Why Do Holding Companies Trade at a Discount? A Clinical Study (*)

Abstract

Holding companies, which play an important role in corporate finance in Belgium and in other Continental European countries, often trade at a discount to their estimated net asset value (NAV). In the first part of this paper, we provide a structured analysis of possible explanations for the holding company discount. First, if the costs of a holding company outweigh its benefits, the holding company destroys value. Second, the estimated NAV may be an overestimation of the actual value of the holding company. Third, noise traders may cause underpricing of the holding company. Finally, the discount could be explained by private benefits of control. In the second part of the paper, we investigate the discount of Cobepa, a Belgian holding company. In consequence of a public bid by the French majority shareholder, BNP Paribas, for all Cobepa-shares, detailed information is available on the estimation of the NAV. The bid led to a conflict of interest between the Belgian management and the French shareholder of Cobepa. The bid was part of a strategy of BNP Paribas to refocus Cobepa. The Belgian management of Cobepa resisted this strategy and opposed the bid, claiming that the price offered by BNP Paribas (which was significantly below the estimated NAV of Cobepa) was too low. The Banking and Finance Commission, the official Belgian financial supervisor, confirmed the point of view of the Belgian management, and ruled that the price offered by BNP Paribas, which was significantly below the estimated NAV of Cobepa, was too low, an action with which it explored the limits of its authority.

Keywords: holding companies, closed-end fund discount, pyramidal groups, private benefits, case study

JEL Classification: 150, 210, 350