Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

<a href="https://www.smartkarma.com/entities/20668" target="_blank" data-smartkarma-citation="entities:20668:1">Mitsubishi Corp (8058 JP)</a> has just announced it resolved at its Board of Directors meeting it intends to conduct a tender offer for 16,649,900 shares (16.65%) of <a href="https://www.smartkarma.com/entities/1040" target="_blank" data-smartkarma-citation="entities:1040:1">Lawson Inc (2651 JP)</a> pending resolution of the preconditions (anti-trust and any other regulatory approvals, Lawson's board has agreed to support the tender offer, MACs, etc) to take its ownership above 50%. That 16.65mm shares is about 25% of the float. Lawson has <a href="http://www.lawson.co.jp/company/news/detail/1279848_2504.html" target="_blank">announced</a> on its website (Japanese only so far) the intention to support the Tender Offer if the Tender Offer commences and pre-conditions are met. There are interesting ramifications to the details (more below).As suggested in yesterday's piece, <a href="https://www.smartkarma.com/insights/lawson-mitcorp-tender-coming" target="_blank" data-smartkarma-citation="insights:5877">Lawson - MitCorp Tender Coming?</a> the price proposed is higher than the Nikkei's suggestion, though not as high as is probably appropriate. The <a href="http://www.mitsubishicorp.com/jp/en/pr/archive/2016/files/0000031079_file1.pdf" target="_blank">announcement</a> by Mitsubishi Corp says the Tender Offer price will be ¥8,650/share and the Tender Offer is expected to commence in January 2017 and go for 20-30 business days. The timing may have some potential optionality on the economics for shareholders. There is no minimum quantity to the tender offer - i.e. if fewer than the expected number of shares to be purchased are tendered, ALL shares will be purchased.Also counter to what the Nikkei <a href="http://asia.nikkei.com/Business/Deals/Trading-house-Mitsubishi-mulls-bid-for-Lawson" target="_blank">suggested</a>, there is no intention to have Lawson conduct a private placement of new shares in order to get MitCorp above 50% if the tender does not allow MitCorp to acquire sufficient shares. As noted in the above-linked piece, that would have been a governance nightmare. Instead, Mitsubishi Corp in the announcement says "if the Target Company does not become a consolidated subsidiary of the Offeror as a result of the Tender Offer, then the Offeror, in light of the market trends and other factors, intends to purchase additional shares in the Target Company through market trading and other methods after the Tender Offer is completed in order to make the Target Company a consolidated subsidiary of the Offeror."This makes things potentially VERY interesting. Let's imagine for a minute that NOBODY tendered their shares. The expression of intent suggests that Mitsubishi would then go into the market to buy a quarter of the float. If they did, one might expect the market impact to be substantially greater than the price attainable through the tender offer. Perhaps MitCorp would amend their intention because of the impact on price, perhaps not. Perhaps current holders would tender. If everyone tenders, then one could expect there will be no secondary market purchase after the tender. It's the very definition of an interesting game theory problem. And the market actors are independent. In any case, the makeup of the shareholder base is highly-oriented to "free float" which means pro-ration will be expected to be on the low side. There are relatively few cross-shareholding relationships outside of the 33.5mm shares held by Mitsubishi Corp. MitCorp's relative Mitsubishi Shokuhin owns 0.3%, NTT Docomo holds ~2%, and another few miscellaneous companies hold about 1%. This makes the tender pro-ration guesstimate more interesting. The absolute minimum pro-ration is about 25.1%. I expect the practical minimum is about 50% but I expect pro-ration could be a fair bit higher. In addition, there is a bunch more VERY interesting optionality to this trade. The trade has negative convexity risks (short intracorrelation to the market and long a falling pro-ration to the downside) and some corporate action optionality to the upside. This is an interesting arb trade.Arb Grids and much more below the fold for subscribers.[This event will see ongoing Insights. Please follow the Insight stream to get updates, or check back in the Discussions or the Stream for more ongoing content].

Mitsubishi Corp (8058 JP) has just announced it resolved at its Board of Directors meeting it intends to conduct a tender offer for 16,649,900 shares (16.65%) of Lawson Inc (2651 JP) pending resolution of the preconditions (anti-trust and any other regulatory approvals, Lawson's board has agreed to support the tender offer, MACs, etc) to take its ownership above 50%. That 16.65mm shares is about 25% of the float. Lawson has announced on its website (Japanese only so far) the intention to support the Tender Offer if the Tender Offer commences and pre-conditions are met. There are interesting ramifications to the details (more below).As suggested in yesterday's piece, Lawson - MitCorp Tender Coming? the price proposed is higher than the Nikkei's suggestion, though not as high as is probably appropriate. The announcement by Mitsubishi Corp says the Tender Offer price will be ¥8,650/share and the Tender Offer is expected to commence in January 2017 and go for 20-30 business days. The timing may have some potential optionality on the economics for shareholders. There is no minimum quantity to the tender offer - i.e. if fewer than the expected number of shares to be purchased are tendered, ALL shares will be purchased.Also counter to what the Nikkei suggested, there is no intention to have Lawson conduct a private placement of new shares in order to get MitCorp above 50% if the tender does not allow MitCorp to acquire sufficient shares. As noted in the above-linked piece, that would have been a governance nightmare. Instead, Mitsubishi Corp in the announcement says "if the Target Company does not become a consolidated subsidiary of the Offeror as a result of the Tender Offer, then the Offeror, in light of the market trends and other factors, intends to purchase additional shares in the Target Company through market trading and other methods after the Tender Offer is completed in order to make the Target Company a consolidated subsidiary of the Offeror."This makes things potentially VERY interesting. Let's imagine for a minute that NOBODY tendered their shares. The expression of intent suggests that Mitsubishi would then go into the market to buy a quarter of the float. If they did, one might expect the market impact to be substantially greater than the price attainable through the tender offer. Perhaps MitCorp would amend their intention because of the impact on price, perhaps not. Perhaps current holders would tender. If everyone tenders, then one could expect there will be no secondary market purchase after the tender. It's the very definition of an interesting game theory problem. And the market actors are independent. In any case, the makeup of the shareholder base is highly-oriented to "free float" which means pro-ration will be expected to be on the low side. There are relatively few cross-shareholding relationships outside of the 33.5mm shares held by Mitsubishi Corp. MitCorp's relative Mitsubishi Shokuhin owns 0.3%, NTT Docomo holds ~2%, and another few miscellaneous companies hold about 1%. This makes the tender pro-ration guesstimate more interesting. The absolute minimum pro-ration is about 25.1%. I expect the practical minimum is about 50% but I expect pro-ration could be a fair bit higher. In addition, there is a bunch more VERY interesting optionality to this trade. The trade has negative convexity risks (short intracorrelation to the market and long a falling pro-ration to the downside) and some corporate action optionality to the upside. This is an interesting arb trade.Arb Grids and much more below the fold for subscribers.[This event will see ongoing Insights. Please follow the Insight stream to get updates, or check back in the Discussions or the Stream for more ongoing content].

Japan TMT Analyst

Pelham Smithers

Market Intel on Asian Tech with a Japan focus

Pelham Smithers Associates

Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods. 

Research is provided by the following:
Pelham Smithers: Macro, consumer electronics, telecoms & pharma
Joel Scheiman: Electronics materials / components
Julie Boote: Autos
Will Nestuk: Capital goods, machinery & transportation equipment parts
Thao Nguyen: eCommerce, internet content, marketing & advertising

Thematic (Sector/Industry)

While it is not a given that a switch from a high growth, high interest rate environment to a low growth, low interest rate environment is a good one for equities in general, it should be good for defensive stocks, because these are the most bond-like of equities and the switch almost defines a fixed income bull market. Japan may not have been particularly high growth or high interest rate in 2000, but it was certainly higher growth and higher interest rate than today, and it is no surprise that defensive sectors like foods (+210% relative to Topix since 1999) and pharmaceuticals (+160%) have done very well over this time. The question, now, is whether this is set to continue, or whether we might have hit a turning point.

While it is not a given that a switch from a high growth, high interest rate environment to a low growth, low interest rate environment is a good one for equities in general, it should be good for defensive stocks, because these are the most bond-like of equities and the switch almost defines a fixed income bull market. Japan may not have been particularly high growth or high interest rate in 2000, but it was certainly higher growth and higher interest rate than today, and it is no surprise that defensive sectors like foods (+210% relative to Topix since 1999) and pharmaceuticals (+160%) have done very well over this time.  The question, now, is whether this is set to continue, or whether we might have hit a turning point.

Japan

Mitsubishi Shokuhin Co.,Ltd. is a wholesaler of processed food. The Company sells a varietyof groceries including canned products, dried food, frozen food, pet food, beverages, and liquors.

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Mitsubishi Shokuhin (7451 JP)

Lawson - MitCorp Tender Has Arrived

Mitsubishi Corp (8058 JP) has just announced it resolved at its Board of Directors meeting it intends to conduct a tender offer for 16,649,900...

Travis Lundy

Death Rattle for Defensives?

While it is not a given that a switch from a high growth, high interest rate environment to a low growth, low interest rate environment is a good...

Pelham Smithers Associates

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