Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

On June 30, Samsung C&amp;T sent a letter to shareholders. That letter talked about the "significant business challenges and industry headwinds." In a presentation 10 days before that to investors, C&amp;T&nbsp;talked about "mature...&nbsp;...market", "lack of global&nbsp;footprint and&nbsp;experience", "continuously challenged by market competition."One of those comments&nbsp;was C&amp;T referring to C&amp;T.The other was C&amp;T referring to Cheil.A close read of the letter, and C&amp;T's&nbsp;public presentation <a href="http://www.newsamsungcnt.com/download/150620_Shareholders_Communication_Material_en.pdf" target="_blank">materials from the 20th</a>&nbsp;of June (<a href="http://www.newsamsungcnt.com/download/150624_Shareholders_Communication_Material_en.pdf" target="_blank">or 24th</a>&nbsp;- they're mostly the same), serve to lay bare&nbsp;the internal inconsistencies in both the two companies' attitudes towards their own businesses (Cheil is considerably less bullish on paper than C&amp;T is about Cheil), and the fact that C&amp;T's proposed numbers &nbsp;are all over the place (which means&nbsp;either management and the board did not know about (lack of due diligence), or ignored the errors (lack of care, or fraud)). The C&amp;T management/board presentation seems to use selected externally-sourced data, internal data without attribution or reference, draws&nbsp;conclusions from the intersection of these data sets, plus other changes it sees fit to make without reference. And there is little consistency to any of it.Where did they get these numbers?The inconsistencies demonstrate&nbsp;questionable understanding of business dynamics, pro-forma business size, reasons for synergies, some magical pixie dust application to the margins available from proposed synergies, some accounting gimmicks (which are one-sided - the dark&nbsp;side to the maneuver is&nbsp;not explained), and then a big&nbsp;arithmetic error in accounting for future EPS available to C&amp;T shareholders.&nbsp;And then another error in calculating ownership. &nbsp;&nbsp;In one example, Cheil's revenues in the E&amp;C and Trading&nbsp;business lines (i.e. C&amp;T's business lines) appear&nbsp;set to grow 44.4% CAGR from 2014-2020, while C&amp;T's grow 0.8% CAGR. And that is without merger synergies.If that is not right, then C&amp;T's presentation is deliberately misleading.Nowhere in the press has this really been addressed, which is disappointing. Glass Lewis appears to have figured out the first part of the problem. Bloomberg <a href="http://www.bloomberg.com/news/articles/2015-07-02/samsung-c-t-chief-invokes-virtues-of-ge-in-defense-of-merger" target="_blank">reported</a>&nbsp;&ldquo;Nowhere does the board discuss, in its own terms, the veracity of these estimates relative to internal projections,&rdquo; proxy advisory firm Glass Lewis &amp; Co. wrote in a July 1 report recommending investors oppose Cheil&rsquo;s offer. &ldquo;This seemingly unchecked external perspective is paired with loose observations of operational risk.&rdquo; ISS says similar things. Elliot showed in its <a href="http://www.fairdealforsct.com/20150626Present/" target="_blank">second presentatio</a>n that <a href="http://www.newsamsungcnt.com/download/150620_Shareholders_Communication_Material_en.pdf" target="_blank">C&amp;T's June 20th presentation</a>, made after Elliot's first presentation, contained at least two&nbsp;errors in the EPS calculation.&nbsp;There are lots of questions to be asked.&nbsp;One can start with the revenue and revenue growth assumptions over time, move to the profit-margin assumptions, then move to the 'revenue synergy' assumptions (and their profit margins), then address the EPS issue. Which is an easy fix, but even then they probably got something wrong on the back end too.A Teaser on Revenues<ul><li>Samsung C&amp;T claims the NEWCO 2020 Goal&nbsp;is 60trln won of revenues including&nbsp;6trln&nbsp;won in "revenue synergies" implying pro-forma standalone estimates of 54 trillion. It suggests its own revenues will be 29.9trln on a standalone basis by then.</li><li>C&amp;T's&nbsp;own presentation has zero evidence, claim, implication, whatever, to suggest Cheil can get to where it needs to be to support a pro-forma two company stand-alone total of 54 trillion won in revenue in 2020.&nbsp;</li><li>C&amp;T suggests a 40.5trln two-company stand-alone number. Then it hints at a 49.9trln won number, while pooh-poohing it.&nbsp;It never gets to a 54trln number.&nbsp;</li><li>But it uses the 54trln number&nbsp;as its basis for&nbsp;everything else in the presentation.</li></ul>&nbsp;CONCLUSIONS:<ul><li>There are glaring holes&nbsp;in&nbsp;the Samsung C&amp;T presentations. And inconsistencies. Then there are arithmetic errors. And accounting gimmicks with little net effect. And some very wishy-washy excuses for 'synergy.'</li><li>Investors should be aware that...<ol><li>The revenues proposed at Cheil on a stand-alone pro-forma basis are&nbsp;very strong, but they don't get anywhere near the "2020 Goal".&nbsp;To get to the 2020 NEWCO Goal of 60 trillion in revenue and 6 trillion in 'revenue synergies' one requires truly astounding leaps of faith, and growth.</li><li>Assuming those leaps of faith and growth are stipulated, the 'revenue synergies' are hard, if not impossible to see.&nbsp;But assuming one stipulates those, the embedded assumptions for pre-tax margin growth on those synergistic revenues are multiples of anything in either company's experience.</li><li>Then the EPS proposal for C&amp;T legacy ownership of NEWCO is calculated wrongly.&nbsp;</li><li>Twice.</li></ol></li><li>All of which leaves one to wonder.... how exactly was due diligence done?</li><li>How did C&amp;T board of directors buy into the concept that their own business would only grow 0.8% CAGR a year to 2020, but Cheil's version of those businesses would grow revenues at better than 40% over 6yrs?</li><li>Or did C&amp;T simply write the wrong thing in its presentation?&nbsp;</li><li>One simply does not know.</li><li>Elliot pointed out EPS&nbsp;errors. C&amp;T&nbsp;said it wouldn't "dignify [Elliot's presentation]&nbsp;with a response."</li><li>C&amp;T is asking investors to vote for the deal and management efforts based on pie-in-the-sky assumptions of growth at Cheil, what appears to be a sandbagging of C&amp;T's own future,&nbsp;magical sprinkles&nbsp;of margin growth at Cheil, compounded by magical growth of growth in margin, sugared with&nbsp;'revenue synergies' generated by accounting re-statement and some downright weird toppings elsewhere&nbsp;- Synergies in mobile phone cases? Hospital power supplies? Sportswear M&amp;A?</li><li>Because of the lack of due care of Samsung C&amp;T's management and BoD&nbsp;in proposing the business case, and in its arithmetic, and possible accounting errors, &nbsp;Elliot should have plenty of avenues in&nbsp;its appeal against the Court's decision last week to not grant an injunction against the merger.</li></ul><ul><li>Take Care. There are trillions being left on the table.&nbsp;There is an enormous application of pixie dust here, and none of it seems to have anything to do with&nbsp;the fact that C&amp;T's shareholdings are worth more than its market cap. C&amp;T shareholders are being asked to give up 70+% of its assets - which are worth far more than Cheil's assets - in return for 30% of the pie-in-the-sky. And C&amp;T tells you that Cheil's own numbers are optimistic without the synergies C&amp;T would provide. C&amp;T brings more to the table than Cheil and gets far less in return.</li></ul>A fair bit more below the fold...

On June 30, Samsung C&amp;T sent a letter to shareholders. That letter talked about the "significant business challenges and industry headwinds." In a presentation 10 days before that to investors, C&amp;T&nbsp;talked about "mature...&nbsp;...market", "lack of global&nbsp;footprint and&nbsp;experience", "continuously challenged by market competition."One of those comments&nbsp;was C&amp;T referring to C&amp;T.The other was C&amp;T referring to Cheil.A close read of the letter, and C&amp;T's&nbsp;public presentation materials from the 20th&nbsp;of June (or 24th&nbsp;- they're mostly the same), serve to lay bare&nbsp;the internal inconsistencies in both the two companies' attitudes towards their own businesses (Cheil is considerably less bullish on paper than C&amp;T is about Cheil), and the fact that C&amp;T's proposed numbers &nbsp;are all over the place (which means&nbsp;either management and the board did not know about (lack of due diligence), or ignored the errors (lack of care, or fraud)). The C&amp;T management/board presentation seems to use selected externally-sourced data, internal data without attribution or reference, draws&nbsp;conclusions from the intersection of these data sets, plus other changes it sees fit to make without reference. And there is little consistency to any of it.Where did they get these numbers?The inconsistencies demonstrate&nbsp;questionable understanding of business dynamics, pro-forma business size, reasons for synergies, some magical pixie dust application to the margins available from proposed synergies, some accounting gimmicks (which are one-sided - the dark&nbsp;side to the maneuver is&nbsp;not explained), and then a big&nbsp;arithmetic error in accounting for future EPS available to C&amp;T shareholders.&nbsp;And then another error in calculating ownership. &nbsp;&nbsp;In one example, Cheil's revenues in the E&amp;C and Trading&nbsp;business lines (i.e. C&amp;T's business lines) appear&nbsp;set to grow 44.4% CAGR from 2014-2020, while C&amp;T's grow 0.8% CAGR. And that is without merger synergies.If that is not right, then C&amp;T's presentation is deliberately misleading.Nowhere in the press has this really been addressed, which is disappointing. Glass Lewis appears to have figured out the first part of the problem. Bloomberg reported&nbsp;&ldquo;Nowhere does the board discuss, in its own terms, the veracity of these estimates relative to internal projections,&rdquo; proxy advisory firm Glass Lewis &amp; Co. wrote in a July 1 report recommending investors oppose Cheil&rsquo;s offer. &ldquo;This seemingly unchecked external perspective is paired with loose observations of operational risk.&rdquo; ISS says similar things. Elliot showed in its second presentation that C&amp;T's June 20th presentation, made after Elliot's first presentation, contained at least two&nbsp;errors in the EPS calculation.&nbsp;There are lots of questions to be asked.&nbsp;One can start with the revenue and revenue growth assumptions over time, move to the profit-margin assumptions, then move to the 'revenue synergy' assumptions (and their profit margins), then address the EPS issue. Which is an easy fix, but even then they probably got something wrong on the back end too.A Teaser on RevenuesSamsung C&amp;T claims the NEWCO 2020 Goal&nbsp;is 60trln won of revenues including&nbsp;6trln&nbsp;won in "revenue synergies" implying pro-forma standalone estimates of 54 trillion. It suggests its own revenues will be 29.9trln on a standalone basis by then.C&amp;T's&nbsp;own presentation has zero evidence, claim, implication, whatever, to suggest Cheil can get to where it needs to be to support a pro-forma two company stand-alone total of 54 trillion won in revenue in 2020.&nbsp;C&amp;T suggests a 40.5trln two-company stand-alone number. Then it hints at a 49.9trln won number, while pooh-poohing it.&nbsp;It never gets to a 54trln number.&nbsp;But it uses the 54trln number&nbsp;as its basis for&nbsp;everything else in the presentation.&nbsp;CONCLUSIONS:There are glaring holes&nbsp;in&nbsp;the Samsung C&amp;T presentations. And inconsistencies. Then there are arithmetic errors. And accounting gimmicks with little net effect. And some very wishy-washy excuses for 'synergy.'Investors should be aware that...The revenues proposed at Cheil on a stand-alone pro-forma basis are&nbsp;very strong, but they don't get anywhere near the "2020 Goal".&nbsp;To get to the 2020 NEWCO Goal of 60 trillion in revenue and 6 trillion in 'revenue synergies' one requires truly astounding leaps of faith, and growth.Assuming those leaps of faith and growth are stipulated, the 'revenue synergies' are hard, if not impossible to see.&nbsp;But assuming one stipulates those, the embedded assumptions for pre-tax margin growth on those synergistic revenues are multiples of anything in either company's experience.Then the EPS proposal for C&amp;T legacy ownership of NEWCO is calculated wrongly.&nbsp;Twice.All of which leaves one to wonder.... how exactly was due diligence done?How did C&amp;T board of directors buy into the concept that their own business would only grow 0.8% CAGR a year to 2020, but Cheil's version of those businesses would grow revenues at better than 40% over 6yrs?Or did C&amp;T simply write the wrong thing in its presentation?&nbsp;One simply does not know.Elliot pointed out EPS&nbsp;errors. C&amp;T&nbsp;said it wouldn't "dignify [Elliot's presentation]&nbsp;with a response."C&amp;T is asking investors to vote for the deal and management efforts based on pie-in-the-sky assumptions of growth at Cheil, what appears to be a sandbagging of C&amp;T's own future,&nbsp;magical sprinkles&nbsp;of margin growth at Cheil, compounded by magical growth of growth in margin, sugared with&nbsp;'revenue synergies' generated by accounting re-statement and some downright weird toppings elsewhere&nbsp;- Synergies in mobile phone cases? Hospital power supplies? Sportswear M&amp;A?Because of the lack of due care of Samsung C&amp;T's management and BoD&nbsp;in proposing the business case, and in its arithmetic, and possible accounting errors, &nbsp;Elliot should have plenty of avenues in&nbsp;its appeal against the Court's decision last week to not grant an injunction against the merger.Take Care. There are trillions being left on the table.&nbsp;There is an enormous application of pixie dust here, and none of it seems to have anything to do with&nbsp;the fact that C&amp;T's shareholdings are worth more than its market cap. C&amp;T shareholders are being asked to give up 70+% of its assets - which are worth far more than Cheil's assets - in return for 30% of the pie-in-the-sky. And C&amp;T tells you that Cheil's own numbers are optimistic without the synergies C&amp;T would provide. C&amp;T brings more to the table than Cheil and gets far less in return.A fair bit more below the fold...

C&T/Cheil:  Proposed Inconsistencies & Magical Arithmetic 

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C&T/Cheil: Proposed Inconsistencies & Magical Arithmetic

On June 30, Samsung C&T sent a letter to shareholders. That letter talked about the "significant business challenges and industry headwinds."...

Travis Lundy

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