst-based position in a brand with poor operating performance, caused me to size the position at just a shade under 0.5% of our portfolio.
It turns out my instincts on the catalysts to pressure management and look for a buyer both bore out. A willingness to consider a deal was reported in August 2019. The CEO turned over in October 2019. But, as I write this on April 18, 2020, the stock has collapsed further to USD $3.33. A buyer has not emerged. Indeed, Bloomberg featured an article on B&O which included the following critique:
When you stream your favorite beats from Spotify Technology SA, the highest quality you get is 320 kilobits per second. Apple Inc.’s competing service offers much the same. That’s less than a third of a CD’s 1,411 kbps, let alone the pristine audio quality of a vinyl record.
So the more that people sign up for streaming services – and Spotify added 57 million users over the past year alone – the less likely they are to spend $3,000 on a Bang & Olufsen sound system. It would be like trying to drive a Ferrari through central London at rush hour: You’re just not getting what you paid for.
…(CEO) Tear urgently needs to find a way to make B&O appealing to a buyer before the music stops completely.
‘In the Streaming Age, $3,000 Speakers Sound Like Duds’ by Alex Webb of Bloomburg on December 18, 2019
I don’t know what the future holds for B&O. I am hopeful that a buyer emerges and can position the attributes of the brand, its design and quality, within an existing suite of products. Perhaps Samsung, who purchased HARMAN, could incorporate attributes from B&O to improve its positioning in European markets. I also hope that any future acquirer decides to retain roots in Struer.
I invested time last summertime contemplating what a turnaround of B&O would look like and was encouraged when I saw many of those elements reflected in the reports and interviews with the firm’s leadership. Based upon the April 2, 2020 webcast, and the highlight below, it does not seem that there is a question about whether B&O can identify its challenges. But, can it identify solutions and then execute on them? I hope they do.
In the meantime, the B&O position on our monthly Fidelity statement provides another reminder of the extent to which, in finance, getting a thesis “partially correct” does not necessarily translate into value.
