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SOGEN FUNDS'
JEAN-MARIE EVEILLARD ET AL.
(continued from preceding
page)
OID: Assuming for the moment that they can earn the returns you describe, can they reinvest those earnings at high returns, too?
Eveillard: Yes. In normal times, they generate lots of excess cash flow. And they can reinvest it - either by installing new equipment or making small acquisitions.
Because the paper business is not a stable business and earnings vary so much from one year to the next, the price acquirers pay does, too. In fact, it varies tremendously.
OID: Because the price of paper varies so much.
Eveillard: Right. Therefore, the smart people make acquisitions of good, small paper companies at the bottom of the cycle when the managements of paper companies and their shareholders are sort of discouraged - particularly when there is some financial distress.
OID: And I gather you would include Emin Leydier's management among those smart people rather than among those who'll be selling out in distress.
Eveillard: Exactly.
OID: Their FF500 million of debt doesn't make you worry about them one day being a distressed seller themselves? After all, that's over FF300 per share.
Eveillard: That debt would make me uncomfortable - indeed I would be uncomfortable even if they had no debt - did they not meet several key criteria: First, that they not be in the worst kind of commodity business. Second, that they be the industry's low-cost competitor. And, third, that management be skilled, motivated and honest. If a business passes muster on each of those criteria, debt or no debt and commodity business or not, then I think it can have lots of value.
OID: And since you mentioned management, I gather it's no coincidence that the top two officers are named Emin and Leydier.
Eveillard: That's right. It's a business that the two families have developed.
OID: Which suggests that perhaps the enterprise may have their attention.
Eveillard: It has their attention because their money is at stake. The families, which include more than just the two top officers, control the company.
But that may be both a plus and a minus. It's a plus for the reason you suggest - they have their own money and pride at stake. However, it may also be a minus in that, as I mentioned earlier, they can't be taken over against their will. The reason I don't see it as a minus is that I think they're doing a fine job.
ADJUSTED TO AMERICAN-STYLE ACCOUNTING,
EVEN THEIR DEPRESSED EARNINGS ARE IMPRESSIVE.
Page 14 of 20
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