Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<p>When NTT announced its proposed cash takeover of NTT Docomo, it meant two things. </p><ol>
<li>The biggest cash takeover ever seen in Japan.</li>
<li>The biggest equity reallocation trade ever seen in Japan off a single event.</li>
</ol><p>This was discussed to some extent in <em><a href="https://www.smartkarma.com/insights/ntt-docomo-the-three-arbs-and-the-great-re-allocation-trade" target="_blank" data-smartkarma-citation="insights:44115" rel="noopener">NTT Docomo: The Three Arbs and the Great Re-Allocation Trade</a></em>but details remained to be ironed out. That's happening now. </p><hr><p>Yesterday, the TSE let its TOPIX Index customers know that it would lower the Free Float Weight of <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> in TOPIX at the close of the 27th of November.</p><p>I had expected that they would wait until <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> presented its Demand For Cash Out to NTT Docomo - an event I would expect to occur on 24 November - and for the TSE to designate NTT Docomo a Security To Be Delisted on that day. If that happened, TOPIX and other TSE-calculated indices would remove NTT Docomo from their indices at the close of the third business day following such designation. That would be the 27th. </p><p>It is possible NTT does its Demand for Cash Out on a different day. If that happens, then the trade is split. </p><p>The important trade here, as I have been trying to impress on readers, is NOT the NTT Docomo deletion but the index portfolio management trades which happen because of it. NTT Docomo will be bought by arbitrageurs. But the index funds will have to buy the index ex-Docomo in the size that they own(ed) Docomo. That is - over the course of the TOPIX and JPX Nikkei 400 index deletions - not far from JPY 900 billion to buy. </p><p>Details and trade suggestions below.</p>

When NTT announced its proposed cash takeover of NTT Docomo, it meant two things. 
The biggest cash takeover ever seen in Japan.
The biggest equity reallocation trade ever seen in Japan off a single event.
This was discussed to some extent in NTT Docomo: The Three Arbs and the Great Re-Allocation Tradebut details remained to be ironed out. That's happening now. Yesterday, the TSE let its TOPIX Index customers know that it would lower the Free Float Weight of NTT Docomo Inc (9437 JP) in TOPIX at the close of the 27th of November.I had expected that they would wait until NTT (Nippon Telegraph &amp; Telephone) (9432 JP) presented its Demand For Cash Out to NTT Docomo - an event I would expect to occur on 24 November - and for the TSE to designate NTT Docomo a Security To Be Delisted on that day. If that happened, TOPIX and other TSE-calculated indices would remove NTT Docomo from their indices at the close of the third business day following such designation. That would be the 27th. It is possible NTT does its Demand for Cash Out on a different day. If that happens, then the trade is split. The important trade here, as I have been trying to impress on readers, is NOT the NTT Docomo deletion but the index portfolio management trades which happen because of it. NTT Docomo will be bought by arbitrageurs. But the index funds will have to buy the index ex-Docomo in the size that they own(ed) Docomo. That is - over the course of the TOPIX and JPX Nikkei 400 index deletions - not far from JPY 900 billion to buy. Details and trade suggestions below.

The Great Docomo/TOPIX Reallocation Trade

Event-Driven

<p>With the results of the <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> Tender Offer for <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> announced yesterday, getting them to 91.46%, this triggers a fast-track change in the Nikkei 225 treatment based on a <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20200615E_1.pdf" target="_blank" rel="noopener">rule change for constituent selection</a> announced on 15 June. </p><p>This was discussed briefly in <a href="https://www.smartkarma.com/insights/surprising-ntt-docomo-tender-result-accelerates-squeezeout-great-re-allocation-nikkei-225-change" target="_blank" data-smartkarma-citation="insights:45412" rel="noopener">Surprising NTT Docomo Tender Result Accelerates Squeezeout, Great Re-Allocation, Nikkei 225 Change</a>.</p><p>The relevant part of the rule change is shown below. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/172/461/original/Screenshot%202020-11-18%20at%202.53.16%20PM.png?1605682411" class="editor-image img-responsive" data-smartkarma-image-id="172461"></figure></section><p></p><p>The first time it was used was with the replacement for <a href="https://www.smartkarma.com/entities/sony-financial-holdings-inc" target="_blank" data-smartkarma-citation="entities:564:1" rel="noopener">Sony Financial Holdings (8729 JP)</a> where the clearance of 90% made delisting a foregone conclusion because it only required the parent to ask. The same is the case here. </p><p>Today, the Nikkei Index Business Office <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20201118E_1.pdf" target="_blank" rel="noopener">announced</a> the replacement for NTT Docomo in the Nikkei 225 Index. It is <a href="https://www.smartkarma.com/entities/sharp-corp" target="_blank" data-smartkarma-citation="entities:391:1" rel="noopener">Sharp Corp (6753 JP)</a> with a presumed par value of 50 yen. The change will be made at the close of trading on 1 December 2020 (8 trading days left). </p><p>This is surprising. Very surprising. <em><strong>And it matters a lot.</strong></em></p><p>Due to the reverse 1:10 share split of end-2017, this <em>should</em> have been a presumed par value of 500 yen. I half wonder whether they made a typo and will correct it. The other possibility is that because it happened while the stock was in the Purgatorio of the Second Section, that data simply didn't register so they ignored it. Which would be a <em>Very Bureaucratic Thing To Do</em>.</p><p>Details on the index rebalance trade below.</p>

With the results of the NTT (Nippon Telegraph &amp; Telephone) (9432 JP) Tender Offer for NTT Docomo Inc (9437 JP) announced yesterday, getting them to 91.46%, this triggers a fast-track change in the Nikkei 225 treatment based on a rule change for constituent selection announced on 15 June. This was discussed briefly in Surprising NTT Docomo Tender Result Accelerates Squeezeout, Great Re-Allocation, Nikkei 225 Change.The relevant part of the rule change is shown below. The first time it was used was with the replacement for Sony Financial Holdings (8729 JP) where the clearance of 90% made delisting a foregone conclusion because it only required the parent to ask. The same is the case here. Today, the Nikkei Index Business Office announced the replacement for NTT Docomo in the Nikkei 225 Index. It is Sharp Corp (6753 JP) with a presumed par value of 50 yen. The change will be made at the close of trading on 1 December 2020 (8 trading days left). This is surprising. Very surprising. And it matters a lot.Due to the reverse 1:10 share split of end-2017, this should have been a presumed par value of 500 yen. I half wonder whether they made a typo and will correct it. The other possibility is that because it happened while the stock was in the Purgatorio of the Second Section, that data simply didn't register so they ignored it. Which would be a Very Bureaucratic Thing To Do.Details on the index rebalance trade below.

NTT Docomo Delisting; Nikkei 225 Replacement Is SHARP (6753) - With a Surprise

<p>Today during the lunch session, there were reports across the newswires of <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> and other companies (including both <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> and Rakuten Mobile) sending a letter to the Telecommunications Ministry (It was, in fact, addressed to the Ministry of Internal Affairs and Communications). </p><p>The headlines were...</p><div><div><p>*KDDI: NTT TAKEOVER OF DOCOMO WOULD HURT MARKET DEVELOPMENT<br>*KDDI, SOFTBANK AMONG FIRMS SEEKING REVIEW OF NTT DOCOMO DEAL</p></div></div><p>This caused NTT Docomo shares to fall sharply on the PM session open, briefly falling as much as 75bp to ¥3861 (vs the ¥3900 Tender Offer Price) before the shares settled around ¥10 down on the day near ¥3876-3884/share for most of the rest of the day.</p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/170/780/original/Screenshot%202020-11-11%20at%202.54.24%20PM.png?1605077689" class="editor-image img-responsive" data-smartkarma-image-id="170780"></figure></section><p>The media said that the letter called on Japan’s Telecommunications Ministry "to ensure a fair market environment amid NTT’s planned takeover of Docomo, arguing the deal could inhibit fair competition and development of the telecom market." (Bloomberg). </p>
<p>The letter, it turns out, is on KDDI's home page in Japanese (<a href="https://news.kddi.com/kddi/corporate/newsrelease/2020/11/11/4779.html" target="_blank" rel="noopener">link</a>).</p>
<p>There are interesting comments within the letter but I am surprised it took this long to produce. This really looks like it is KDDI and others setting the stage to be able to pursue a campaign of harassment against NTT if necessary going forward. <em>Complain about it in general terms before the deal goes through, in order to give yourself room to complain about specifics later. </em></p>
<p>It is what I would do if I were in their shoes. </p>
<p><strong>What was surprising to me was the reaction on NTT Docomo shares.</strong> Given the nature of the document, the nature of JFTC and MIC purview on the transaction, and what must have been reasonably explicit "approval" to get the NTT deal for Docomo done in the first place, if this letter means something about the future competitiveness of the NTT/Docomo/East/West/Com grouping, the stock which should have been negatively impacted was <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a>. Indeed, NTT shares ended up "only" 1.4% on the day after starting the day higher, but this was stronger than KDDI on the day.</p>
<p>More commentary about NTT Docomo, NTT, and KDDI below the fold.  </p>
<p></p>
<p></p></section>

Today during the lunch session, there were reports across the newswires of KDDI Corp (9433 JP) and other companies (including both Softbank Corp (9434 JP) and Rakuten Mobile) sending a letter to the Telecommunications Ministry (It was, in fact, addressed to the Ministry of Internal Affairs and Communications). The headlines were...*KDDI: NTT TAKEOVER OF DOCOMO WOULD HURT MARKET DEVELOPMENT *KDDI, SOFTBANK AMONG FIRMS SEEKING REVIEW OF NTT DOCOMO DEALThis caused NTT Docomo shares to fall sharply on the PM session open, briefly falling as much as 75bp to ¥3861 (vs the ¥3900 Tender Offer Price) before the shares settled around ¥10 down on the day near ¥3876-3884/share for most of the rest of the day.The media said that the letter called on Japan’s Telecommunications Ministry "to ensure a fair market environment amid NTT’s planned takeover of Docomo, arguing the deal could inhibit fair competition and development of the telecom market." (Bloomberg). 
The letter, it turns out, is on KDDI's home page in Japanese (link).
There are interesting comments within the letter but I am surprised it took this long to produce. This really looks like it is KDDI and others setting the stage to be able to pursue a campaign of harassment against NTT if necessary going forward. Complain about it in general terms before the deal goes through, in order to give yourself room to complain about specifics later. 
It is what I would do if I were in their shoes. 
What was surprising to me was the reaction on NTT Docomo shares. Given the nature of the document, the nature of JFTC and MIC purview on the transaction, and what must have been reasonably explicit "approval" to get the NTT deal for Docomo done in the first place, if this letter means something about the future competitiveness of the NTT/Docomo/East/West/Com grouping, the stock which should have been negatively impacted was NTT (Nippon Telegraph &amp; Telephone) (9432 JP). Indeed, NTT shares ended up "only" 1.4% on the day after starting the day higher, but this was stronger than KDDI on the day.
More commentary about NTT Docomo, NTT, and KDDI below the fold.  



NTT (Nippon Telegraph & Telephone) / Event-Driven

<p>On 29 September 2020, <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> announced it would buy out minorities of <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> in a $40 billion buyout - the biggest Tender Offer Japan had ever seen. </p><p>As it was financed with debt, that constituted the single biggest "stock buyback" that NTT could possibly have executed. Normally, NTT buys back ¥200-350bn of <em>stock</em> per year. With this buyout bought ¥200+bn of <em>net income</em> per year. </p><p>This came on top of previous statements by the CEO of NTT that the company would seek to sell and securitize trillions of yen of assets and return capital to shareholders. </p><p>Shockingly NTT shares fell on the news of the buyout. I could not fathom why. They may have overpaid what they needed to pay to get it done, but it was going to get done. They were going to pay ¥4trln of debt, <em>and zero equity</em>, to get ¥210-250bn in net income and ¥400bn+ of operating cashflow, presumably for a very long time, in exchange for a relatively low interest rate payment.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/695/original/Screenshot%202020-11-06%20at%202.31.50%20PM.png?1604644954" class="editor-image img-responsive" data-smartkarma-image-id="169695"></figure></section><div class="content-highlight">
<p>Several people contacted me when this was announced and asked whether I was worried about NTT being too indebted. </p>
<p>My blunt answer to them was that I was not at all worried. This was, in effect, a MAMMOTH BUYBACK and NTT had real estate assets, tower assets, and any number of other hard assets which could be sold or securitized to pay down debt and there was no chance that NTT was going to issue equity. The simple reason why there would be no equity top up was and is that the NTT Law requires that the government hold one-third* of the shares outstanding of NTT and there is no chance that the government is going to be convinced to buy more shares of NTT to maintain their stake. This was pure leverage and pure net income to NTT shareholders. </p>
</div><div class="content-remarks"><p>* It's a little complicated because there is some weirdness where IPO shares are excluded from the calculation, but it comes VERY close to one-third in practical terms.</p></div><h3>The NEW News</h3><p>On Friday 6 November NTT released Q2 earnings. They will not overwhelm anyone and there wasn't much talk about what the plans are for synergies at NTT Docomo, but I think that has to be expected because the Tender Offer, while a foregone conclusion in terms of rights, is not even over yet.</p><p>However I think people STILL do not look at NTT and its results the right way. What we knew Friday? <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> OP in Q2 was +8.3%yoy. <a href="https://www.smartkarma.com/entities/ntt-data-corp" target="_blank" data-smartkarma-citation="entities:11232:1" rel="noopener">NTT Data Corp (9613 JP)</a> was up 9.5%yoy. What we did <em>not</em> know was that NTT ex-listed subs OP was up 4.7%yoy. That was better than expected. </p><p>NTT ex-listed subs OP has continued to grow over the years. The rolling 4Q total is the blue bars below (the red bars are the implied quarterly OP based on consensus OP annual estimates (out to March 2023) for NTT, NTT Docomo and NTT Data backing out NTT ex-listed subs).</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/726/original/Screenshot%202020-11-06%20at%205.21.56%20PM.png?1604654537" class="editor-image img-responsive" data-smartkarma-image-id="169726"></figure><p>What was clear from the discussion that NTT led on the day of the announcement of the Tender Offer to buy in minorities of NTT Docomo was that they saw synergies, and they saw lower costs compared to what the Street was expecting. For whatever reason, as will be discussed below, Street consensus for forward years of NTT does not include all of NTT Docomo. And it seems to include no synergies.</p></section><h3>The OTHER NEW News - A Buyback</h3><p>Up to 120mm shares spending up to ¥250bn from 11 March to 31 March 2021. </p><p>THAT was unexpected. </p><p>This deserves a discussion.</p>

On 29 September 2020, NTT (Nippon Telegraph &amp; Telephone) (9432 JP) announced it would buy out minorities of NTT Docomo Inc (9437 JP) in a $40 billion buyout - the biggest Tender Offer Japan had ever seen. As it was financed with debt, that constituted the single biggest "stock buyback" that NTT could possibly have executed. Normally, NTT buys back ¥200-350bn of stock per year. With this buyout bought ¥200+bn of net income per year. This came on top of previous statements by the CEO of NTT that the company would seek to sell and securitize trillions of yen of assets and return capital to shareholders. Shockingly NTT shares fell on the news of the buyout. I could not fathom why. They may have overpaid what they needed to pay to get it done, but it was going to get done. They were going to pay ¥4trln of debt, and zero equity, to get ¥210-250bn in net income and ¥400bn+ of operating cashflow, presumably for a very long time, in exchange for a relatively low interest rate payment.
Several people contacted me when this was announced and asked whether I was worried about NTT being too indebted. 
My blunt answer to them was that I was not at all worried. This was, in effect, a MAMMOTH BUYBACK and NTT had real estate assets, tower assets, and any number of other hard assets which could be sold or securitized to pay down debt and there was no chance that NTT was going to issue equity. The simple reason why there would be no equity top up was and is that the NTT Law requires that the government hold one-third* of the shares outstanding of NTT and there is no chance that the government is going to be convinced to buy more shares of NTT to maintain their stake. This was pure leverage and pure net income to NTT shareholders. 
* It's a little complicated because there is some weirdness where IPO shares are excluded from the calculation, but it comes VERY close to one-third in practical terms.The NEW NewsOn Friday 6 November NTT released Q2 earnings. They will not overwhelm anyone and there wasn't much talk about what the plans are for synergies at NTT Docomo, but I think that has to be expected because the Tender Offer, while a foregone conclusion in terms of rights, is not even over yet.However I think people STILL do not look at NTT and its results the right way. What we knew Friday? NTT Docomo Inc (9437 JP) OP in Q2 was +8.3%yoy. NTT Data Corp (9613 JP) was up 9.5%yoy. What we did not know was that NTT ex-listed subs OP was up 4.7%yoy. That was better than expected. NTT ex-listed subs OP has continued to grow over the years. The rolling 4Q total is the blue bars below (the red bars are the implied quarterly OP based on consensus OP annual estimates (out to March 2023) for NTT, NTT Docomo and NTT Data backing out NTT ex-listed subs).What was clear from the discussion that NTT led on the day of the announcement of the Tender Offer to buy in minorities of NTT Docomo was that they saw synergies, and they saw lower costs compared to what the Street was expecting. For whatever reason, as will be discussed below, Street consensus for forward years of NTT does not include all of NTT Docomo. And it seems to include no synergies.The OTHER NEW News - A BuybackUp to 120mm shares spending up to ¥250bn from 11 March to 31 March 2021. THAT was unexpected. This deserves a discussion.

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

NTT (Nippon Telegraph & Telephone) / Equity Bottom-Up

<p style="text-align: justify;">NTT posted solid Q2 20 results but the focus is squarely on how the acquisition of DoCoMo minorities will unfold. With the tender still open details are scarce but NTT did unveil a ¥6,000bn, mid-term debt target (2x EBITDA) driven by securitization and debt re-payment. Of more interest, the company says it can achieve this AND maintain returns to shareholders, which it emphasized by announcing a ¥250bn buyback for this year.  Management is keeping its full-year guidance as a strong first-half provides some cushion should there be changes in the operating environment, particularly overseas with a resurgence in Covid-19. </p>

NTT posted solid Q2 20 results but the focus is squarely on how the acquisition of DoCoMo minorities will unfold. With the tender still open details are scarce but NTT did unveil a ¥6,000bn, mid-term debt target (2x EBITDA) driven by securitization and debt re-payment. Of more interest, the company says it can achieve this AND maintain returns to shareholders, which it emphasized by announcing a ¥250bn buyback for this year.  Management is keeping its full-year guidance as a strong first-half provides some cushion should there be changes in the operating environment, particularly overseas with a resurgence in Covid-19. 

NTT - Q2 20 Results: Mixed DoCoMo Update but Strong Message on Shareholder Returns

Japan

Nippon Telegraph and Telephone Corporation provides a variety of telecommunication services, including telephone, telegraph, leased circuits, data communication, terminal equipment sales, and related services. The Company provides both local and long distance telephone services within Japan.

NTT (Nippon Telegraph & Telephone) (9432 JP)

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NTT (Nippon Telegraph & Telephone) (9432 JP)

The Great Docomo/TOPIX Reallocation Trade

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NTT Docomo Delisting; Nikkei 225 Replacement Is SHARP (6753) - With a Surprise

In Sharp (6753) Nikkei has offered an unsurprising replacement for Docomo in the Nikkei 225, but the terms are unexpected (and a trifle...

Travis Lundy

NTT/Docomo - The KDDI Quibble

KDDI and two dozen other telecom operators today revealed a letter protesting future NTT/Docomo market dominance. This isn't an attempt to block...

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NTT - Go Big Or Go Home

Hot on the heels of announcing a $40bn buyout of Docomo minorities - effectively a giant buyback - NTT announced a buyback of its own stock. It...

Travis Lundy

NTT - Q2 20 Results: Mixed DoCoMo Update but Strong Message on Shareholder Returns

NTT posted strong results and whilst details on what happens with DoCoMo remain scarce the company did unveil de-leveraging targets compatible with...

Kirk Boodry

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