We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Indonesia, Malaysia, Thailand and Chinese ADRs.
ANZ will fund the Suncorp Bank acquisition by a fully underwritten 1:15 pro rata accelerated renounceable entitlement offer to raise A$3.5bn at A$18.9/share, a 12% discount to TERP.
A small increase in the Herfindahl-Hirschman Index (HHI) for the mortgage lending market will make it difficult for ACCC to deny approval for the acquisition.
The Uniti Group Ltd (UWL AU) Scheme Meeting was held Friday, approving both General Scheme Resolution and Rollover Shares Scheme unanimously. The MBD Bidco deal is done.
Friday after the close, the S&P DJI Global Index team announced that Uniti would be deleted from the ASX200 21 July at the close.
Gold miner West African Resources (WAF AU) was chosen as the replacement. It’s a decent-sized inclusion and should have been well-flagged last week but may have been ignored.
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The FTSE TWSE Taiwan Dividend+ Index is interesting since there are multiple moving parts and is not widely tracked. We take an early look at potential changes in December.
In the last six weeks, AGL Energy Ltd (AGL AU) has fallen and is now at the low end of its post-Brookfield bid trading range. Now below the A$8.25 bid.
AGL has one generator down – the Loy Yang A Unit 2 – which will be back in late Sep. Guidance is left… unguided. There will be a related loss.
In the meantime, the rest of the producing assets have probably been having a field day. But given shareholder structure, we’re still in limbo.
We estimate passive trackers will need to sell 45.3m shares (A$226m; 10.2 days of ADV) on Uniti Group Ltd (UWL AU) at the close on 21 July.
With over 10 days of ADV to buy from passive trackers and only 4 days to implementation, West African Resources (WAF AU) could outperform its peers till 21 July.
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Fortescue Metals (FMG AU) has corrected due to the iron ore price dropping. China’s massive stimulus could provide an impetus to demand in 6-8 months and revive pricing.
Substantial correction of steel margins is halted. Iron ore the inventory at the mills and ports has now stabilized. We believe this provides support to pricing at these levels.
Fortescue Metals (FMG AU) yields at the spot have dropped to 12% FCF and 9% dividend yields, but we believe there is an upside to this.
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The Link Administration (LNK AU) Board will not recommend Dye&Durham/DND’s revised lower offer of A$4.57 per share due to shareholder feedback, the underlying value and alternative options.
The slightly above guidance is designed to show that Link’s contribution to DND’s build a billion objective remains on track and there is little chance of triggering the MAC clause.
DND needs to secure a deal this week to use its attractive deal financing, according to AFR. This could be the cue for DND to give a little more.
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The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
On Thursday, MYOB Group Ltd (MYO AU) released its Scheme Booklet in which the Independent Expert, Grant Samuel, valued MYOB between A$3.19 and A$3.69 per share. Consequently, Grant Samuel concluded that KKR & Co Inc (KKR US)‘s revised proposal of A$3.40 cash per share is fair and reasonable. However, Manikay Partners continues to voice concerns about the KKR proposal as it believes MYOB is worth well in excess of A$4.00 per share.
With the shares 4 cents below KKR’s revised proposal, we continue to believe shareholders should cash out as Manikay’s valuation is only justifiable if MYOB’s delivers flawless execution.
Brexit fear diminishing boosting GBP and other currencies
Eurozone IP rebounds, the first sign of stabilisation
Pressure increases for a rate cut in Australia
We can see a case for GBP to rise towards 1.40 helping recoveries in EUR and AUD, and weakening the USD more broadly. But the outlook for a more sustained period of low EUR rates, no structural underweight in EUR, and limited demand for Euro assets suggest that its upside may be limited. Rate cut expectations have reached a new peak in Australia, and the AUD should continue to remain heavy. Chinese economic reports (trade, credit, PMIs) have been weak, Jan/Feb activity data are due later today. The overall outlook for the USD remains mixed and cautious trading continues to be advised. Event risk will keep traders playing the short game.
On Wednesday, Sigma Healthcare (SIG AU) rejected an indicative takeover offer from rival Australian Pharma Industries (API AU). Shareholders were disappointed with the news, with Sigma’s shares closing 12.3% lower at A$0.54 per share. API shares fared better and fell 3.6% to A$1.35 each.
We believe Sigma’s board were left with the tough choice of accepting a lowball offer or improving the existing business and riding out the inevitable share price fall. By rejecting the API bid, the Sigma board made the difficult but right choice, in our view. While further downside risk to the share price is limited, we caution that shareholders require patience as the road to share price recovery will be long.
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On the 27th November 2018, Xenith Ip (XIP AU) and Qantm Intellectual Property (QIP AU), both leading providers of IP origination services in Australia – and two of the three listed IP plays – announced a merger via an all-scrip scheme, such that Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group, respectively. Xenith’s board unanimously recommended the merger to its shareholders.
The same day IPH proposed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a A$0.05 dividend) by way of a scheme. QANTM’s board rejected the proposal due to its highly conditional nature.
IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) on the 13 February 2019 and said that is does not support the QANTM scheme. IPH followed up with a scheme proposal for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, which was summarily rejected by Xenith.
Execution risk, especially ACCC approval was an express concern for Xenith. At the time, this appeared spurious given privately owned companies collectively hold a larger market share – and growing – compared to the three listcos currently in play.
The ACCC agreed and signed off on the IPH/XIP tie-up on the 21 March, and a IPH/Xenith merger on the 28 March. Xenith continued to stonewall and backed QANTM’s proposal.
On the 8 April, IPH bumped the scrip portion of its proposal for Xenith. The revised terms were cash (A$1.28) and 0.1261 IPH shares – or $2.15/share – at the time of the announcement. There is a mix & match facility wherein shareholders can choose 100% cash or 100% scrip, subject to scale back.
Xenith approached QANTM to provide a counter proposal to match IPH’s updated offer, however QANTM opted out. Xenith had run out of excuses not to back IPH’s proposal.
This is a done deal and will trade tight to terms. Conditions include the termination of the QANTM scheme implementation deed (which will take place shortly with Xenith incurring a A$1.6mn break fee) and Xenith shareholder approval.
The Scheme meeting is tentatively scheduled for the week commencing the 15 July with an expected implementation date early August.
We had warned to watch out for dovish noises from the RBA this week after it changed its monetary policy meeting statement earlier in the month to say they are monitoring developments, suggesting they may be willing to consider a rate cut in coming months if downside risks to growth materialize.
However, the speech on the “State of the Economy” on Wednesday by Deputy Governor Guy Debelle sounded relatively optimistic that the deterioration in the outlook since mid-2018 both in Australia and globally may be temporary. The RBA is more watchful, but not yet ready to cut rates.
Debelle highlighted risks to the Australian growth outlook including the clampdown on shadow financing in China and trade tensions, slower household consumption in Australia and a weaker housing market.
However, he sounded more optimistic on the state of the global economy than many market commentators, noting ongoing strength in service sectors and employment and wage growth (globally and in Australia).
He tended to downplay the negative influence the housing market decline may have on the Australian economy.
He suggested that the RBA is lazor focused on the labour market. Provided employment growth continues, unemployment declines and wages growth accelerates, the RBA is unlikely to cut rates. At this time, the RBA still sees strength in leading indicators of the labour market, even though job ads have fallen in recent months. It appears to prefer the vacancy data that rose to a new high in February from three months earlier.
Understandably, in response to Debelle’s glass half full speech, Australian rates and the AUD have firmed.
It is fair to predict that the RBA will cut rates later this year, as most market economists have done. However, Debelle and the RBA are not yet convinced this will be necessary. In particular, it appears to need evidence that the labour market is losing momentum, and this may take several months.
After a brief pause in trading yesterday morning, Crown Resorts (CWN AU) announced it is in confidential discussions with Wynn Resorts (WYNN US) concerning an acquisition of Crown by way of a Scheme. The announcement states that Wynn has approached Crown on more than one occasion.
That was in the morning.
WYNN confirmed it and released an 8K in the early hours of the 9th saying they would not comment further.
Several hours later, WYNN apparently said it was terminating deal talks with Crown because of the “premature disclosure of preliminary discussions”.
Oops.
This will surely knock Crown shares back down after their 19.7% gain on Tuesday.
But it does not remove the reason for a deal. The Crown commentary clearly indicated that they were not averse to doing a deal. That would suggest James Packer is not either.
The proposal arrived at a unique time for both companies after the CEOs and major shareholders of both companies relinquished their roles in 2018: Packer for health reasons, and Steve Wynn after allegations of sexual harassment.
If Wynn wants to expand its footprint into the hemisphere and James Packer wants to arrange his affairs, a deal somewhere should be in the offing. This deal may just get pushed to the back burner before coming back to the fore. Several years ago, ADM launched a proposal at Graincorp. Months later there had been no apparent communication and the shares drifted off and then, all of a sudden, there was an agreed deal.
We see scope for dovish noises from the FOMC minutes and Fed speakers. The Fed appears to be in the process of shifting towards adopting an average inflation target, which should make them more sanguine if inflation rises above the 2% target and more responsive to signs that economic growth may be slowing. We expect no substantive changes in policy guidance from the ECB this week. The RBA has opportunities in a speech and the financial stability review this week, and its minutes next week to flesh out what appears to have been a shift to an easing bias earlier this month.
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On Thursday, MYOB Group Ltd (MYO AU) released its Scheme Booklet in which the Independent Expert, Grant Samuel, valued MYOB between A$3.19 and A$3.69 per share. Consequently, Grant Samuel concluded that KKR & Co Inc (KKR US)‘s revised proposal of A$3.40 cash per share is fair and reasonable. However, Manikay Partners continues to voice concerns about the KKR proposal as it believes MYOB is worth well in excess of A$4.00 per share.
With the shares 4 cents below KKR’s revised proposal, we continue to believe shareholders should cash out as Manikay’s valuation is only justifiable if MYOB’s delivers flawless execution.
Brexit fear diminishing boosting GBP and other currencies
Eurozone IP rebounds, the first sign of stabilisation
Pressure increases for a rate cut in Australia
We can see a case for GBP to rise towards 1.40 helping recoveries in EUR and AUD, and weakening the USD more broadly. But the outlook for a more sustained period of low EUR rates, no structural underweight in EUR, and limited demand for Euro assets suggest that its upside may be limited. Rate cut expectations have reached a new peak in Australia, and the AUD should continue to remain heavy. Chinese economic reports (trade, credit, PMIs) have been weak, Jan/Feb activity data are due later today. The overall outlook for the USD remains mixed and cautious trading continues to be advised. Event risk will keep traders playing the short game.
On Wednesday, Sigma Healthcare (SIG AU) rejected an indicative takeover offer from rival Australian Pharma Industries (API AU). Shareholders were disappointed with the news, with Sigma’s shares closing 12.3% lower at A$0.54 per share. API shares fared better and fell 3.6% to A$1.35 each.
We believe Sigma’s board were left with the tough choice of accepting a lowball offer or improving the existing business and riding out the inevitable share price fall. By rejecting the API bid, the Sigma board made the difficult but right choice, in our view. While further downside risk to the share price is limited, we caution that shareholders require patience as the road to share price recovery will be long.
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On Thursday, MYOB Group Ltd (MYO AU) released its Scheme Booklet in which the Independent Expert, Grant Samuel, valued MYOB between A$3.19 and A$3.69 per share. Consequently, Grant Samuel concluded that KKR & Co Inc (KKR US)‘s revised proposal of A$3.40 cash per share is fair and reasonable. However, Manikay Partners continues to voice concerns about the KKR proposal as it believes MYOB is worth well in excess of A$4.00 per share.
With the shares 4 cents below KKR’s revised proposal, we continue to believe shareholders should cash out as Manikay’s valuation is only justifiable if MYOB’s delivers flawless execution.
Brexit fear diminishing boosting GBP and other currencies
Eurozone IP rebounds, the first sign of stabilisation
Pressure increases for a rate cut in Australia
We can see a case for GBP to rise towards 1.40 helping recoveries in EUR and AUD, and weakening the USD more broadly. But the outlook for a more sustained period of low EUR rates, no structural underweight in EUR, and limited demand for Euro assets suggest that its upside may be limited. Rate cut expectations have reached a new peak in Australia, and the AUD should continue to remain heavy. Chinese economic reports (trade, credit, PMIs) have been weak, Jan/Feb activity data are due later today. The overall outlook for the USD remains mixed and cautious trading continues to be advised. Event risk will keep traders playing the short game.
On Wednesday, Sigma Healthcare (SIG AU) rejected an indicative takeover offer from rival Australian Pharma Industries (API AU). Shareholders were disappointed with the news, with Sigma’s shares closing 12.3% lower at A$0.54 per share. API shares fared better and fell 3.6% to A$1.35 each.
We believe Sigma’s board were left with the tough choice of accepting a lowball offer or improving the existing business and riding out the inevitable share price fall. By rejecting the API bid, the Sigma board made the difficult but right choice, in our view. While further downside risk to the share price is limited, we caution that shareholders require patience as the road to share price recovery will be long.
Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, announced a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of year three.
Xenith’s board unanimously recommended the merger to its shareholders.
IPH did not blink and on the same day as the Xenith/QANTM announcement, lobbed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.
QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH countered those claims, spurring QANTM to counter those countered claims.
On the 13 February 2019, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith’s shares increased 20.3% to close at A$1.69/share.
The provisional date for ACCC s clearance of the QANTM/Xenith merger is the 21 March. The provisional date for IPH/Xenith is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH’s proposal has an indicative implementation date of mid-July.
IPH’s proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM’s all-scrip offer.
The key risk to IPH’s proposal is ACCC’s consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With IPH’s blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.
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