Buying 3i Group PLC

I established a position in 3i Group PLC (III/London Stock Exchange) Monday. 3i is headquartered in London and invests in LBOs (leveraged buyouts), growth opportunities and venture capital in Europe, Asia and the United States.

3i closed in London on Monday at 652 pence per share, which equals roughly US$11.98.

The company invests primarily in small-to-mid sized private equity deals across the UK and the European continent, and plans for more activity in Asia. It has a distinct competitive advantage in doing deals across Europe. This is true for three reasons. First, there is less competition in doing small-to-mid size deals. Second, 3i enjoys a solid network of offices across the continent that maintains strong business relationships on the ground. And third, the company’s pan-European scope means it is not tied to conditions in any one or two countries on the continent. (More about 3i’s willingness to NOT do deals for the sake of doing them, plus it’s prospects in Asia in a moment.)

The company announced its fiscal year results last Thursday. As of 3/31/05, its net asset value was 603 pence per share. As stated above, 3i closed in London on Monday at 652 pence, which means its trading a little over one times NAV. But 3i calculates its NAV conservatively and its intrinsic value is probably closer to 800 pence per share. When 3i sells an investment, the mark-up from stated carrying value typically is about 50%.

3i has approximately 613 million shares outstanding, with a market capitalization of almost 4 billion pounds (roughly US$7.3 billion).

Shareholders come first at 3i

The company has been winding up investments over the past year -- the number of companies invested in has dropped from 1,900 to 1,500. Management says it can’t find enough attractive opportunities with the proceeds and is planning to return 500 million pounds (approximately $920 million) to shareholders, pending a shareholder vote scheduled for July 6.

Half of that amount will be paid in a special dividend of 40.7 pence per share. The other half will be used for a share buyback (representing approximately 6% of 3i’s outstanding shares).

Chief Executive Philip Yea, who came on board last July, has said plans are to reduce the total number of investments to about 800. That suggests more investment gains to come.

Yea said during last week’s conference call that “the priority is to find good assets to invest in.” But added, when asked about future payouts to shareholders, “I don’t expect this to be our last.” I don't, either.

More Focus on Asia

3i is increasingly looking outside the UK to boost returns. In the past year, over half of the company’s new investments were made outside the UK, with most in the European continent.

Yea said the company is expanding its operations in Asia. The company has opened an office in India, and is opening a new one in Shanghai this week. It’s had an office in Hong Kong for some time.

“Asia is very important to us,” Yea explained. “Strategically we’ve been putting a lot of effort into the region.”

NOTE: As stated, 3i’s shares trade on the London Stock Exchange. It’s a member of the FTSE 100. I bought my shares in London using Charles Schwab’s global trading desk (1-800-992-4685). Investors buying ordinary (common) shares of British companies using Schwab typically pay a markup of 1.5%. 3i’s shares also trade over the counter in the US, but the difference between the bid and asked can be greater. There is no ADR available.

CG’s advice: ALWAYS use a limit order when buying foreign shares on foreign exchanges. (Actually, I ALWAYS places limit orders every time I purchase any stock.)

Also, fluctuations between the British pound and US dollar could impact my investment in 3i for better or worse.

Comments

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[Hamed Elbarki]

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