It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected.
Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.
In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.
Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.
The bid comes at a turbulent time for Lynas, which is caught in a regulatory dispute with authorities in Malaysia. While Wesfarmers proposal could be viewed as a lifeline for Lynas, we believe that Wesfarmers’s proposal is opportunistic and unattractive.
There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.
Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
This morning, Wesfarmers Ltd (WES AU) announced an indicative, non-binding proposal to the Board of Directors of Lynas Corp Ltd (LYC AU) to acquire Lynas at A$2.25/share, payable in cash in the form of a Scheme of Arrangement.
This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price.
It is, however, a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian Minister for Energy, Science, Technology, Environment and Climate 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. On December 5th, the shares fell to A$1.65 and they have not recovered.
This is very early, non-binding, conditional in the extreme, and conditional non-binding offers are a graveyard of Australian arbitrageurs. The Offer is not all that attractive to boot. But I expect the stock will go up anyway, and that may make for some interesting trading opportunities.
DHICO rights offer 1st round pricing was fixed at ₩5,550. This ₩5,550 will serve as the ceiling. It is nearly guaranteed that the final offer price will be fixed somewhere between ₩5,000 and ₩5,550. It can not go lower than the face value ₩5,000.
Today (Mar 26) is the last day to get subscription rights. Subscription rights will be then tradable on Apr 19~25. The 4 bookrunners will buy all forfeited shares at a 15% discount to final offering price. There is no cancellation risk.
Local arb traders made their move yesterday. Foreign arb traders entered as well. Past tendency shows buying earlier would pay off more handsomely than waiting longer. DHICO’s fundamentals isn’t showing any positive sign yet. Deal structure isn’t helping improve street sentiments either. This event needs a lot of arb traders to hit the target. This is another relief point for those making early trades.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
On Friday 22 February after the close, Nintendo Co Ltd (7974 JP) announced a buyback (E, J), a share cancellation (E, J), and a public equity offering of secondary shares (J-only). This kind of event is not abnormal in a year when profits are weaker and share prices are down. Cross-holders often sell shares into the end of the year in order to realise profits and let unrealised gains from the balance sheet filter into the income statement.
This time it is five sellers from four banks which all hail from the area: Bank Of Kyoto (8369 JP), Nomura Trust (which holds shares in a trust account for the MUFJ Bank pension fund as a beneficiary), Mitsubishi Ufj Financial (8306 JP)‘s MUFJ Bank, Resona Holdings (8308 JP), and Shiga Bank (8366 JP). The MUFJ Bank holdings likely originate from Sanwa Bank which was Osaka-based before merging with BOT-Mitsubishi almost 15 years ago, and Resona is also from Osaka – next door to Kyoto where Nintendo was founded – and Shiga Bank is the prefecture next door.
This would look like a normal sell-down… except for one thing.
There was a note in the announcement to the effect that “in the context of how companies deal with their policy cross-holdings becoming the subject of greater focus, we confirmed that several shareholders desired to sell shares, and as a company subject to such cross-holdings, we are conducting the above-mentioned Offering.”
In the TSE crossholding of SGX situation, the sale was not the most important part. The explanation of how the Board came to its decision and what they decided to do about it was important.
On the other hand, Japan’s Corporate Governance Code (the Code), which was introduced in 2015, requires listed companies to examine and explain the economic rationale and future outlook of holding shares of other listed companies for reasons other than pure investment purposes. Following a review of the requirements under the Code, JPX reached the conclusion that the existing cooperative relationship with SGX would continue even without holding the shares of SGX. [my bold]
The Japan Exchange Group had now provided the example for why even companies with cooperative business relationships should not own cross-holdings. And it is, if active stewards of capital choose to make it so, more subtle. Shareholders have even an even better pressure point. IF a company’s cooperative relationship with another company would not survive the unwinding of cross-holdings to improve capital efficiency for both sides, is that company truly independent? Is that company beholden to the company whose shares it holds? Is the cross-holding board doing its job?
And the Japan Exchange Group had said it would unwind its holdings of SGX over three years, so as not to overly impact the market for SGX shares. This provided an example of HOW to unwind, in addition to the WHY to unwind announced above.
The BIG QUESTION (And Nothing Else Matters)
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.
In this version of the GER weekly research wrap, we assess the controversy surrounding potentially inflated revenue concerns for Best World International (BEST SP) . Secondly, we dig into the latest M&A situation for Graincorp Ltd A (GNC AU) amidst a testy AGM and a slow resolution to a binding bid which may limit a bump. In addition, we update on the KKR bid for MYOB Group Ltd (MYO AU) which Arun contends is unlikely to receive a counter bid due to KKR’s blocking stake. Finally, we initiate on the IPO of hotelier Zhejiang New Century Hotel Management Group (ZHEKAIH HK). A calendar of upcoming catalysts is also attached.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.
The bid comes at a turbulent time for Lynas, which is caught in a regulatory dispute with authorities in Malaysia. While Wesfarmers proposal could be viewed as a lifeline for Lynas, we believe that Wesfarmers’s proposal is opportunistic and unattractive.
There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.
Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
This morning, Wesfarmers Ltd (WES AU) announced an indicative, non-binding proposal to the Board of Directors of Lynas Corp Ltd (LYC AU) to acquire Lynas at A$2.25/share, payable in cash in the form of a Scheme of Arrangement.
This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price.
It is, however, a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian Minister for Energy, Science, Technology, Environment and Climate 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. On December 5th, the shares fell to A$1.65 and they have not recovered.
This is very early, non-binding, conditional in the extreme, and conditional non-binding offers are a graveyard of Australian arbitrageurs. The Offer is not all that attractive to boot. But I expect the stock will go up anyway, and that may make for some interesting trading opportunities.
DHICO rights offer 1st round pricing was fixed at ₩5,550. This ₩5,550 will serve as the ceiling. It is nearly guaranteed that the final offer price will be fixed somewhere between ₩5,000 and ₩5,550. It can not go lower than the face value ₩5,000.
Today (Mar 26) is the last day to get subscription rights. Subscription rights will be then tradable on Apr 19~25. The 4 bookrunners will buy all forfeited shares at a 15% discount to final offering price. There is no cancellation risk.
Local arb traders made their move yesterday. Foreign arb traders entered as well. Past tendency shows buying earlier would pay off more handsomely than waiting longer. DHICO’s fundamentals isn’t showing any positive sign yet. Deal structure isn’t helping improve street sentiments either. This event needs a lot of arb traders to hit the target. This is another relief point for those making early trades.
Best of luck for the new week – Arun, Venkat and Rickin
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In this version of the GER weekly research wrap, we assess the controversy surrounding potentially inflated revenue concerns for Best World International (BEST SP) . Secondly, we dig into the latest M&A situation for Graincorp Ltd A (GNC AU) amidst a testy AGM and a slow resolution to a binding bid which may limit a bump. In addition, we update on the KKR bid for MYOB Group Ltd (MYO AU) which Arun contends is unlikely to receive a counter bid due to KKR’s blocking stake. Finally, we initiate on the IPO of hotelier Zhejiang New Century Hotel Management Group (ZHEKAIH HK). A calendar of upcoming catalysts is also attached.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
Aveo Group (AOG AU), an Australian retirement village operator, is amid a strategic review to sell itself. At its 1H19 results on 13 February, Aveo said it had received several non-binding bids from parties interested in acquiring the entire company.
Scepticism on a successful sale remains high as Aveo’s discount to NTA has increased from 44% on 14 August 2018 (the day before the announcement of strategic review) to the current 46%. However, we believe that the widening NTA discount is an opportunity to capitalise on an emerging bidding battle.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.
Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
This morning, Wesfarmers Ltd (WES AU) announced an indicative, non-binding proposal to the Board of Directors of Lynas Corp Ltd (LYC AU) to acquire Lynas at A$2.25/share, payable in cash in the form of a Scheme of Arrangement.
This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price.
It is, however, a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian Minister for Energy, Science, Technology, Environment and Climate 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. On December 5th, the shares fell to A$1.65 and they have not recovered.
This is very early, non-binding, conditional in the extreme, and conditional non-binding offers are a graveyard of Australian arbitrageurs. The Offer is not all that attractive to boot. But I expect the stock will go up anyway, and that may make for some interesting trading opportunities.
DHICO rights offer 1st round pricing was fixed at ₩5,550. This ₩5,550 will serve as the ceiling. It is nearly guaranteed that the final offer price will be fixed somewhere between ₩5,000 and ₩5,550. It can not go lower than the face value ₩5,000.
Today (Mar 26) is the last day to get subscription rights. Subscription rights will be then tradable on Apr 19~25. The 4 bookrunners will buy all forfeited shares at a 15% discount to final offering price. There is no cancellation risk.
Local arb traders made their move yesterday. Foreign arb traders entered as well. Past tendency shows buying earlier would pay off more handsomely than waiting longer. DHICO’s fundamentals isn’t showing any positive sign yet. Deal structure isn’t helping improve street sentiments either. This event needs a lot of arb traders to hit the target. This is another relief point for those making early trades.
The market misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand. There isn’t still any convincing sign of server DRAM falling demand. By the time SamE gets the optimization issue right, server DRAM demand of Amazon and Google will come. This will stabilize DRAM price as well. Micron’s production reduction will help it.
There seem to be several signs that it will be over much sooner than initially feared. I expect it to be over by the end of 2Q. This will lead to a ₩4tril addition quarterly to the current street consensus. At this, current PER falls to 9x.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aveo Group (AOG AU), an Australian retirement village operator, is amid a strategic review to sell itself. At its 1H19 results on 13 February, Aveo said it had received several non-binding bids from parties interested in acquiring the entire company.
Scepticism on a successful sale remains high as Aveo’s discount to NTA has increased from 44% on 14 August 2018 (the day before the announcement of strategic review) to the current 46%. However, we believe that the widening NTA discount is an opportunity to capitalise on an emerging bidding battle.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aveo Group (AOG AU), an Australian retirement village operator, is amid a strategic review to sell itself. At its 1H19 results on 13 February, Aveo said it had received several non-binding bids from parties interested in acquiring the entire company.
Scepticism on a successful sale remains high as Aveo’s discount to NTA has increased from 44% on 14 August 2018 (the day before the announcement of strategic review) to the current 46%. However, we believe that the widening NTA discount is an opportunity to capitalise on an emerging bidding battle.
On Friday 22 February 2019 after the close, Nintendo Co Ltd (7974 JP)announced (J) a Secondary Shares 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 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 ¥33 billion worth (whichever is reached first) to last from the business day immediately following the delivery date of the Offering shares (practically speaking, a day on or between 13 March and 18 March 2019) to 12 April 2019. Based on an average daily volume traded of 2.2mm shares, 10% participation would mean the buyback would take 5 days to complete. 5% would take 9 days. The company also announced (E) it would cancel 10 million shares on 29 March 2019. That may only be 45% of the post-buyback treasury share position, but it leads to another event investors should watch.
This is the first buyback Nintendo has announced in five years. The Nikkei article discussing the situation suggests that the possibility of supply/demand being weak is the reason for the buyback. The stated reason for the Offering as proposed by Nintendo in its Offering announcement, suggested a goal of increasing and diversifying the shareholder base.
The fact that JPX was selling the shares was not important. The reasoning was. And JPX provided an example of how it should be done (as explained in the insight).
My words then still stand.
And JPX provided an example of how it should be done (as explained in the insight). The ramifications are significant.
The ramifications of this Offering are significant too. This is a lot more than just an offering by entities looking to take profits.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aveo Group (AOG AU), an Australian retirement village operator, is amid a strategic review to sell itself. At its 1H19 results on 13 February, Aveo said it had received several non-binding bids from parties interested in acquiring the entire company.
Scepticism on a successful sale remains high as Aveo’s discount to NTA has increased from 44% on 14 August 2018 (the day before the announcement of strategic review) to the current 46%. However, we believe that the widening NTA discount is an opportunity to capitalise on an emerging bidding battle.
On Friday 22 February 2019 after the close, Nintendo Co Ltd (7974 JP)announced (J) a Secondary Shares 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 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 ¥33 billion worth (whichever is reached first) to last from the business day immediately following the delivery date of the Offering shares (practically speaking, a day on or between 13 March and 18 March 2019) to 12 April 2019. Based on an average daily volume traded of 2.2mm shares, 10% participation would mean the buyback would take 5 days to complete. 5% would take 9 days. The company also announced (E) it would cancel 10 million shares on 29 March 2019. That may only be 45% of the post-buyback treasury share position, but it leads to another event investors should watch.
This is the first buyback Nintendo has announced in five years. The Nikkei article discussing the situation suggests that the possibility of supply/demand being weak is the reason for the buyback. The stated reason for the Offering as proposed by Nintendo in its Offering announcement, suggested a goal of increasing and diversifying the shareholder base.
The fact that JPX was selling the shares was not important. The reasoning was. And JPX provided an example of how it should be done (as explained in the insight).
My words then still stand.
And JPX provided an example of how it should be done (as explained in the insight). The ramifications are significant.
The ramifications of this Offering are significant too. This is a lot more than just an offering by entities looking to take profits.
On Friday 22 February after the close, NTT Docomo Inc (9437 JP)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. This is largely technical. But it has an interesting side effect.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
This morning, Wesfarmers Ltd (WES AU) announced an indicative, non-binding proposal to the Board of Directors of Lynas Corp Ltd (LYC AU) to acquire Lynas at A$2.25/share, payable in cash in the form of a Scheme of Arrangement.
This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price.
It is, however, a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian Minister for Energy, Science, Technology, Environment and Climate 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. On December 5th, the shares fell to A$1.65 and they have not recovered.
This is very early, non-binding, conditional in the extreme, and conditional non-binding offers are a graveyard of Australian arbitrageurs. The Offer is not all that attractive to boot. But I expect the stock will go up anyway, and that may make for some interesting trading opportunities.
DHICO rights offer 1st round pricing was fixed at ₩5,550. This ₩5,550 will serve as the ceiling. It is nearly guaranteed that the final offer price will be fixed somewhere between ₩5,000 and ₩5,550. It can not go lower than the face value ₩5,000.
Today (Mar 26) is the last day to get subscription rights. Subscription rights will be then tradable on Apr 19~25. The 4 bookrunners will buy all forfeited shares at a 15% discount to final offering price. There is no cancellation risk.
Local arb traders made their move yesterday. Foreign arb traders entered as well. Past tendency shows buying earlier would pay off more handsomely than waiting longer. DHICO’s fundamentals isn’t showing any positive sign yet. Deal structure isn’t helping improve street sentiments either. This event needs a lot of arb traders to hit the target. This is another relief point for those making early trades.
The market misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand. There isn’t still any convincing sign of server DRAM falling demand. By the time SamE gets the optimization issue right, server DRAM demand of Amazon and Google will come. This will stabilize DRAM price as well. Micron’s production reduction will help it.
There seem to be several signs that it will be over much sooner than initially feared. I expect it to be over by the end of 2Q. This will lead to a ₩4tril addition quarterly to the current street consensus. At this, current PER falls to 9x.
On Monday the 18th of March, Yoshiaki Murakami-associated companies announced they had raised their stake in Kosaido Co Ltd (7868 JP) above 10%. That stake raise happened at a price ABOVE where Bain Capital Japan’s bidding entity had set its “final” Tender Offer Price of ¥700/share beforehand, indicating there was no way Murakami-associated companies would accept Bain’s price.
On the 20th, Minami Aoyama Fudosan – another Murakami-associated company heretofore uninvolved – announced a Tender Offer for a minimum of 50.00% of Kosaido (and up to 100% of the shares out) at ¥750/share (and announced they had bought more bringing their stake to 13.47% in total).
The shares reacted strongly Friday the 22nd after a market holiday Thursday, rising 16.6% to close 14.5% through the Murakami-fund terms.
After the close on Friday, the Murakami-affiliated company Reno KK which has been the lead entity to date in the effort – announced a larger position (as I noted on the 19th was likely). Also after the close, Kosaido itself made three public releases.
It is worth reading them, and it is worth thinking about what the company’s options are.
For Recent Insights on the Kosaido Situation Published on Smartkarma…
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
This was the basis of the trade. Hitachi Ltd (6501 JP) has been susceptible to pressure for a bump since even before the Tender Offer was announced because of the proxy fight at last year’s board meeting for management rights. Hitachi supported the incumbent who consequently retired as chairman, but kept the continuity. The board was split 6:3.
Since late January or early February when it became clear that board support for the deal was still split 6:3 and one of the points in a couple of the independent directors’ comments as reasons why the deal was not supported was that Hitachi’s bid at NT$60/share did not match an informal offer from Otis at $63/share, it has been clear that one way to extinguish that criticism was to bid NT$63 or higher.
And now Hitachi has. After the close on Friday, a release from Yungtay Engineering (1507 TT) hit the mops system saying that Hitachi had amended the Public Purchase statement by raising the Purchase Price to NT$65/share. This is closer to the high end of the original valuations provided by the law firm and public accountancy firms of NT$40.27-68.31 and NT$55.15-67.83. Taiwan Hitachi Elevator released a press release carried by the ChinaTimes here.
After 6 months of haggling and due diligence, debt negotiation, and structuring, global education company Navitas has now signed a Scheme Implementation Deed with a consortium led by Australian Private Equity firm BGH Capital consortium, which includes Navitas Founder Rod Jones (also the largest holder at 13%) and AustralianSuper. The Scheme Price of A$5.825 is a 6% uplift from the original A$5.50 offered in the preliminary, indicative, non-binding offer announced on 10 October 2018 and a 34% premium to the undisturbed price of 9 October 2018 of A$4.35/share.
At an equity valuation of A$2.1bn, this is being done at a TTM EV/EBITDA of ~15.5x (and probably around 0.8 turns less for FY19 forecast, which is healthy, but the company spins off prodigious cashflow, which makes it doable for private equity with leverage.
Given the lack of any real news or rumour of competing offer in the last five months, or in the period since the lockup, Travis Lundy doesn’t think it likely we will see one. Because he thinks this deal has very few hurdles, expect it to trade tight.
Harbin Electric’s (“HE”) composite doc for its merger by absorption has been dispatched. HE’s major shareholder Harbin Electric Corporation, an SOE, is seeking to delist the company by way of a merger by absorption at HK$4.56/share, an 82.4% premium to last close. The offer has been declared final and the IFA considers the offer fair & reasonable. The significant offer premium to last close, the material drop in FY18 profit, and the lack of possibility of a competitive bidder emerging suggests this Offer falls over the line.
Seeing it blocked at the H-share meeting is a risk, although no single shareholder has the requisite stake to block the deal. The tendering acceptance condition in this two-step hybrid Offer of 90% of H shares out, has been seen in prior PRC-incorporated takeovers.
However, I still consider a “fair” price to be something like the distribution of net cash (~$3.48/share by my calcs) to zero then taking over the company on a PER with respect to peers. Dissension rights are available, although I am not aware of any precedents from discussions with both the PRC and HK tribunals, nor the calculation methodology of a “fair price” under such a dissension, nor the timing of payment.
Trading at a wide gross/annualised spread of 8.3%/54.5%, implying a >80% chance of completion. The current downside should this break is 45%. Not an attractive risk/reward.
On March 6th, a day before Hitachi Ltd (6501 JP)‘s Tender Offer for a minimum of just over a third of Yungtay was expected to close, the closing date was extended to 22 April, as Taiwan regulators (MEIC and FTC) had not signed off. The proposed purchase price was unchanged at NT$60.
An EGM called by independent director Chen – who has been against the deal – was expected to take place on the 18 April. It was not clear the underlying purpose of the EGM other than to change the directors in place and gain management rights for the Baojia Group and Hsu Tso-Ming. Perhaps IF the board were to be renewed with less support for Hitachi, then the board could change its support/opinion and that might affect retail investor support for the deal. Retail tends to vote with management. In any event Hitachi filed an injunction to stop the EGM.
IF Hitachi is unlikely to get the required number of shares, then it could easily be the case that they lose board and management control. If they do get the support, they will effectively control the board and management for the foreseeable future.
Travis’ expectation was that this deal was still “Safe” and would get done, most likely at NT$60 but with the option of a “kiss” to NT$63 or so in the case of more public awareness and castigation of Hitachi and the board for ignoring competing indications at higher prices.
Helpfully, after the close on Friday, Hitachi gave it a kiss, raising the Tender Offer price to NT$65/share.
Travis has opinions on what to do here. Read the insights.
On the 8th of March, Bain Capital raised the Tender Offer Price by 14.8% to ¥700/share and extended the Tender Offer by almost two weeks to the 25th of March. It also lowered the amount which needs to be bought to 50.1% from 66.67%. So, on the 21 March, Murakami-san launched a Tender Offer of his own.
Murakami-affiliated entities Minami Aoyama Fudosan KK and Reno KK’s Tender Offer at ¥750/share is to buy a minimum of 9,100,900 shares and a maximum of all remaining shares. The entities currently own 3,355,900 shares (13.47%). That minimum should be easier than buying a minimum of 12,456,800 shares at ¥700/share under Bain Capital’s offer.
There is a theoretical possibility that Japanese retail investors decide to tender their shares into Bain’s bid because it is supported by management rather than sell to a higher bid which is not. Travis doubted it will go this way but stranger things have happened. Bain should be willing to walk.
After Travis wrote the first two insights listed below with the content above, the stock soared 16.5% on Friday and ended at a 14.5% premium to the Murakami tender of ¥750/share (i.e. closed at ¥859/share). The company maintained its support for the Bain Capital bid at ¥700/share, but withdrew its recommendation that investors tender into it. The company did not yet offer a real opinion on Murakami-san’s offer. That must come in the next 9 business days.
Travis has opinions on what to do here. Read the insights below.
Australian property developer, Villa World Ltd (VLW AU)announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close. AVID’s indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.
During 2018, VLW’s share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.
Ho Bee Land Ltd (HOBEE SP), VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share – and a high of A$2.18/share – lifting its stake to 9.41%. VLW has also recently bought back and cancelled 1.76mn shares or ~1.4% of shares out. The highest price paid was $2.09.
AVID’s offer looks opportunistic and it’s doubtful VLW will want to engage. VLW is trading below its book, paying out one of the highest yields among its peers, and with ~21% of the share register potentially defending their position- the largest shareholder actively buying – there’s likely upside from here. Shares closed Friday at $2.24.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with the AFR reporting (paywalled) that Lone Star had joined the bidding. Other interested parties are believed to include Blackstone and Cerberus Capital. Aveo’s share price is up ~11% since announcing the receipt of the indicative bids – and closing at $1.97 on Friday – having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
The partial offer has successfully closed, with no major surprise in the expected pro-ration and the back end traded higher than one’s purchase price – not down. Some of this may be due to lack of stock borrow, and conversely, some of the strength may be due to those who had shorted their borrow buying back their short.
That left us with a question – do we want to own a residual here? Or instantiate a new position? The current post-tender price was 35.7% higher than the undisturbed price.
Travis could not recommend an outright buy on fundamental reasons. He thinks the Itochu story is reasonably compelling, or will be, but the lack of near-term observable fundamental turnaround may disappoint some. There may not be a lot of IR or analyst coverage of the situation either. For that, if you have a residual trade, he would sell it here.
This is not a short recommendation. This is a “It was a good arb trade and now the arb trade is over so don’t become a long-term investor just because it is doing better than you thought.”
CATL which grabbed Panasonic Corp (6752 JP)’s leading position in the battery supplier industry last year now seems to be grabbing the latter’s key customer as well. The news circulating states that CATL could power Tesla Motors (TSLA US)’s Model 3 cars which Tesla is planning to start assembling at Tesla’s new factory near Shanghai.
However, the news lacks credibility as neither company has commented on the matter, while Tesla has already agreed with Tianjin Lishen to supply batteries for its Chinese Plant.
But if true, Tesla would be the key one to benefit, while CATL could be taking up a considerable share of risk in terms of stable future orders.
The boards of Medco Energi Internasional T (MEDC IJ) and Ophir have agreed to increase the Offer price to £0.575 from £0.55, representing a 73.2% premium to the undisturbed price. All other details of the scheme remain unchanged. The court meeting is to take place on the 25 March, while the long stop is the 20 June – unless both companies agree to an extension.
Subsequent to the bump, Coro Energy PLC (CORO LN), which had previously submitted a non-binding cash/scrip reverse takeover offer, declared it has no intention to bid. Sand Grove has also announced it has given an irrevocable undertaking to vote its 18.73% in favour of the scheme. Coro held discussions with Sand Grove before abandoning its bid.
Petrus, which previously estimated a £0.64 – £1.42/share range – just for Ophir’s SEA investments, has yet to respond to the Offer increase; but it’s wholly doubtful their position has altered. Shortly before the bump, it said it would vote its 3.95% stake against the scheme.
While I consider the offer for Ophir sub-optimal – and shares have closed above terms on 30% of the trading days since Medco’s initial offer – Petrus alone cannot disrupt the vote. Medco’s Offer is conditional on 75%+ approval from Ophir’s shareholders, which appears less tenuous following the 4.5% bump and Sand Grove’s irrevocable undertaking. Shares closed at £0.569 on Friday.
CMA CGM SA (144898Z FP)has 89.47% of CEVA and will now move to squeeze out and delist. The additional tender period will run from 20 March to 2 April. CEVA’s board of directors have reversed their earlier opinion and recommend shareholders to tender.
If delisting occurs, it is expected concurrently occur with a squeeze-out, which would be expected to take place in the third quarter of 2019 once all stock exchange and other legal conditions are fulfilled.
Depending on the final tendered %, the squeeze-out will occur via the simpler market squeeze-out process if CMA gets 98%+; or the more complex off-market merger/squeeze out route if the % tendered is between 90%-98%.
Ecopro BM is up 48% since its IPO on March 5th. Ecopro, which holds 56% in Ecopro BN is up just 1%. That stake is now worth 115% of its market cap.
The stub assets primarily comprise a 100% stake in Ecopro Innovation, which is involved in the processing of lithium for lithium ion batteries. Innovation’s net profit increased to ₩26.3bn in the 1Q-3Q18 from ₩10.4bn in 2017. Innovation’s book value also increased to ₩35.3bn at the end of 3Q18 from ₩7.4bn at end of 2017.
Douglas Kim recommended going long Ecopro Co and shorting Ecopro BM. Plugging in his numbers, I back out a discount to NAV of 55%. Both legs are pretty liquid.
Curtis Lehnert closes this set-up trade as levels have reverted to the average. Both companies recently reported so-so results, suggesting the core business continues to face declining revenue from “roadshop” brands aimed at the lower-end of the market.
More surprising was the stock buyback announced at both companies 20 days after the earnings announcement, which spurred a 15% rally in the Group’s share price while Corp rallied nearly 11%. The buyback announcement seems to have caught the market by surprise and also caused the stub to revert to its 6-month average level of ~16% discount to NAV.
Douglas recommended closing the Hyosung unwind trade, which has returned ~8.2% before comms and borrowing cos.
The reason for Hyosung TNC’s recent move upwards? Right place, right time it would seem, as its trading value substantially increased, touching ₩8.9bn on the 19 March, the highest level this year, and the highest level since August 22nd, 2018.
On November 13th last year, Linkbal announced it was looking to move from MOTHERS to the TSE First Section. The stock rallied. Then it fell a lot. On March 5th, the company announced a forthcoming tachiaigai bunbai offering designed to increase the float. This would get it most of the way towards meeting the requirements, but likely not all the way.
An inclusion is still months off. And there would likely be another sale to increase shareholder count by 800-1000 before then, whether in the form of a Public Offering/Uridashi or in the form of another tachiaigai bunbai.
The company’s market cap is not large enough to warrant analyst coverage, and float will remain relatively small. I expect the stock to get re-evaluated by small-cap managers. There are some. There probably should be more.
Travis recommended investors buy the stock – which traded over 2% of shares outstanding at -2% in the first five minutes, and 3% of outstanding in the first 20 minutes, before rising to close +13.6% on Wednesday. The stock fell 6% on Friday.
Hopewell Holdings (54 HK)‘s “Egregiously Bad” scheme has passed with 96.27% of disinterested shareholders approving the resolution. Shares will now be suspended at the close of trading on the 17 April. Cheques are expected to be dispatched on the 14 April. Seems like I’m not the only one as David Webb was also unimpressed with the Offer.
After Eclipx (ECX AU) announced a 42.4% decline in NPATA in the first five months vs. FY18, and other significant issues in the Right2Drive and Grays divisions, Mcmillan Shakespeare (MMS AU)said it did “not believe it will be possible to complete the proposed scheme“. Eclipx closed down 60% on the week.
Brookfield has received FIRB approval in its tilt for Healthscope Ltd (HSO AU). The AFR is reporting (paywalled) that BGH is now out of the running for Healthscope. Which leaves Brookfield’s twin bids ($2.50 via a scheme or $2.40 via an off-market takeover) as the expected winner. Norges Bank announced it now holds 5.08%.
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.
The news released on the 11th of March, about Tesla Motors (TSLA US) choosing CATL (A) (300750 CH) as battery supplier has focused much attention on the two companies and other battery suppliers. CATL which grabbed Panasonic Corp (6752 JP)’s leading position in the industry last year now seems to be grabbing the latter’s key customer as well. The news circulating states that, CATL could power Tesla’s Model 3 cars which Tesla is planning to start assembling at Tesla’s new factory near Shanghai. Following the release of this supposed deal, the stocks of the two companies moved positively, with CATL surging by almost 6.7% while Tesla rose by almost 2.4% during the day. However, both parties have not commented on this news yet or made any formal announcement regarding such a potential deal. In our Insight, Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, we mentioned that Tesla was looking to locally source its batteries in China and that CATL could potentially be one such supplier. However, in January this year, it was reported that Tesla had signed a preliminary agreement with China’s Tianjin Lishen to supply batteries for its new Shanghai car factory, making the current news look less believable. Although it seems like the ongoing news about a Tesla-CATL pair up lacks integrity, with CATL sort of denying its intend to work with Tesla (according to an updated news release), the news does look interesting and its effect upon the related companies seems noteworthy.
After 6 months of haggling and due diligence, debt negotiation, and structuring, global education company Navitas Ltd (NVT AU) has now signed a Board-recommended Scheme Implementation Deed with a consortium led by Australian Private Equity firm BGH Capital consortium which includes Navitas Founder Rod Jones (also the largest holder at 13%) and AustralianSuper.
The agreed Scheme Price of A$5.825 is a 6% uplift from the original A$5.50 offered in the preliminary, indicative, non-binding offer announced on 10 October 2018 and a 34% premium to the undisturbed price of 9 October 2018 of A$4.35/share.
This history is that the consortium came in at A$5.50 (plus another cash+RollCo scrip offer), a month or so later the company effectively rejected it by not allowing the consortium to do due diligence after management lifted earnings guidance. This upset a number of shareholders. In November the share price ranged from A$4.95-5.25 or so and Chairman Tracey Horton got only 51% support at the AGM that month. The shares fell briefly below A$4.70 in early January this year before BGH came back in mid-January with a “revised indicative offer” of A$5.825 whereupon the shares bounced from about A$4.90 to about A$5.50 then climbed to A$5.60+ on 10mm shares volume in 3 days.
The shares hovered around A$5.58-5.62 for 6-7 weeks until the beginning of March, briefly traded into the A$5.70s, and then traded back down the last few days this week to the A$5.59-5.63 area.
On Thursday 21 March the shares were halted for the day, StreetTalk had an article about the deal being imminent, and late in the afternoon, the BGH SID was announced.
Now we start the official process. The Scheme document is expected to be dispatched in May 2019 with a deal completed by end-June or early July. I expect this deal gets up.
Navitas Ltd (NVT AU), an Australian-listed education company, entered into a binding agreement to be acquired by the BGH Consortium. As a reminder on 15 January 2019, the BGH Consortium bid against itself by offering a revised proposal of A$5.825 cash per share, 6% higher than its previous rejected offer.
Navitas’ board have unanimously recommended the scheme. We believe that BGH Consortium’s proposal is attractive and shareholders should accept the offer.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
