Reinet Investments (REIN LX)

Reinet Investments is a publicly traded family office of the Rupert family of South Africa.

This investment vehicle was spun out of swiss based Compagnie Financiere Richemont in a
complicated, multi step corporate restructuring.

Reinet was endowed with cash and with shares of British American Tobacco (BATS LN).

Today, there are about 196 million REIN LX shares outstanding (or about 1960 million REI SJ depositary receipts traded in South Africa).

The assets that Reinet today holds are 406 million Euro of Cash and Investments, and 83.5 million shares of BATS LN.

The 406 million in cash and investments is comprised of approximately 350 million euros in cash and the rest in solar and optical technology companies. The venture capital allocation is fairly minimal overall. Therefore for simplicity, lets just say that 406 million Euro in cash sits within this holding company. This equates to about Euro 2.07 per outstanding REIN LX share.

The principal asset of Reinet is the BATS LN shareholding which currently amounts to 0.43 BATS LN per REIN LX. The price of BATS shares in Euro equivalents is about 18.25 Euros as of today's closing price.

Thus each REIN LX at present contains BATS share worth Euro 7.85.

There are no significant liabilities.

The cash and BATS holdings represents Net Asst Value.

NAV turns aout to be Euro 9.92 per REIN LX shares.

At present REIN LX trades at Euro 6.85, or 69% of NAV.

In other words this holding or investment company trades at 31% discount to NAV.

Reinet Investments was set up 2 months ago as an investment firm managing assets under a closed end, 1%/10% fee structure.

The company currently has about Euro 1.93 billion under management.

Today the Rupert family is a major shareholder in the entity and through an optional share placing, they will subscribe to additional shares at parity to NAV. This optional placing will be concluded on December 19 or shortly thereafter.

After this share placing, it is believed that the assets within Reinet Investments and the Reinet Fund will be approximately Euro 2.1 billion.

Why would anyone at this point consider an investment in Reinet?

1) The discount to NAV of 31% which might be deemed excessive given the quality of assets and given how recent the entity was set up. In a closed-end fund context, something has to be seriously impaired for a fund to trade at a 31% discount to NAV. There is no asset value impairment going on at Reinet, other than the Rupert family controlling their family office and owning currently about 25-30% of shares outstanding. After the option placing the Rupert family will come to own about 40% of shares outstanding.

2) The track record of the Rupert family is excellent by most standards. 2 Generations of Ruperts have shown quite exceptional business acumen turning them into billionaires (net worth estimated around 2-3 billion according to the usual wealth trackers). Sure enough there is hard work behind it all and typical financial journalists dont give proper attribution of how much of the results are due to industry and how much due to capital. We are not going at this point into details of trying to demystify the sources of Rupert family wealth. They are shrewd dealmakers. they are hard charging dealmakers. They are not known for giving away anything for free. Looking at their corporate constellations over time, the like to operate in tax-efficient jurisdictions while enjoying quality of life. So some people work hard, while others work smart.
Clearly, the Ruperts are smart, and they have not given up working hard. This assessment certainly applies to the family patriarch Johann Rupert.

Reinet Investments gives an opportunity to participate over time in this long term track record by the family. As a passive portfolio investor. We hope that at this point the portfolio of assets is sufficiently large to warrant the effort and that no additional capital structure modifications are needed to prove the family office concept.

At this point, no investments have been undertaken but 80% of assets is centered on BATS LN holding. The rest is cash. BATS LN pays a healthy dividend. And it is a defensive stock. A sin stock. So while Reinet is a bet on the track record of the Ruperts, it is also a defensive stock at this point.

At this point, REIN LX trades at a 13% discount to the value of its BATS holding alone.
This does not inclued the over 2 euros in cash per share that come as a freebie.

For any investor without tobacco scruples, this gamble is probably worth it.

If one does not like BATS LN, one can alway short out that exposure partially or in whole. and make it a call on the Rupert track record along, but such a trade would ignore that tobacco is part of what made the Ruperts so successful over time.

Enough said.

3) Reason number 3 to invest is their articulated strategy for investment.

At this point they have not allocated any money in this family office other than 55 million in venture like investment in solar and optical technologies.

Johann Rupert has expressed all along his scepticism about the current economic state of affairs. He has been critical about the growth in credit and has generally been making a bearish case about the business cycle. He has been bearish for years which has earned him the nick name of Rupert the Bear, which we find quite charming. We wholeheartedly go along with Mr. Ruperts sentiment, given that our own sentiment is defensive, conservative and capital preservation oriented. But growth oriented over long periods of time.

So, Mr. Rupert has laid out a case that there will be plenty of seizures in the financial markets over the next few years and this should create numerous investment opportunities. We generally agree with that. No indication has been given on the timing and size of future investments. We shall see if investment allocations occur in 10 MM tranches or 100 million tranches. and when. Reinet Fund is structured as a closed end fund and the organization is under no pressure to undertake any investments now. This is good.

There evidently is no rush to allocate any assets for as long as investors run up to the Treasury department and demand zero interest 4-week T-bills in 4 times oversubscribed auctions.

The current market environment is enough sickening and the flight to quality has eluded investors from the real systemic risks.

We find it very ironic that flight to quality is going to the US Dollar and to the Treasury at Zero interest rate.

Reinet at this point has an asset bias in Euros for its cash holdings and in various emerging market currencies since BATS LN essentially is an emerging market play in many jurisdictions.
It is probably a healthy diversification outside the G7 countries. At least conceptually.

Although there are some investment opportunities surfacing at this point, there are indications that asset valuations could go much lower after a snapback rally. Tobin's Q-Ratio seems to indicate so.

The current bear market isnt quite over yet.

Since no investments have been undertaken by Reinet at this point, we hold our breath on applauding any such moves.

For the record, Mr. Rupert wants to invest in opportunities created by the seizures in the financial market.

We shall see in the future what he means with that, and to the degree that such investments are disclosed to shareholders.

An investor in Reinet certainly would have to feel comfortable with that contrarian, anti-cyclical investment philosophy.

We surely are.


Thus for various above cited reasons, we recommend purchase of these heavily discounted securities as a long term investment. It would be an allocation to a closed end fund asset and a family office run by some shrewd, if not smart investors.