Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Last November,  <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui &amp; Co Ltd (8031 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsui-chemicals-inc" target="_blank" data-smartkarma-citation="entities:1703:1" rel="noopener">Mitsui Chemicals (4183 JP)</a> jointly announced they would launch a Tender Offer for the 46% of shares of <a href="https://www.smartkarma.com/entities/honshu-chemical-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:9094:1" rel="noopener">Honshu Chemical Industry (4115 JP)</a> that they did not own.I wrote about it in <a href="https://www.smartkarma.com/insights/honshu-chemical-4115-an-embarrassment-of-riches" target="_blank" data-smartkarma-citation="insights:45197" rel="noopener">Honshu Chemical (4115) - An Embarrassment of Riches</a>. The deal was that after receiving all the approvals, perhaps in May 2021, they would launch a Tender Offer at ¥1830, which implied an EV//EBITDA of 2.7x.When Q3 earnings were announced in February, <a href="https://www.smartkarma.com/entities/honshu-chemical-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:9094:1" rel="noopener">Honshu Chemical Industry (4115 JP)</a> lifted its OP forecast by 24% and its Net Income forecast by 33% to ¥1.8bn. But as there was no event yet for the Tender Offer, there was no "need" to review the Board's support for the Tender Offer. I wrote about how this was WRONGER in <a href="https://www.smartkarma.com/insights/honshu-chemical-what-was-the-wrong-price-gets-wronger" target="_blank" data-smartkarma-citation="insights:48124" rel="noopener">Honshu Chemical - What WAS the Wrong Price Gets Wronger</a>.Last week I wrote about how this looked like it might get wronger still. On Friday, Honshu Chemical reported Revenues 2.4% higher than forecast for the full year (note the entire difference arrived in Q4. The OP result was more than 10% higher than the February upward revision to Guidance. The Net Profit number came in at ¥2.06bn, which was 14.4% higher than February guidance and 53% higher than guidance as of the Announcement. The extra cash added to the firm since then amounts to 3.3% of the Tender Offer Price. Conveniently, if any of this beat of forecasts on what the buyers called "high growth potential" would result in forward-looking forecasts different than the original management forecasts (note that the FY2021 OP result was the same as the FY2023 management forecast presented in November), the company is not showing FY2022 forecasts because of the takeover.

Last November,  Mitsui &amp; Co Ltd (8031 JP) and Mitsui Chemicals (4183 JP) jointly announced they would launch a Tender Offer for the 46% of shares of Honshu Chemical Industry (4115 JP) that they did not own.I wrote about it in Honshu Chemical (4115) - An Embarrassment of Riches. The deal was that after receiving all the approvals, perhaps in May 2021, they would launch a Tender Offer at ¥1830, which implied an EV//EBITDA of 2.7x.When Q3 earnings were announced in February, Honshu Chemical Industry (4115 JP) lifted its OP forecast by 24% and its Net Income forecast by 33% to ¥1.8bn. But as there was no event yet for the Tender Offer, there was no "need" to review the Board's support for the Tender Offer. I wrote about how this was WRONGER in Honshu Chemical - What WAS the Wrong Price Gets Wronger.Last week I wrote about how this looked like it might get wronger still. On Friday, Honshu Chemical reported Revenues 2.4% higher than forecast for the full year (note the entire difference arrived in Q4. The OP result was more than 10% higher than the February upward revision to Guidance. The Net Profit number came in at ¥2.06bn, which was 14.4% higher than February guidance and 53% higher than guidance as of the Announcement. The extra cash added to the firm since then amounts to 3.3% of the Tender Offer Price. Conveniently, if any of this beat of forecasts on what the buyers called "high growth potential" would result in forward-looking forecasts different than the original management forecasts (note that the FY2021 OP result was the same as the FY2023 management forecast presented in November), the company is not showing FY2022 forecasts because of the takeover. 

Honshu Chemical Shareholders Get the Short End of the Stick As The Board Is Ex-Gourd

In mid-November 2020, <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui &amp; Co Ltd (8031 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsui-chemicals-inc" target="_blank" data-smartkarma-citation="entities:1703:1" rel="noopener">Mitsui Chemicals (4183 JP)</a> announced a transaction to take out minorities in jointly-held subsidiary <a href="https://www.smartkarma.com/entities/honshu-chemical-industry-co" target="_blank" data-smartkarma-citation="entities:9094:1" rel="noopener">Honshu Chemical Industry Co (4115 JP)</a>. The price was at a 43% premium to then-traded price and a 20-year high. It was also<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/205/873/original/Screenshot+2021-05-13+at+10.55.05+AM.png?1620874520" class="editor-image img-responsive" data-smartkarma-image-id="205873"></figure></section>At the time, in <a href="https://www.smartkarma.com/insights/honshu-chemical-4115-an-embarrassment-of-riches" target="_blank" data-smartkarma-citation="insights:45197" rel="noopener">Honshu Chemical (4115) - An Embarrassment of Riches</a> I said...<blockquote>The result is a governance embarrassment for the two major acquirers, and the target company itself. </blockquote>The two companies, which combined owned 54% of Honshu Chemical, had said <blockquote>the Target has a high potential for growth with its various high-technologies in domains of high-performance monomer[s] related to ICT, Mobility and Healthcare.</blockquote>Then they decided that the "fair" value of the company (the Tender Offer Price) was decided at a 1-year forward EV/EBITDA of 2.7x (where net receivables and inventory was another 1.5x EBITDA), and a 1-year ex-cash PER of 3.7x. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/205/993/original/trump+low+price.gif?1620903117" class="editor-image img-responsive" data-smartkarma-image-id="205993"></figure></section>Three months later the company revised up its forecasts for EBIT and Net Profit for the full year this year by 25% and 33% respectively in February. This company has minimal debt, huge net cash. If you were to pay out the net cash, this 'fuddy-duddy' cyclical trades at 7x earnings, less than book, with a 16% ROE, and near 50% EBITDAROE.And it "has a high potential for growth."The procedures were expected to be completed in May, and then the tender offer would start. The company reports tomorrow 14 May after the close. Since the announcement, the two parent companies' total share return has averaged +30%. Since the original announcement, Honshu Chemical earnings forecasts are up 33% a share. A basket of mostly Chinese peer pure plays has outperformed Shanghai Composite by 13% since the announcement. This was always bumpable. This remains highly bumpable. With apologies to some of my (non-fella) readers...<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/205/925/original/more+cowbell.gif?1620889670" class="editor-image img-responsive" data-smartkarma-image-id="205925"></figure></section>

In mid-November 2020, Mitsui &amp; Co Ltd (8031 JP) and Mitsui Chemicals (4183 JP) announced a transaction to take out minorities in jointly-held subsidiary Honshu Chemical Industry Co (4115 JP). The price was at a 43% premium to then-traded price and a 20-year high. It was alsoAt the time, in Honshu Chemical (4115) - An Embarrassment of Riches I said...The result is a governance embarrassment for the two major acquirers, and the target company itself. The two companies, which combined owned 54% of Honshu Chemical, had said the Target has a high potential for growth with its various high-technologies in domains of high-performance monomer[s] related to ICT, Mobility and Healthcare.Then they decided that the "fair" value of the company (the Tender Offer Price) was decided at a 1-year forward EV/EBITDA of 2.7x (where net receivables and inventory was another 1.5x EBITDA), and a 1-year ex-cash PER of 3.7x. Three months later the company revised up its forecasts for EBIT and Net Profit for the full year this year by 25% and 33% respectively in February. This company has minimal debt, huge net cash. If you were to pay out the net cash, this 'fuddy-duddy' cyclical trades at 7x earnings, less than book, with a 16% ROE, and near 50% EBITDAROE.And it "has a high potential for growth."The procedures were expected to be completed in May, and then the tender offer would start. The company reports tomorrow 14 May after the close. Since the announcement, the two parent companies' total share return has averaged +30%. Since the original announcement, Honshu Chemical earnings forecasts are up 33% a share. A basket of mostly Chinese peer pure plays has outperformed Shanghai Composite by 13% since the announcement. This was always bumpable. This remains highly bumpable. With apologies to some of my (non-fella) readers...

Honshu Chemical (4115) Shareholders Perhaps One Day From a Wrong Price Takeover

On 11 November 2020, when <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui &amp; Co Ltd (8031 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsui-chemicals-inc" target="_blank" data-smartkarma-citation="entities:1703:1" rel="noopener">Mitsui Chemicals (4183 JP)</a> jointly announced they would launch a Tender Offer for the shares of <a href="https://www.smartkarma.com/entities/honshu-chemical-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:9094:1" rel="noopener">Honshu Chemical Industry (4115 JP)</a> that they did not own, I wrote about it in <a href="https://www.smartkarma.com/insights/honshu-chemical-4115-an-embarrassment-of-riches" target="_blank" data-smartkarma-citation="insights:45197" rel="noopener">Honshu Chemical (4115) - An Embarrassment of Riches</a>.
The deal was announced then, because the decision to launch the Tender Offer in future had been made and the negotiations with the Target Company had been completed, and the Special Committee of Honshu Chemical had decided that it was OK to support the Tender Offer and recommend it to its shareholders to tender. 
However, it was long-dated. The Tender Offer was not expected to start for another 6 months, and the valuation was truly embarrassing. It was a 43% premium, and a 20+ year high price. 
But it was still completely the wrong price. 
It is still worth a look.

On 11 November 2020, when Mitsui &amp; Co Ltd (8031 JP) and Mitsui Chemicals (4183 JP) jointly announced they would launch a Tender Offer for the shares of Honshu Chemical Industry (4115 JP) that they did not own, I wrote about it in Honshu Chemical (4115) - An Embarrassment of Riches.
The deal was announced then, because the decision to launch the Tender Offer in future had been made and the negotiations with the Target Company had been completed, and the Special Committee of Honshu Chemical had decided that it was OK to support the Tender Offer and recommend it to its shareholders to tender. 
However, it was long-dated. The Tender Offer was not expected to start for another 6 months, and the valuation was truly embarrassing. It was a 43% premium, and a 20+ year high price. 
But it was still completely the wrong price. 
It is still worth a look. 

Honshu Chemical - What WAS the Wrong Price Gets Wronger

On 11 November 2020, <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui &amp; Co Ltd (8031 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsui-chemicals-inc" target="_blank" data-smartkarma-citation="entities:1703:1" rel="noopener">Mitsui Chemicals (4183 JP)</a> announced a transaction to take out minorities in jointly-held subsidiary <a href="https://www.smartkarma.com/entities/honshu-chemical-industry-co" target="_blank" data-smartkarma-citation="entities:9094:1" rel="noopener">Honshu Chemical Industry Co (4115 JP)</a>.The result is a governance embarrassment for the two major acquirers, and the target company itself. And the Tender Offer is long-dated. It is announced today, but it is expected to start in May 2021 after receiving anti-trust approvals both in and outside Japan.But a situation with such an embarrassing valuation contains possibilities.  More below the fold.

On 11 November 2020, Mitsui &amp; Co Ltd (8031 JP) and Mitsui Chemicals (4183 JP) announced a transaction to take out minorities in jointly-held subsidiary Honshu Chemical Industry Co (4115 JP).The result is a governance embarrassment for the two major acquirers, and the target company itself. And the Tender Offer is long-dated. It is announced today, but it is expected to start in May 2021 after receiving anti-trust approvals both in and outside Japan.But a situation with such an embarrassing valuation contains possibilities.  More below the fold. 

Honshu Chemical (4115) - An Embarrassment of Riches

Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

ARRK was originally a design company making wooden objects and models. Fast-forward half a century later to the late 90s and <a href="https://www.smartkarma.com/entities/arrk-corp" target="_blank" data-smartkarma-citation="entities:4929:1" rel="noopener">Arrk Corp (7873 JP)</a> was a well-known model-maker for the electronics and auto industry and as that business moved into the software space so did ARRK. It listed in 1996, and in the early noughties expanded rapidly in CAD design. The stock price rose 8-fold from 2000 to 2005 and the share price peaked in February 2006 just as the Livedoor Marketing scandal started ripping a hole in small caps. Since then, the shares have fallen 98%.<a href="https://www.smartkarma.com/entities/mitsui-chemicals-inc" target="_blank" data-smartkarma-citation="entities:1703:1" rel="noopener">Mitsui Chemicals (4183 JP)</a> previously conducted a <a href="https://jp.mitsuichemicals.com/en/release/2017/171129.htm" target="_blank" rel="noopener">tender offer</a> acquiring a majority stake in <a href="https://www.smartkarma.com/entities/arrk-corp" target="_blank" data-smartkarma-citation="entities:4929:1" rel="noopener">Arrk Corp (7873 JP)</a> in January 2018. ARRK operates as a business group that provides development support for new products in the industrial goods sector and Mitsui Chemicals acquired this company as part of a plan for business growth in their "Mobility domain" which is a business segment that focuses on automotive materials (such as performance resin). On 14th May 2020, <a href="https://www.smartkarma.com/entities/mitsui-chemicals-inc" target="_blank" data-smartkarma-citation="entities:1703:1" rel="noopener">Mitsui Chemicals (4183 JP)</a><a href="https://jp.mitsuichemicals.com/sites/default/files/media/document/2020/kessan_200514_2e.pdf" target="_blank" rel="noopener">announced</a> a merger deal to buy out minorities in ARRK. The share exchange ratio will be 0.0511 Mitsui Chem Share for 1 Arrk Corp Share. The effective date of the share exchange is scheduled to be 1st August 2020. The shares of Mitsui Chem and ARRK last closed at ¥1,935 and ¥87. These prices currently translate to a gross spread of 13.7% with less than 3 months to completion. The spread will tighten immediately and trade tight until deal completion. As usual, there is more below the fold.

ARRK was originally a design company making wooden objects and models. Fast-forward half a century later to the late 90s and Arrk Corp (7873 JP) was a well-known model-maker for the electronics and auto industry and as that business moved into the software space so did ARRK. It listed in 1996, and in the early noughties expanded rapidly in CAD design. The stock price rose 8-fold from 2000 to 2005 and the share price peaked in February 2006 just as the Livedoor Marketing scandal started ripping a hole in small caps. Since then, the shares have fallen 98%.Mitsui Chemicals (4183 JP) previously conducted a tender offer acquiring a majority stake in Arrk Corp (7873 JP) in January 2018. ARRK operates as a business group that provides development support for new products in the industrial goods sector and Mitsui Chemicals acquired this company as part of a plan for business growth in their "Mobility domain" which is a business segment that focuses on automotive materials (such as performance resin). On 14th May 2020, Mitsui Chemicals (4183 JP)announced a merger deal to buy out minorities in ARRK. The share exchange ratio will be 0.0511 Mitsui Chem Share for 1 Arrk Corp Share. The effective date of the share exchange is scheduled to be 1st August 2020. The shares of Mitsui Chem and ARRK last closed at ¥1,935 and ¥87. These prices currently translate to a gross spread of 13.7% with less than 3 months to completion. The spread will tighten immediately and trade tight until deal completion. As usual, there is more below the fold.

Japan

Mitsui Chemicals, Inc. manufactures and markets a variety of chemical products. The Company's products include ethylene, propylene and other petrochemicals, basic chemicals, synthetic resins, and fine chemicals.  The Company operates worldwide.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Mitsui Chemicals (4183 JP)

Honshu Chemical Shareholders Get the Short End of the Stick As The Board Is Ex-Gourd

Honshu Chem OP and NP were up 38% and 53% for the year vs mgmt forecast just 6mos ago. What was super cheap is even cheaper. The Board didn't see...

Travis Lundy

Honshu Chemical (4115) Shareholders Perhaps One Day From a Wrong Price Takeover

Smallcap monomer maker Honshu Chemical is a TOB target. The parents decided in November to take out minorities. At the WRONG price. Directors...

Travis Lundy

Honshu Chemical - What WAS the Wrong Price Gets Wronger

The takeout of Honshu Chem minorities by majority co-owners was announced at the wrong price, did not tick the METI Fair M&A Guidelines, and the...

Travis Lundy

Honshu Chemical (4115) - An Embarrassment of Riches

Mitsui&Co (8031) and Mitsui Chemical (4183) are joining up to take out their jointly-owned subsidiary Honshu Chemical. The valuation is an utter...

Travis Lundy

ARRK-Mitsui Chem Merger: Done Deal

ARRK was originally a design company making wooden objects and models. Fast-forward half a century later to the late 90s and Arrk Corp (7873 JP)...

Janaghan Jeyakumar, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)