Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

<ul>
<li>The EURO STOXX 50 Index is one of the most highly-watched indices in mainland Europe and the annual index review takes place in September.</li>
<li>In <a href="https://www.smartkarma.com/insights/euro-stoxx-50-quiddity-leaderboard-for-sep-22-eurozone-s-annual-big-impact-rebal-trades" target="_blank" data-smartkarma-citation="insights:72736" rel="noopener">Euro Stoxx 50 Quiddity Leaderboard for Sep 22: Eurozone's Annual Big Impact Rebal Trades</a>, we looked at the Potential ADDs/DELs and the historical performance of Rebalance Events. </li>
<li>With less than a week left until the Reference date, we take a final look at the rankings in this insight.</li>
</ul>


The EURO STOXX 50 Index is one of the most highly-watched indices in mainland Europe and the annual index review takes place in September.
In Euro Stoxx 50 Quiddity Leaderboard for Sep 22: Eurozone's Annual Big Impact Rebal Trades, we looked at the Potential ADDs/DELs and the historical performance of Rebalance Events. 
With less than a week left until the Reference date, we take a final look at the rankings in this insight.


EURO STOXX 50 Quiddity Leaderboard: Two Potential ADDs with ~US$1bn Flows Each

European Event-Driven Analyst

Jesus Rodriguez Aguilar

<ul>
<li>
<a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a> surprised the market by announcing its division into two listed companies: one for regulated network assets, and the other for liberalised businesses (generation &amp; commercialisation/marketing).</li>
<li>Naturgy is trading at 10.1x EV/2021a EBITDA and at a demanding 21.9x P/E, higher than Iberdrola SA (IBE SM)'s 16.3x and Endesa SA (ELE SM)'s 11.5x.</li>
<li>Strategies: pair trades long REE SM/short NTGY SM or long ENG SM/short NTGY SM. Risk: this strategy assumes that both CriteriaCaixa and IFM will stop acquiring shares of Naturgy.</li>
</ul>



Naturgy Energy Group SA (NTGY SM) surprised the market by announcing its division into two listed companies: one for regulated network assets, and the other for liberalised businesses (generation &amp; commercialisation/marketing).
Naturgy is trading at 10.1x EV/2021a EBITDA and at a demanding 21.9x P/E, higher than Iberdrola SA (IBE SM)'s 16.3x and Endesa SA (ELE SM)'s 11.5x.
Strategies: pair trades long REE SM/short NTGY SM or long ENG SM/short NTGY SM. Risk: this strategy assumes that both CriteriaCaixa and IFM will stop acquiring shares of Naturgy.


The bid was saved at the eleventh hour. As per the <a href="https://www.naturgy.com/files/14102021_IP_resultado_OPA_EN.pdf" target="_blank" rel="noopener">CNMV release</a>, IFM achieves 10.83% of the capital of <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a> in the takeover bid. The fund waives the minimum requirement of 17% and complete the deal. There is no apportionment.From the bid announcement, IFM was confident that the partial takeover bid would succeed with at least 17% of the share capital tendered, but IFM reserved one last wild card, lowering the threshold to 10% (imposed by the banks' syndicate as the minimum to grant the financing). Thus ends one of the most controversial deals in Spain in recent years. The interesting question is what is IFM seeking in Naturgy. To obtain a paltry 10.8% it would have been much cheaper buying the shares in the market.Naturgy reduces its weight in the Ibex-35 as a result of the offer. After reducing the free float, the Technical Advisory Committee (CAT) of the index decided yesterday that it will take 20% ​​of Naturgy's capital as a reference for calculating the weighting, instead of the current 40%. Naturgy ended the session yesterday in 14th place on the Ibex, with a weight of 1.90%, according to the report by Bolsas y Mercados Españoles (BME).The adjustment will take place today Friday 15 October, at the close of the session with effect next Monday, 18 October.The loss of weight of Naturgy in the Ibex-35 may cause some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.After the takeover results were announced, Naturgy's shares soared and closed at €24, 4.62% more than on the prior session, possibly due to the accelerated repurchase of shares by hedge funds short the stock. Meanwhile, La Caixa is likely to continue buying shares to strengthen its position (up to 29.9%).Sell on strength.<ul>
<li>I do not see potential for meaningful gains at the current prices. The shares closed on 15 October at €23 (with c. €88 mn traded), exceeding Capital IQ consensus TP of € 22.25;</li>
<li>Lower liquidity after the takeover bid, given that the free-float is reduced from the current 27% to 16%. Its weight in the Ibex-35 will be reduced from 1.9% nowadays to approximately 1%. Some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.</li>
<li>Dividend yield at current prices remains below 5%. There are other options in the sector with greater potential for revaluation, higher liquidity and higher dividend yield (such as <a href="https://www.smartkarma.com/entities/red-electrica-corp-sa" target="_blank" data-smartkarma-citation="entities:21291:1" rel="noopener">Red Electrica Corp SA (REE SM)</a> and <a href="https://www.smartkarma.com/entities/enagas-sa" target="_blank" data-smartkarma-citation="entities:21266:1" rel="noopener">Enagas SA (ENG SM)</a>).</li>
</ul>

The bid was saved at the eleventh hour. As per the CNMV release, IFM achieves 10.83% of the capital of Naturgy Energy Group SA (NTGY SM) in the takeover bid. The fund waives the minimum requirement of 17% and complete the deal. There is no apportionment.From the bid announcement, IFM was confident that the partial takeover bid would succeed with at least 17% of the share capital tendered, but IFM reserved one last wild card, lowering the threshold to 10% (imposed by the banks' syndicate as the minimum to grant the financing). Thus ends one of the most controversial deals in Spain in recent years. The interesting question is what is IFM seeking in Naturgy. To obtain a paltry 10.8% it would have been much cheaper buying the shares in the market.Naturgy reduces its weight in the Ibex-35 as a result of the offer. After reducing the free float, the Technical Advisory Committee (CAT) of the index decided yesterday that it will take 20% ​​of Naturgy's capital as a reference for calculating the weighting, instead of the current 40%. Naturgy ended the session yesterday in 14th place on the Ibex, with a weight of 1.90%, according to the report by Bolsas y Mercados Españoles (BME).The adjustment will take place today Friday 15 October, at the close of the session with effect next Monday, 18 October.The loss of weight of Naturgy in the Ibex-35 may cause some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.After the takeover results were announced, Naturgy's shares soared and closed at €24, 4.62% more than on the prior session, possibly due to the accelerated repurchase of shares by hedge funds short the stock. Meanwhile, La Caixa is likely to continue buying shares to strengthen its position (up to 29.9%).Sell on strength.
I do not see potential for meaningful gains at the current prices. The shares closed on 15 October at €23 (with c. €88 mn traded), exceeding Capital IQ consensus TP of € 22.25;
Lower liquidity after the takeover bid, given that the free-float is reduced from the current 27% to 16%. Its weight in the Ibex-35 will be reduced from 1.9% nowadays to approximately 1%. Some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.
Dividend yield at current prices remains below 5%. There are other options in the sector with greater potential for revaluation, higher liquidity and higher dividend yield (such as Red Electrica Corp SA (REE SM) and Enagas SA (ENG SM)).


IFM/Naturgy: Tender Results & Ibex-35 Index Implications

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a>'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by <a href="https://www.smartkarma.com/entities/endesa-sa" target="_blank" data-smartkarma-citation="entities:21264:1" rel="noopener">Endesa SA (ELE SM)</a> (-11% in four days) and <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a> (-8.8%). See charts in the Insight.
The Board of <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a> considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:
<ol class="">
<li>
IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.</li>
<li>
IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.</li>
<li>
IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.</li>
<li>
IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.</li>
</ol>
I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on Naturgy Energy Group SA (NTGY SM)'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by Endesa SA (ELE SM) (-11% in four days) and Iberdrola SA (IBE SM) (-8.8%). See charts in the Insight.
The Board of Naturgy Energy Group SA (NTGY SM) considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:


IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.

IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.

IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.

IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.

I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

IFM/Naturgy: Board Opinion And Bid Scenarios

The Spanish Government ends, de facto, the liberalizing regime that ruled over the Spanish economy since 1999, because it considers necessary to limit the possible acquisitions of strategic Spanish companies by ANY foreign investor after the COVID-19 hit.
The Spanish Government enhances anti-takeover rules:
<ul>
<li>Temporarily until June 30, 2021, the Government has suspended the liberalization regime for foreign direct investments made by residents and other countries of the EU and the EFTA. Any attempt to acquire over 10% of a Spanish listed company by any EU or EFTA corporate or investor must be approved by the Cabinet.
</li>
<li>In the case of investments of non-EU origin, the suspension of the liberalization regime is maintained indefinitely, until a new legislative change is introduced.</li>
<li>This protects the Ibex 35 companies from takeover raids by European rivals.</li>
</ul>
This rule could make it possible to avoid hypothetical bids of <a href="https://www.smartkarma.com/entities/total-sa" target="_blank" data-smartkarma-citation="entities:812:1" rel="noopener">Total Sa (FP FP)</a> or <a href="https://www.smartkarma.com/entities/eni-spa" target="_blank" data-smartkarma-citation="entities:21185:1" rel="noopener">Eni SpA (ENI IM)</a> for <a href="https://www.smartkarma.com/entities/repsol-sa" target="_blank" data-smartkarma-citation="entities:21292:1" rel="noopener">Repsol SA (REP SM)</a> or <a href="https://www.smartkarma.com/entities/deutsche-telekom-ag" target="_blank" data-smartkarma-citation="entities:21611:1" rel="noopener">Deutsche Telekom Ag (DTE GR)</a> for <a href="https://www.smartkarma.com/entities/telefonica-sa" target="_blank" data-smartkarma-citation="entities:21299:1" rel="noopener">Telefonica SA (TEF SM)</a> , which have been the subject of rumours in the market.
<ul>
<li>Analysts see Repsol and Telefónica as the most vulnerable members of the IBEX 35 index, due to their current low valuation. Repsol trades at 4.9x EV/Forward EBITDA vs. the median of comparable companies, 6.3x. Telefonica is trading at 5.2x EV/Forward EBITA vs. the median of comparable companies, 6.5x.</li>
</ul>
Some transactions that are underway could be affected. For example, the French group Vinci agreed to buy the industrial services division of ACS, for over €5 bn (for reference: <a href="https://www.smartkarma.com/insights/acs-unlocking-value-via-disposals" target="_blank" data-smartkarma-citation="insights:44311" rel="noopener">ACS: Unlocking Value Via Disposals</a>).

The Spanish Government ends, de facto, the liberalizing regime that ruled over the Spanish economy since 1999, because it considers necessary to limit the possible acquisitions of strategic Spanish companies by ANY foreign investor after the COVID-19 hit.
The Spanish Government enhances anti-takeover rules:

Temporarily until June 30, 2021, the Government has suspended the liberalization regime for foreign direct investments made by residents and other countries of the EU and the EFTA. Any attempt to acquire over 10% of a Spanish listed company by any EU or EFTA corporate or investor must be approved by the Cabinet.

In the case of investments of non-EU origin, the suspension of the liberalization regime is maintained indefinitely, until a new legislative change is introduced.
This protects the Ibex 35 companies from takeover raids by European rivals.

This rule could make it possible to avoid hypothetical bids of Total Sa (FP FP) or Eni SpA (ENI IM) for Repsol SA (REP SM) or Deutsche Telekom Ag (DTE GR) for Telefonica SA (TEF SM) , which have been the subject of rumours in the market.

Analysts see Repsol and Telefónica as the most vulnerable members of the IBEX 35 index, due to their current low valuation. Repsol trades at 4.9x EV/Forward EBITDA vs. the median of comparable companies, 6.3x. Telefonica is trading at 5.2x EV/Forward EBITA vs. the median of comparable companies, 6.5x.

Some transactions that are underway could be affected. For example, the French group Vinci agreed to buy the industrial services division of ACS, for over €5 bn (for reference: ACS: Unlocking Value Via Disposals).

Enhanced Limits to Investments in Spanish Companies

Spain

Endesa S.A. is active in the generation, transmission, distribution, and commercialization of electricity in Spain, Portugal, and North Africa. The company is also a major operator in the natural gas market and offers other services related to the energy business.

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Endesa SA (ELE SM)

EURO STOXX 50 Quiddity Leaderboard: Two Potential ADDs with ~US$1bn Flows Each

I expect 2 ADDs with ~US$1bn inflows each and 2 DELs with ~US$0.5bn in outflows each. While flows are significant, the LONG ADDs-SHORT DELs Trade...

Janaghan Jeyakumar, CFA

Demerger Plans for Naturgy

The demerger does not represent much upside potential in my view, other than paving the way for future corporate operations. Naturgy seems...

Jesus Rodriguez Aguilar

IFM/Naturgy: Tender Results & Ibex-35 Index Implications

IFM achieves 10.8%. Sell on strength on less potential for meaningful gains at current prices, lower liquidity and weight in the Ibex-35 will be...

Jesus Rodriguez Aguilar

IFM/Naturgy: Board Opinion And Bid Scenarios

It could potentially be interesting to stay up to 2 October, in case there is an improvement in IFM's offer and sell upon the news, unless one...

Jesus Rodriguez Aguilar

Enhanced Limits to Investments in Spanish Companies

Any attempt to acquire over 10% of a Spanish listed company by any foreign investor must be approved by the Cabinet. This could prevent bids of...

Jesus Rodriguez Aguilar

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