Event-Driven

In this briefing:

1. DSV Improves Bid and Göhner Foundation and Panalpina Agree
2. M&A: A Round-Up of Deals in March 2019
3. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications
4. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
5. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

1. DSV Improves Bid and Göhner Foundation and Panalpina Agree

Late Sunday night Bloomberg reported that DSV A/S (DSV DC) had sweetened its offer for Panalpina Welttransport Holding (PWTN SW) from the previous CHF 180/share and that the new bid had won the support of the Foundation. 

This morning quite early we have an agreed deal and what had seemed a tough deal now seems easy.

According to a press release a short while ago.

DSV and Panalpina have reached an agreement on the terms and conditions of a combination by way of a Public Exchange Offer to all Panalpina shareholders. The board of directors of Panalpina recommends that Panalpina shareholders accept the Public Exchange Offer. The Public Exchange Offer already has the support of shareholders representing 69.9% of the registered shares of Panalpina, who have irrevocably agreed to tender their shares into the Public Exchange Offer. This includes Panalpina’s largest shareholder, Ernst Göhner Foundation and Cevian and Artisan*.

The deal is 2.375 shares of DSV for every share of Panalpina, which as of Friday’s close had a value of CHF 195.80/share which is a 43% premium to the CHF 137/share where Panalpina was trading the day before DSV’s first bid.

Exact terms of the Exchange Offer have not been disclosed but there will be an 80% acceptance condition (including the 69.9% who have already irrevocably agreed to accept the Offer), and other conditions will include “receipt of all necessary regulatory approvals, approval of a capital increase at an extraordinary general meeting in DSV, approval of a listing prospectus and admittance of the new DSV shares for trading at NASDAQ Copenhagen and effectiveness of a US Registration Statement.” (DSV press release)

In light of the Exchange Offer, the Ernst Göhner Foundation asked the board of Panalpina to postpone the April 5th EGM which was set to decide on the one-share one-vote.

2. M&A: A Round-Up of Deals in March 2019

For the month of March, ten new deals were discussed on Smartkarma with an overall deal size of US$22.3bn.

Clicking on the company name in the table below will take you to the entity page where you can see insight(s) written by Smartkarma contributors.

Blackstone and Hellman & Friedman made a proposal for Scout24 AG (G24 GR) in mid-January – which was rejected by the board – and subsequently returned with an improved offer which was then supported. The deal was first written on after the Tender Offer was officially launched in March.

The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.

Brief Summary of News in March of Arb Situations On Smartkarma’s Radar

(again, click on the company names to take to you to the insights and/or discussion posts)

3. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications

This post looks at the tax situations that Nexon’s Kim may be facing for each of the two options and the signals that he may be sending with regard to his decision. Also, this post discusses how each option may impact on mandatory tender offer which is a crucial point for current massive short buildup on Nexon Japan shares.

4. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW

Last Week in Event SPACE …

• The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
• The value enhancement to Naspers Ltd (NPN SJ) from spinning off and separately listing its stake in Tencent Holdings (700 HK) is not apparent.
• Trading around its “undisturbed” levels, Lynas Corp Ltd (LYC AU) looks like a short after rejecting Wesfarmers Ltd (WES AU)‘s left-field unsolicited proposal.
• The gloves are off as Merck KGaA (MRK GR) announced an unsolicited $48/share cash tender offer for Versum Materials (VSM US). 
• With the ACCC’s blessing, now is a good time for Xenith Ip (XIP AU) to jettison Qantm Intellectual Property (QIP AU) and engage with IPH Ltd (IPH AU).
• While the deal for Scout24 AG (G24 GR) is likely to get up, someone else coming over the top at this late stage is not impossible.
• PCCW Ltd (8 HK) is “cheap” relative to HKT Ltd (6823 HK) – a catalyst to narrow the discount would be helpful.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nissan Motor (7201 JP) (Mkt Cap: $32bn; Liquidity: $98mn)

Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.

• Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
• If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
  
• Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP.  He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
• Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.

Links to:
Mio’s insight: Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger.
Travis’ insight: Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Samsung Electronics (005930 KS) (Mkt Cap: $265bn; Liquidity: $464mn)

Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.

• And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
• SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.

(link to Sanghyun’s insight: Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price)

Briefly …

Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1bn; Liquidity: $7mn)

Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme.  This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.

• Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia. 

• This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago.  Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25. 
• A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
• At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
  

(link to Travis’ insight: Wesfarmers Puts Out A Bid for Lynas)

Xenith Ip (XIP AU) (Mkt Cap: $115mn; Liquidity: $1mn)

The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.

• None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
• With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.

(link to my insight: Xenith Is Running Out Of Excuses)

China Power New Energy Development Co (735 HK) (Mkt Cap: $581mn; Liquidity: $1mn)

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

• This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
• Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
• The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend. 

(link to my insight: China Power New Energy To Be Delisted After SOE Injection Abandoned)

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $79mn)

Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.

• Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
• The shareholder vote on the VSM/ENTG is scheduled for April 26^th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
• Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”

(link to John DeMasi‘s: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III))

Scout24 AG (G24 GR) (Mkt Cap: $5.6bn; Liquidity: $20mn)

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer.  The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.

• The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming. 
• Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
• Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.

(link to Travis’ insight: Scout24 Tender Offer Launched: Price Still Not Quite Full)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.

• Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
• The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”.  It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing. 
• Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return.  I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.

(link to my insight: StubWorld: Naspers Embeds Another Layer Into Tencent)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.

• The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
• As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.

(link to Curtis’ insight: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On)

• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s SPA has completed – you can see the movement in shares on CCASS – triggering the MGO.

  Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.

• Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.

• Ophir Energy (OPHR LN)‘s shareholders approved Medco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.

• 9.12% of shares out have tendered into Delta Electronics Thai (DELTA TB)‘s Offer, bringing the Offeror’s total holding to 30.05%. 
• The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

5. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

In this briefing:

1. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell
2. Nexon Valuation Analysis

1. Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell

Last Week in Event SPACE …

• Nintendo Co Ltd (7974 JP)‘s offering and the buyback are strong symbols and practical examples of what the Corporate Governance Code wants to accomplish.
• Calling an EGM by the Ernst Göhner Foundation is both “sneaky” AND interesting (and bullish) news for the Panalpina Welttransport Holding (PWTN SW) offer by DSV A/S (DSV DC). 

• Merck KGaA (MRK GY) gatecrashes Versum Materials (VSM US)/Entegris Inc (ENTG US) friendly merger.

• Shareholders in Hanergy Thin Film Power (566 HK) face a “Hobson’s Choice” ahead of its forced delisting.

• With the combination of increased hostility leading to a greater likelihood of eventual private takeout, shorts will cover and foreigners may buy, squeezing existing Descente Ltd (8114 JP) minorities up and out.

• The IFA conclusion is flawed on Hopewell Holdings (54 HK)‘s low-ball Offer.

• Plus other events, CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nintendo Co Ltd (7974 JP) (Mkt Cap: $33.3bn; Liquidity: $615mn)
Bank Of Kyoto (8369 JP) (Mkt Cap: $3.4bn; Liquidity: $7mn)

Nintendo announced (J) a Secondary Share Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the then-last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33bn worth (whichever is reached first) to be commenced the day after settlement of the Offering.

• These banks (such as Bank of Kyoto) which have long-held policy cross-holdings in a Kyoto company with a diehard Kyoto cultural heritage (which can often include a diehard cross-holding culture) may have all succumbed to the new Corporate Governance Code. This is really important. 
• This deal is going to retail investors, quite specifically because Nintendo management and board view retail investors as both “sticky” investors and likely to largely follow management’s agenda in AGMs. Management might have misjudged how much this will get flipped.
  
• The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains. Given the size, it looks like the former though it will be difficult to get confirmation. Travis Lundy would want to be long Bank of Kyoto both outright and against the cross-holding portfolio.

link to Travis’ insight:
Nintendo Offering & Buyback: The Import & The Dynamics
Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

NTT Docomo Inc (9437 JP) (Mkt Cap: $72.4bn; Liquidity: $92mn)

NTT Docomo announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February. The buyback has already occurred. However, by the vagaries of TSE-calculated indices, they lead to index down-weightings (unless otherwise offset).

• This is a very large cancellation for a very large company, so it means a selldown of – by Travis’ estimate – 21.5-22.8mm shares at the close of trading March 28th. Traders looking to tilt short NTT Docomo or tilt long NTT short NTT Docomo will have that as a tailwind.

(link to Travis’ insight: NTT Docomo Share Cancellation)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $21mn)

Panalpina’s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation (EGF), made a formal request to hold an EGM prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights be abolished and a “One Share One Vote” structure be adopted. The situation has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the EGF which were deemed “grandfathered” prior to the change. 

• EGF wants to pass this giving everyone their capital share percentage vote because the alternative is worse. Getting this passed would slightly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance but it would mean that the EGF could continue to block any deal it did not like.  The thing is, there is nothing in the Articles of Association which grants EGF that “grandfathered” exemption.
• Cevian wants to block such this from going through, and to have the EGF capped at 5% like the Articles of Association suggest all should be. Cevian says that Panalpina has unlawfully maintained a grandfathering exemption from the 5% cap for the EGF. IF the EGF is capped, it means that effectively the EGF loses the ability to block deals they don’t like. 
• The situation is weird. It is possible that Panalpina is asking a convoluted and possibly unlawful voting structure with non-best-practice registration deadlines to vote on changing the vote structure. To Travis, this actually probably deserves a court challenge.

links to Travis’ insight:
Panalpina To Have EGM to Approve One Share One Vote.
The Mechanics of the Panalpina Vote

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $60mn)

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum with the announcement of a $48/share (51.7% premium to the undisturbed) acquisition proposal. Late last month Versum and Entegris announced a $9bn (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the remaining 52.5%.

• It’s now in VSM’s court. Should it opt to ditch Entegris’ merger-of-equals proposal and side with Merck, it would incur a US$140mn termination fee or $1.28/share.
• John DeMasi reckons Merck’s proposal is superior, however a pure cash offer vs. stock swap are not directly comparable. The prospect of Entegris substantially increasing the exchange ratio or adding a chunk of cash to the merger consideration seems remote. John expects we will see a bump in Merck’s offer to make it friendly, and a recommended deal, in short order.

(link to John’s insight: Versum Materials – Entegris Beaten to the Punch by Merck KGaA)

Wabco Holdings (WBC US) (Mkt Cap: $7.1bn; Liquidity: $56mn)

Brake supplier, Wabco confirmed that it is in takeover talks with ZF Friedrichshafen, one of the leading auto parts suppliers in Germany.   ZF and Wabco jointly develop the Evasive Manoeuvre Assist system for trucks, combining Wabco’s braking and vehicle dynamics control systems alongside ZF’s active steering technology.

• The pushback is the Zeppelin Foundation, ZF’s controlling shareholder, and its aversion to taking on excess debt. Management and the foundation previously clashed over the €13.5bn TRW transaction in 2015.

(link to Lightstream’s insight: WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF)

Hanergy Thin Film Power (566 HK) (Mkt Cap/Liquidity: n.a) 

Back in October last year, Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China. The key issue, putting aside the fact Hanergy has been suspended for near-on four years, is that the scrip consideration has no assigned value.

• Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares (with an as yet undermined jurisdiction), which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, they will hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as would be the case per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to potentially squeeze out minorities at a bargain price.
• It is not clear why the SFC is okay with this takeover proposal, apart from simply being open to any idea to remove Hanergy from the Exchange. At a guess, the SPV consideration structure (as opposed to a straightforward cash offer) is possibly geared to reduce shareholder rights compared to those available under Bermuda Companies Act, Bermuda being where Hanergy is incorporated.
• The Scheme doc, due out later this month, or early next, requires sign-off from the SFC. Presumably the SPV jurisdiction should at least be known by then. It is hard to believe an official takeover document would be dispatched boasting no determinate offer value in addition to unknown shareholder protection rights attached to the unlisted scrip.

(link to my insight: Hanergy’s Hobson’s Choice)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $5mn) 

Descente said will release its Mid-Term Plan early in an effort to encourage shareholders to not tender. For its part, Itochu has released an amendment to its original doc, saying Descente has been naughty (bad-mouthing Itochu to the press while in negotiations), and that it will wait until after the Tender Offer is completed to re-engage. Itochu effectively reserves the right to go full hostile.

• ANTA’s CEO was quoted in an interview saying ANTA supports Itochu’s tender offer and management restructuring and governance initiatives because they say they believe it will lift corporate value.  That means Itochu+ANTA have a functional majority if not absolute.
• This should raise back end values. Descente management is quite stuck here. To Travis, there is likely some upside optionality. Some may decide to stick with the company, raising pro-ration rates.

(link to Travis’ insight: Descente Descended and Itochu Angle Is More Hostile)

Hopewell Holdings (54 HK) (Mkt Cap: $4bn; Liquidity: $11mn) 

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  

• The Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years – the Glorious Property (845 HK) offer, which incidentally was voted down. The widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.
• Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. Therefore, the IFA concluded the Offer is reasonable by referencing the premium to last close and historical pricing. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.
• A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ). Trading at a wide gross/annualised return of 7.8%/45.4%, reflecting the risk to completion, and the significant downside should the scheme be voted down.

(link to my insight: Hopewell’s Egregiously Bad Offer, But What Can You Do?) 

DHG Pharmaceutical Jsc (DHG VN) (Mkt Cap: $668mn; Liquidity: $1.5mn) 

Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer at VND 120,000 (3.5% premium to the previous close when the doc was prepared), this time to purchase up to 21.7% of the Vietnam-listed DHG, lifting its stake to 56.69%.

• The State Capital Investment Corporation (SCIC) owns 43.31%. IF the SCIC tenders, the minimum proration is 33.38%.  IF the SCIC does NOT tender their shares, this is effectively a full tender. All of your shares would be purchased.
• The very recent performance has been most curious. The last 11 days – before the announcement – have seen the stock move 37.6% on 9x average volume, with little to no news to drive it as far as Travis can tell. Looks some leakage ahead of the partial offer announcement.

• Travis thinks there is a non-negligible possibility that Taisho will have to bump their Tender Offer Price. And a non-negligible chance that SCIC tenders.

(link to Travis’ insight: Taisho To Launch Another DHG Pharma Tender)

Yahoo Japan (4689 JP) (Mkt Cap: $13.5bn; Liquidity: $53mn) 

OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture en masse.

(link to LightStream Research ‘s insight: Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”)

Ruralco Holdings (RHL AU) (Mkt Cap: $335mn; Liquidity: $0.5mn)

Ruralco has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

• Nutrien has first mover advantage, however a counter from Elders Ltd (ELD AU) is possible. The two companies have a history after Ruralco attempted to buy out Elders in 2012, but failed over a disagreement in pricing.
• ACCC should not be issue to this transaction. A 2013 ruling did not oppose a Ruralco/Elders tie-up, and a similar conclusion is expected for Nutrien.
• The gross/annualised spread of 0.2%/0.7% is unattractive. But at this deal price, Elders could still come over the top. Trading itself at 11.4x EV/EBITDA (according to CapIQ), upping the price by 10% would still be accretive to Elders.

(link to my insight: Nutrien’s Move On Ruralco Makes Agronomic Sense)

Yungtay Engineering (1507 TT) (Mkt Cap: $792mn; Liquidity: $1mn) 

Revealed in the release of notes about the Board approval of the Independent Review Committee’s review in late January was the news that Otis offered to buy the company for NT$63/share but it didn’t go anywhere. In addition, some directors – most likely the partisan ones installed in the failed board proxy fight last summer – objected to the lower minimum threshold, which is a sign they don’t want the deal to go through (because the lowering of that threshold is otherwise an unmitigated positive for minority investors).

• Despite stories of a suit of breach of trust against six directors for not entertaining or pursuing offers at NT$63 by Otis and/or Schindler, the company had not received any notification from judicial authorities and has not updated the market about Tender-related matters in the last two weeks.
• Travis thinks there is the small possibility of a bump to NT$63; but it is not a difficult deal to get done at the minimum threshold at NT$60.

(link to Travis’ insight: Yungtay Noises Haven’t Produced a Result Yet) 

Golden Land Prop Dvlp (GOLD TB) (Mkt Cap: $611mn; Liquidity: $1mn) 

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for GOLD at Bt8.50/share, ~2.4% premium to last close. Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

• This tender offer therefore has been initiated to consolidate the Sirivadhanabhakdi family’s holding into GOLD. Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. The tender offer will be unconditional.
• The intention to delist GOLD is evident although it will be challenging for FPT to secure 90%+ in the tender offer process, given the single-digit premium to last close, and the fact GOLD traded above the current terms as recently as early December. Getting to 90% requires almost 50% of the minority to submit their shares.
• Currently trading at a gross/annualized spread of 2.4%/5.9% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

(link to my insight: Golden Land: Less An Offer, More A Consolidation Of Interests) 

Sichuan Swellfun Co Ltd A (600779 CH)(Mkt Cap: $3.1bn; Liquidity: $28mn) 

Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00/share. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

• On a trading basis, this is somewhat interesting. If you are quite bullish the stock, you have a partial put (and you own it already). If you are tentatively bullish A-shares, this offers you a partial put, but there is a possibility that the RMB 45.00 price creates a kind of short-term cap just because it is a sticky price in peoples’ minds.
• Travis is not particularly bearish the stock despite the fact that the earnings forecasts have dropped a fair bit since he looked at this six months ago. The consensus EPS forecasts for Dec 2020 today are roughly the same as they were for Dec 2019 six months ago.

(link to Travis’ insight: Diageo Proposes Another Partial Tender for Sichuan Swellfun)

Briefly …

• Douglas Kim reported that Amazon.com Inc (AMZN US) and Comcast Corp Class A (CMCSA US) may enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. (link to Douglas’s insight:  Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!)
• The new news on Kosaido Co Ltd (7868 JP) is that the independent statutory auditor Nakatsuji-san has officially expressed his opposition to the Tender Offer. With the shares 19% through terms despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share looks low, and this seems a situation where the deal may fail unless there is a bump. (link to Travis’ insight: Kosaido (7868 JP) TOB Extended)
• On the 28 Feb, Bank Danamon Indonesia (BDMN IJ)‘s shares went ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected, but Travis thinks they could fall further: there is no compelling reason to own the bank after it goes ex-rights to receive cash. (link to Travis’ insight: Bank Danamon Goes Ex-Rights)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

FY18 results for PCCW, HKT, and PCPD are out. Plugging in the de-consolidated numbers, I estimate PCCW’s discount to NAV at ~37%, right on the 2 STD line. On a simple ratio (PCCW/HKT), it is again approaching an all-time low. 

• Still select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW’s stub ops, recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16’s stub EBITDA was also negative.
• One positive takeaway is that the dividend pass through is holding at around 90%.

(link to my insight: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating)

Korean Stubs Spotlight

Douglas provided the one-year share price comparisons of 30 Korean holdcos and the opcos as well as changes to the foreign ownership stakes of these companies YTD. Significant changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

• Among these 30 pair, five recorded significant share prices divergence in the past year (by 30% or more): Hyosung Corporation (004800 KS) vs. Hyosung Advanced Materials C (298050 KS), BGF Retail (282330 KS) vs. BGF Co Ltd (027410 KS), Doosan Corp (000150 KS) vs. Doosan Heavy Industries (034020 KS), Cuckoo Holdings (192400 KS) vs. Cuckoo Homesys (284740 KS) and Orion Holdings (001800 KS) vs. Orion Corp (271560 KS).
• Among these 30 pairs, five experienced 2.0% or more changes in the difference of the holdco and opco’s foreign shareholding percentages: Doosan Corp (000150 KS) vs.Doosan Heavy Industries (034020 KS),  Halla Corp (014790 KS) vs.Mando Corp (204320 KS), Lotte Holdings (004990 KS) vs. Lotte Shopping Co (023530 KS), LS Corp (006260 KS) vs. Ls Industrial Systems (010120 KS) and SK Telecom (017670 KS) vs. SK Hynix Inc (000660 KS).

(link to Douglas insight: Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership)

• Sanghyun Park points out that Hyundai Motor Co (005380 KS)‘s Common vs. pref ratio is getting out of whack, possibly because of Elliott’s ₩4.5tn dividend demand. Both 1P and 2PB are sufficiently undervalued relative to the Common. The div yield difference to Common is also at the highest levels for both pref types. Sanghyun suggests shorting the Common and being long 1P or 2PB now. 1P is probably a safer bet, but 2PB is more liquid. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time to Short Common & Long Pref)
• Sanghyun also points out Samsung Electronics (005930 KS) Common/1P price ratio gap is again above +100% of σ on a 20D MA in favour of Common. He recommends going long 1P and short Common for now. (link to Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices)

For the month of February, thirteen new deals were discussed on Smartkarma with a cumulative deal size of US$12.3bn. This overall number includes the “offer” for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component. A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal. The average premium to last close for the new deals was 27.5%.

(link to my insight: M&A: A Round-Up of Deals in February 2019)

• Pioneer Corp (6773 JP) announced that the deal had received all relevant anti-trust approvals, and payment for shares by the Acquirer (BPAE) of the Third Party Placement was now expected to take place on March 8th. 

• Glow Energy Pcl (GLOW TB) announced it has entered an S&P to sell Glow SPP1 to B. Grimm Power Service for Bt3.3bn. The P/B was not provided. This is equivalent to ~2.5% of Glow’s market cap.

• Propertylink Group (PLG AU)‘s Offer has been extended to 8th March as they look to get to 90% and move to compulsory.

• Delta Electronics Thai (DELTA TB) has now clarified that the dividend will be added to the offer.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. Nexon Valuation Analysis

In this report, we provide a valuation analysis of Nexon Co Ltd (3659 JP). A key question is “How much are investors willing to pay for Nexon which would drive higher EV/EBIT multiples and inversely reduce the earnings yield (measured by EBIT/EV)?” 

In our view, we believe that investors would be comfortable with earnings yield (measured by EBIT/EV) of about 7-9% given the risks of operating a global game franchise such as Nexon. This would suggest EV/EBIT of about 11x to 14x, using 2019 estimates. Our sensitivity analysis suggests that at the top end of the EV/EBIT valuation range of 14x, this would imply market cap of 1,905 billion yen, which would be 21% higher than current market cap. As such, despite Nexon’s share price rising 25% YTD, we think there could be further upside in the months ahead. 

Having digested plethora of public information on this deal (but not privy to all the bankers’ discussions) in the past several days, we believe that the US based companies including Amazon and Comcast are better positioned to acquire NXC Corp/Nexon, rather than the consortium led by Tencent. 

We believe there is an intense Chinese government pressure on Tencent to not do this deal. (This is just our guess based on public information). The game industry is not strategically important to China, unlike other industries such as semiconductors, energy, or financial. Depending on how much controlling stake Tencent wants to take, it is likely to involve several billions of dollars ($4 billion to $7 billion for Tencent, for example). This is a lot of money. Plus, China Inc’s balance sheet is not as strong as pre-GFC of 2008. Forking over $4 to $7 billion out of China into Japan/Korea would be meaningful. In short, although Tencent would like to do this deal, we think that behind the scenes, the Chinese government appears to be putting intense pressure on Tencent to not do this deal. 

In this briefing:

1. M&A: A Round-Up of Deals in March 2019
2. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications
3. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
4. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover
5. China Power New Energy To Be Delisted After SOE Injection Abandoned

1. M&A: A Round-Up of Deals in March 2019

For the month of March, ten new deals were discussed on Smartkarma with an overall deal size of US$22.3bn.

Clicking on the company name in the table below will take you to the entity page where you can see insight(s) written by Smartkarma contributors.

Blackstone and Hellman & Friedman made a proposal for Scout24 AG (G24 GR) in mid-January – which was rejected by the board – and subsequently returned with an improved offer which was then supported. The deal was first written on after the Tender Offer was officially launched in March.

The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.

Brief Summary of News in March of Arb Situations On Smartkarma’s Radar

(again, click on the company names to take to you to the insights and/or discussion posts)

2. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications

This post looks at the tax situations that Nexon’s Kim may be facing for each of the two options and the signals that he may be sending with regard to his decision. Also, this post discusses how each option may impact on mandatory tender offer which is a crucial point for current massive short buildup on Nexon Japan shares.

3. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW

Last Week in Event SPACE …

• The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
• The value enhancement to Naspers Ltd (NPN SJ) from spinning off and separately listing its stake in Tencent Holdings (700 HK) is not apparent.
• Trading around its “undisturbed” levels, Lynas Corp Ltd (LYC AU) looks like a short after rejecting Wesfarmers Ltd (WES AU)‘s left-field unsolicited proposal.
• The gloves are off as Merck KGaA (MRK GR) announced an unsolicited $48/share cash tender offer for Versum Materials (VSM US). 
• With the ACCC’s blessing, now is a good time for Xenith Ip (XIP AU) to jettison Qantm Intellectual Property (QIP AU) and engage with IPH Ltd (IPH AU).
• While the deal for Scout24 AG (G24 GR) is likely to get up, someone else coming over the top at this late stage is not impossible.
• PCCW Ltd (8 HK) is “cheap” relative to HKT Ltd (6823 HK) – a catalyst to narrow the discount would be helpful.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nissan Motor (7201 JP) (Mkt Cap: $32bn; Liquidity: $98mn)

Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.

• Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
• If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
  
• Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP.  He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
• Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.

Links to:
Mio’s insight: Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger.
Travis’ insight: Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Samsung Electronics (005930 KS) (Mkt Cap: $265bn; Liquidity: $464mn)

Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.

• And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
• SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.

(link to Sanghyun’s insight: Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price)

Briefly …

Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1bn; Liquidity: $7mn)

Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme.  This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.

• Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia. 

• This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago.  Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25. 
• A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
• At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
  

(link to Travis’ insight: Wesfarmers Puts Out A Bid for Lynas)

Xenith Ip (XIP AU) (Mkt Cap: $115mn; Liquidity: $1mn)

The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.

• None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
• With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.

(link to my insight: Xenith Is Running Out Of Excuses)

China Power New Energy Development Co (735 HK) (Mkt Cap: $581mn; Liquidity: $1mn)

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

• This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
• Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
• The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend. 

(link to my insight: China Power New Energy To Be Delisted After SOE Injection Abandoned)

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $79mn)

Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.

• Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
• The shareholder vote on the VSM/ENTG is scheduled for April 26^th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
• Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”

(link to John DeMasi‘s: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III))

Scout24 AG (G24 GR) (Mkt Cap: $5.6bn; Liquidity: $20mn)

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer.  The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.

• The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming. 
• Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
• Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.

(link to Travis’ insight: Scout24 Tender Offer Launched: Price Still Not Quite Full)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.

• Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
• The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”.  It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing. 
• Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return.  I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.

(link to my insight: StubWorld: Naspers Embeds Another Layer Into Tencent)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.

• The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
• As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.

(link to Curtis’ insight: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On)

• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s SPA has completed – you can see the movement in shares on CCASS – triggering the MGO.

  Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.

• Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.

• Ophir Energy (OPHR LN)‘s shareholders approved Medco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.

• 9.12% of shares out have tendered into Delta Electronics Thai (DELTA TB)‘s Offer, bringing the Offeror’s total holding to 30.05%. 
• The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

4. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

5. China Power New Energy To Be Delisted After SOE Injection Abandoned

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average.

A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available.

China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

However, China Three Gorges is presumably required to abstain from voting at the court meeting, as it is deemed to be acting in concert with the SPIC under class (1) of the definition of the acting in concert in the Takeovers Code. The announcement does not make this clear.

Assuming China Three Gorges does abstain, a 10% blocking stake at the court meeting is equivalent to 4.48% of shares out or 53mn shares.

This looks like a pretty clean deal. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.

The stock is currently trading at an attractive gross/annualised spread of 8.3%/28.9% conservatively assuming a late July completion, and inclusive of the final dividend. 

In this briefing:

1. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications
2. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
3. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover
4. China Power New Energy To Be Delisted After SOE Injection Abandoned
5. Scout24 Tender Offer Launched: Price Still Not Quite Full

1. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications

This post looks at the tax situations that Nexon’s Kim may be facing for each of the two options and the signals that he may be sending with regard to his decision. Also, this post discusses how each option may impact on mandatory tender offer which is a crucial point for current massive short buildup on Nexon Japan shares.

2. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW

Last Week in Event SPACE …

• The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
• The value enhancement to Naspers Ltd (NPN SJ) from spinning off and separately listing its stake in Tencent Holdings (700 HK) is not apparent.
• Trading around its “undisturbed” levels, Lynas Corp Ltd (LYC AU) looks like a short after rejecting Wesfarmers Ltd (WES AU)‘s left-field unsolicited proposal.
• The gloves are off as Merck KGaA (MRK GR) announced an unsolicited $48/share cash tender offer for Versum Materials (VSM US). 
• With the ACCC’s blessing, now is a good time for Xenith Ip (XIP AU) to jettison Qantm Intellectual Property (QIP AU) and engage with IPH Ltd (IPH AU).
• While the deal for Scout24 AG (G24 GR) is likely to get up, someone else coming over the top at this late stage is not impossible.
• PCCW Ltd (8 HK) is “cheap” relative to HKT Ltd (6823 HK) – a catalyst to narrow the discount would be helpful.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nissan Motor (7201 JP) (Mkt Cap: $32bn; Liquidity: $98mn)

Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.

• Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
• If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
  
• Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP.  He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
• Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.

Links to:
Mio’s insight: Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger.
Travis’ insight: Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Samsung Electronics (005930 KS) (Mkt Cap: $265bn; Liquidity: $464mn)

Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.

• And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
• SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.

(link to Sanghyun’s insight: Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price)

Briefly …

Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1bn; Liquidity: $7mn)

Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme.  This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.

• Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia. 

• This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago.  Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25. 
• A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
• At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
  

(link to Travis’ insight: Wesfarmers Puts Out A Bid for Lynas)

Xenith Ip (XIP AU) (Mkt Cap: $115mn; Liquidity: $1mn)

The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.

• None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
• With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.

(link to my insight: Xenith Is Running Out Of Excuses)

China Power New Energy Development Co (735 HK) (Mkt Cap: $581mn; Liquidity: $1mn)

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

• This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
• Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
• The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend. 

(link to my insight: China Power New Energy To Be Delisted After SOE Injection Abandoned)

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $79mn)

Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.

• Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
• The shareholder vote on the VSM/ENTG is scheduled for April 26^th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
• Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”

(link to John DeMasi‘s: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III))

Scout24 AG (G24 GR) (Mkt Cap: $5.6bn; Liquidity: $20mn)

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer.  The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.

• The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming. 
• Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
• Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.

(link to Travis’ insight: Scout24 Tender Offer Launched: Price Still Not Quite Full)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.

• Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
• The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”.  It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing. 
• Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return.  I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.

(link to my insight: StubWorld: Naspers Embeds Another Layer Into Tencent)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.

• The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
• As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.

(link to Curtis’ insight: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On)

• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s SPA has completed – you can see the movement in shares on CCASS – triggering the MGO.

  Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.

• Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.

• Ophir Energy (OPHR LN)‘s shareholders approved Medco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.

• 9.12% of shares out have tendered into Delta Electronics Thai (DELTA TB)‘s Offer, bringing the Offeror’s total holding to 30.05%. 
• The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

3. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

4. China Power New Energy To Be Delisted After SOE Injection Abandoned

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average.

A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available.

China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

However, China Three Gorges is presumably required to abstain from voting at the court meeting, as it is deemed to be acting in concert with the SPIC under class (1) of the definition of the acting in concert in the Takeovers Code. The announcement does not make this clear.

Assuming China Three Gorges does abstain, a 10% blocking stake at the court meeting is equivalent to 4.48% of shares out or 53mn shares.

This looks like a pretty clean deal. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.

The stock is currently trading at an attractive gross/annualised spread of 8.3%/28.9% conservatively assuming a late July completion, and inclusive of the final dividend. 

5. Scout24 Tender Offer Launched: Price Still Not Quite Full

In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.

The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low. 

The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.

The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top. 

The New News

Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.

More discussion below.

In this briefing:

1. Nexon Valuation Analysis

1. Nexon Valuation Analysis

In this report, we provide a valuation analysis of Nexon Co Ltd (3659 JP). A key question is “How much are investors willing to pay for Nexon which would drive higher EV/EBIT multiples and inversely reduce the earnings yield (measured by EBIT/EV)?” 

In our view, we believe that investors would be comfortable with earnings yield (measured by EBIT/EV) of about 7-9% given the risks of operating a global game franchise such as Nexon. This would suggest EV/EBIT of about 11x to 14x, using 2019 estimates. Our sensitivity analysis suggests that at the top end of the EV/EBIT valuation range of 14x, this would imply market cap of 1,905 billion yen, which would be 21% higher than current market cap. As such, despite Nexon’s share price rising 25% YTD, we think there could be further upside in the months ahead. 

Having digested plethora of public information on this deal (but not privy to all the bankers’ discussions) in the past several days, we believe that the US based companies including Amazon and Comcast are better positioned to acquire NXC Corp/Nexon, rather than the consortium led by Tencent. 

We believe there is an intense Chinese government pressure on Tencent to not do this deal. (This is just our guess based on public information). The game industry is not strategically important to China, unlike other industries such as semiconductors, energy, or financial. Depending on how much controlling stake Tencent wants to take, it is likely to involve several billions of dollars ($4 billion to $7 billion for Tencent, for example). This is a lot of money. Plus, China Inc’s balance sheet is not as strong as pre-GFC of 2008. Forking over $4 to $7 billion out of China into Japan/Korea would be meaningful. In short, although Tencent would like to do this deal, we think that behind the scenes, the Chinese government appears to be putting intense pressure on Tencent to not do this deal. 

In this briefing:

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

In this briefing:

1. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
2. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover
3. China Power New Energy To Be Delisted After SOE Injection Abandoned
4. Scout24 Tender Offer Launched: Price Still Not Quite Full
5. Denso Continues to Strengthen Its Investment CASE with Acquisitions

1. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW

Last Week in Event SPACE …

• The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
• The value enhancement to Naspers Ltd (NPN SJ) from spinning off and separately listing its stake in Tencent Holdings (700 HK) is not apparent.
• Trading around its “undisturbed” levels, Lynas Corp Ltd (LYC AU) looks like a short after rejecting Wesfarmers Ltd (WES AU)‘s left-field unsolicited proposal.
• The gloves are off as Merck KGaA (MRK GR) announced an unsolicited $48/share cash tender offer for Versum Materials (VSM US). 
• With the ACCC’s blessing, now is a good time for Xenith Ip (XIP AU) to jettison Qantm Intellectual Property (QIP AU) and engage with IPH Ltd (IPH AU).
• While the deal for Scout24 AG (G24 GR) is likely to get up, someone else coming over the top at this late stage is not impossible.
• PCCW Ltd (8 HK) is “cheap” relative to HKT Ltd (6823 HK) – a catalyst to narrow the discount would be helpful.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Nissan Motor (7201 JP) (Mkt Cap: $32bn; Liquidity: $98mn)

Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.

• Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
• If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
  
• Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP.  He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
• Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.

Links to:
Mio’s insight: Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger.
Travis’ insight: Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Samsung Electronics (005930 KS) (Mkt Cap: $265bn; Liquidity: $464mn)

Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.

• And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
• SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.

(link to Sanghyun’s insight: Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price)

Briefly …

Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $1bn; Liquidity: $7mn)

Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme.  This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.

• Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia. 

• This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago.  Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25. 
• A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
• At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
  

(link to Travis’ insight: Wesfarmers Puts Out A Bid for Lynas)

Xenith Ip (XIP AU) (Mkt Cap: $115mn; Liquidity: $1mn)

The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.

• None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
• With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.

(link to my insight: Xenith Is Running Out Of Excuses)

China Power New Energy Development Co (735 HK) (Mkt Cap: $581mn; Liquidity: $1mn)

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

• This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
• Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
• The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend. 

(link to my insight: China Power New Energy To Be Delisted After SOE Injection Abandoned)

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $79mn)

Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.

• Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
• The shareholder vote on the VSM/ENTG is scheduled for April 26^th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
• Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”

(link to John DeMasi‘s: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III))

Scout24 AG (G24 GR) (Mkt Cap: $5.6bn; Liquidity: $20mn)

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer.  The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.

• The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming. 
• Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
• Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.

(link to Travis’ insight: Scout24 Tender Offer Launched: Price Still Not Quite Full)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.

• Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
• The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”.  It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing. 
• Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return.  I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.

(link to my insight: StubWorld: Naspers Embeds Another Layer Into Tencent)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.

• The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
• As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.

(link to Curtis’ insight: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On)

• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s SPA has completed – you can see the movement in shares on CCASS – triggering the MGO.

  Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.

• Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.

• Ophir Energy (OPHR LN)‘s shareholders approved Medco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.

• 9.12% of shares out have tendered into Delta Electronics Thai (DELTA TB)‘s Offer, bringing the Offeror’s total holding to 30.05%. 
• The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

3. China Power New Energy To Be Delisted After SOE Injection Abandoned

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average.

A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available.

China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

However, China Three Gorges is presumably required to abstain from voting at the court meeting, as it is deemed to be acting in concert with the SPIC under class (1) of the definition of the acting in concert in the Takeovers Code. The announcement does not make this clear.

Assuming China Three Gorges does abstain, a 10% blocking stake at the court meeting is equivalent to 4.48% of shares out or 53mn shares.

This looks like a pretty clean deal. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.

The stock is currently trading at an attractive gross/annualised spread of 8.3%/28.9% conservatively assuming a late July completion, and inclusive of the final dividend. 

4. Scout24 Tender Offer Launched: Price Still Not Quite Full

In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.

The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low. 

The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.

The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top. 

The New News

Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.

More discussion below.

5. Denso Continues to Strengthen Its Investment CASE with Acquisitions

Denso Corp (6902 JP) announced this month that it has invested in the Seattle-based connected vehicle services pioneer- Airbiquity Inc. Airbiquity is one of the leading companies in the connected vehicle services sector and has been one of the companies that has continuously developed automotive telematics technology. This investment made by Denso follows its investment made in Quadric.io this year ( Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims). As we previously mentioned, Denso is in full swing in its development in the autonomous driving field and next-generation technologies development. Thus, it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. According to Denso, its investment worth $5m in Airbiquity is expected to accelerate the development of over-the-air (OTA) systems for wirelessly updating automotive software from a remote location. OTA systems are methods of distributing new software, configuration settings, and providing updates to the electronic device in use, for instance, a car navigation system in a vehicle. These OTA systems which have been increasingly used to update the software of such multimedia products in a vehicle are now gaining more prominence given the emergence of next-generation technologies such as electrification, EV and connectivity. We also believe that Denso’s Stake in Airbiquity is likely to accelerate Denso’s transition in its business model to be a leading software solution provider. Thus, its series of investments such as in Tohoku Pioneer EG, JOLED, ThinCI, Quadric, and now Airbiquity are indicative of the decisiveness of its change in business model and moves towards achieving next-generation technology leadership.

In this briefing:

1. Taisho To Launch Another DHG Pharma Tender

1. Taisho To Launch Another DHG Pharma Tender

After the close on 28 February 2019, Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer, this time to purchase up to 21.7% of the Vietnam-listed DHG Pharmaceutical Jsc (DHG VN) a.k.a. Duoc Hau Giang Pharmaceutical JSC.

On 3 July 2018, the company announced that it had received approval from the State Securities Commission (SSC) to raise the foreign ownership limit to 100%, with official disclosure of it going into effect 4 July. Shortly afterwards, Taisho launched a Tender Offer to purchase 7.06% of the shares outstanding of DHG, with the intention to get to 32.00%. Taisho registered to buy more shares last autumn, and bought a further 925,200 shares on 20 February to bring their stake to 34.99%, and now they intend to move to 56.69%.

This next one threatens a much higher minimum pro-ration, BUT it is at the same price as the last one, and while this is at a significant premium to a one-month or three-month average trading price, it is less than a 3.5% premium to Wednesday’s close of VND 116,000/share.

More below the fold.

In this briefing:

1. Taisho To Launch Another DHG Pharma Tender

1. Taisho To Launch Another DHG Pharma Tender

After the close on 28 February 2019, Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer, this time to purchase up to 21.7% of the Vietnam-listed DHG Pharmaceutical Jsc (DHG VN) a.k.a. Duoc Hau Giang Pharmaceutical JSC.

On 3 July 2018, the company announced that it had received approval from the State Securities Commission (SSC) to raise the foreign ownership limit to 100%, with official disclosure of it going into effect 4 July. Shortly afterwards, Taisho launched a Tender Offer to purchase 7.06% of the shares outstanding of DHG, with the intention to get to 32.00%. Taisho registered to buy more shares last autumn, and bought a further 925,200 shares on 20 February to bring their stake to 34.99%, and now they intend to move to 56.69%.

This next one threatens a much higher minimum pro-ration, BUT it is at the same price as the last one, and while this is at a significant premium to a one-month or three-month average trading price, it is less than a 3.5% premium to Wednesday’s close of VND 116,000/share.

More below the fold.

In this briefing:

1. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover
2. China Power New Energy To Be Delisted After SOE Injection Abandoned
3. Scout24 Tender Offer Launched: Price Still Not Quite Full
4. Denso Continues to Strengthen Its Investment CASE with Acquisitions
5. Xenith Is Running Out Of Excuses

1. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

2. China Power New Energy To Be Delisted After SOE Injection Abandoned

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average.

A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available.

China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

However, China Three Gorges is presumably required to abstain from voting at the court meeting, as it is deemed to be acting in concert with the SPIC under class (1) of the definition of the acting in concert in the Takeovers Code. The announcement does not make this clear.

Assuming China Three Gorges does abstain, a 10% blocking stake at the court meeting is equivalent to 4.48% of shares out or 53mn shares.

This looks like a pretty clean deal. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.

The stock is currently trading at an attractive gross/annualised spread of 8.3%/28.9% conservatively assuming a late July completion, and inclusive of the final dividend. 

3. Scout24 Tender Offer Launched: Price Still Not Quite Full

In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.

The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low. 

The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.

The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top. 

The New News

Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.

More discussion below.

4. Denso Continues to Strengthen Its Investment CASE with Acquisitions

Denso Corp (6902 JP) announced this month that it has invested in the Seattle-based connected vehicle services pioneer- Airbiquity Inc. Airbiquity is one of the leading companies in the connected vehicle services sector and has been one of the companies that has continuously developed automotive telematics technology. This investment made by Denso follows its investment made in Quadric.io this year ( Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims). As we previously mentioned, Denso is in full swing in its development in the autonomous driving field and next-generation technologies development. Thus, it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. According to Denso, its investment worth $5m in Airbiquity is expected to accelerate the development of over-the-air (OTA) systems for wirelessly updating automotive software from a remote location. OTA systems are methods of distributing new software, configuration settings, and providing updates to the electronic device in use, for instance, a car navigation system in a vehicle. These OTA systems which have been increasingly used to update the software of such multimedia products in a vehicle are now gaining more prominence given the emergence of next-generation technologies such as electrification, EV and connectivity. We also believe that Denso’s Stake in Airbiquity is likely to accelerate Denso’s transition in its business model to be a leading software solution provider. Thus, its series of investments such as in Tohoku Pioneer EG, JOLED, ThinCI, Quadric, and now Airbiquity are indicative of the decisiveness of its change in business model and moves towards achieving next-generation technology leadership.

5. Xenith Is Running Out Of Excuses

When IPH Ltd (IPH AU) gate-crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a scheme proposal comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, versus QANTM’s all-cash offer (1.22 QANTM), the key risk to IPH’s Offer was ACCC opposing its Offer. As announced today, ACCC will not oppose.

This decision was largely expected and previously discussed here. Although IPH, QANTM, and Xenith are the only three ASX-listed intellectual property companies, privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. The ACCC agrees and signed off on an IPH/XIP tie-up as it did on the 21 March, by not opposing the merger of XIP and QANTM.

XIP acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exists a number of concerns as detailed in its 19 March announcement. IPH responded to those concerns on the 20 March. These include:

1. Shareholders of Xenith will hold an immaterial % of the merged IPH entity compared to QANTM.
   • IPH’s scrip portion accounted for (then) 35% of its Offer (now ~37%), shares which have superior liquidity versus QANTM given IPH’s position in the ASX200. 
   • The cash portion also provides added certainty on value into the Offer compared to QANTM’s all scrip offer.
2. The control premium as at 11 March is insufficient.
   • Probably the most contentious concern. QANTM’s all-scrip offer on the 27 November backed out an indicative offer price of $1.598/share or a 28.4% premium to last close.
   • IPH’s $1.97/share indicative offer (a 60% premium to XIP’s undisturbed price, and a 31% premium to the independent expert’s mid-point fair value (page 55)) compared to QANTM’s indicative offer of $2.03 immediately before IPH’s announcement.
   • Circumstances have changed materially since, with IPH’s cash/scrip offer now worth $2.02 as I type, versus $1.67 for QANTM.
     

     

     Source: CapIQ
3. The increased execution risk concerning ACCC. Now a non-issue.
4. It is questionable whether employees, controlling 40% of Xenith, would support the offer.
   • Employees are free to decide on what they consider to be the most compelling Offer. IPH has offered to hold discussions with XIP employees. 
5. CGT rollover will likely be lower via the large cash element under IPH’s offer vs. QANTM’s all scrip offer.
   • Maybe. Possibly. An all-scrip offer typically affords greater rollover relief. Nevertheless, Xenith is trading below its 2015 IPO price of $2.72/share.

With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH. The scheme meeting to decide on the QANTM Offer is scheduled for the 3 April.