Event-Driven

In this briefing:

1. Aveo Group (AOG AU): An Emerging Bidding Battle Presents an Opportunity
2. Nintendo Offering & Buyback: The Import & The Dynamics
3. NTT Docomo Share Cancellation
4. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

1. Aveo Group (AOG AU): An Emerging Bidding Battle Presents an Opportunity

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.

2. Nintendo Offering & Buyback: The Import & The Dynamics

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 real reason why this selldown is happening – also noted in the Offering Document “reason for the offering” – is because of the heightened focus on policy cross-holdings highlighted in the changes to the Corporate Governance Code (especially Principle 1.4) which went live June 1 2018. The major changes were discussed in Japan’s Corporate Governance Code Amendments – A Much Bigger Stick for Activists and Stewards at that time, but the hint of how this might play out was discussed in Japan Crossholdings: Japan Exchange’s Sale of SGX Shares Sets A Precedent – Watch Closely from 1 April 2018. In an announcement after the close on the last day of the last fiscal year, Japan Exchange Group (8697 JP) announced it would sell down its 4.95% stake in Singapore Exchange (SGX SP) over the space of three years. 

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.

3. NTT Docomo Share Cancellation

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.

4. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

Last Week in Event SPACE …

• The question mark over the size of Rakuten Inc (4755 JP)‘s stake in Lyft may be known in the coming two weeks.
• Delta Electronics Thai (DELTA TB)‘s Tender Off document fails to clarify how the FY18 dividend will be treated.
• An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
• Ophir Energy (OPHR LN)‘s shareholders ratchet up their opposition to Medco Energi Internasional T (MEDC IJ)‘s Offer.
• A bump seems envisaged against an already healthy price, but it may not need be a big one to get the Dairy Crest (DCG LN) deal done.
  
• DSV A/S (DSV DC)‘s Offer either comes down to price, or it comes down to loyalty to Panalpina Welttransport Holding (PWTN SW)‘s management.
• The BGF Co Ltd (027410 KS) set up trade has provided a decent return recently, but could still run further.
• Plus 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)

Rakuten Inc (4755 JP) (Mkt Cap: $10.2bn; Liquidity: $51mn)

Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.

• As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn. 
• A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.

(link to Travis’ insight: Will Rakuten Get A Near-Term Lyft?) 

Doosan Heavy Industries (034020 KS) (Mkt Cap: $868mn; Liquidity: $78.5mn)
Doosan Engineering & Construction (011160 KS) (Mkt Cap: $91mn; Liquidity: $0.4mn)

DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.

• For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
• For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.

link to Sanghyun Park‘s insights:
Doosan E&C Rights Offer: Conditions & Timetable
DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable.

Delta Electronics Thai (DELTA TB) (Mkt Cap: $2.8bn; Liquidity: $3mn)

The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.

• Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
• Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.

(link to my insight: Delta Thailand’s Tender Offer: Updated Timetable)

M1 Ltd (M1 SP) (Mkt Cap: $1.4bn; Liquidity: $3mn)

The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK) made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.

• If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out). 
• So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.

(link to Travis’ insight: M1 Offer Unconditional as Axiata Tenders)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $160mn; Liquidity: $1mn)

When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.

• Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough. 
• This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
• The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself. 

(link to Travis’ insight: Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO)

Briefly …

• After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
• Xingfa Aluminium (98 HK) announced both China Lesso Group Holdings (2128 HK) (26.3% shareholder) and Sure Keen (11.5%, ED Liao Yuqing’s vehicle), collectively holding  37.81% of shares out, will NOT tender their shares into the offer. (Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium)

Dairy Crest (DCG LN) (Mkt Cap: $1.3bn; Liquidity: $4.5mn)

Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.

• At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
• Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
• One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017.  Doable, but as it is an agreed deal, Travis doesn’t see the need to push it. 

(link to Travis’ insight: Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump)

Ophir Energy (OPHR LN) (Mkt Cap: $509mn; Liquidity: $6mn)

Petrus Advisors (3.5% shareholder) has dialed up the pressure on its opposition to Medco Energi Internasional T (MEDC IJ)‘s £0.55/share offer for Ophir Energy (OPHR LN), specifically calling into question Bill Schrader’s (Ophir’s Chairman) business acumen.

• In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
• Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier –  alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
• Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.

(link to my insight: Petrus Doubles Down On Ophir Energy)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $22mn)

Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done.  45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?

• Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
• DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
• It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
• If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop. 

(link to Travis’ insight: The Panalpina Conundrum)

Mahindra & Mahindra (MM IN) 

Curtis Lehnert backs out a discount to NAV of 42%, the widest since at least 2015. His proposal to structure the trade is to use a market-cap weighted hedge on the two largest listed subsidiaries, Tech Mahindra (TECHM IN) and Mahindra & Mahindra Fin Services Ltd. (MMFS IN) along with a core business hedge using Maruti Suzuki India (MSIL IN) to hedge the core automotive business. 

• Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
• The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.

(link to Curtis’ insight: TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise)

BGF Co Ltd (027410 KS) / Bgf Retail (282330 KS)

On January 8th, Douglas Kim initiated a setup trade of going long BGF Co and going short BGF Retail. (Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail) This setup has worked out well (7.5% return) and he now think this is a good time to close the trade.

• In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).

links to:
Douglas’ insight: Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail
Sanghyun’s insight: BGF Duo Stub Trade: Short Sub / Long Holdco with a Very Short-Term Horizon

Can One Bhd (CAN MK) / Kian Joo Can Factory (KJC MK)

Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.

• This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
• For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.

(link to my insight: StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels)

Briefly …

• Sanghyun recommended long Hansae Yes24 Holdings Co, Ltd. (016450 KS), short Hansae Co Ltd (105630 KS), now that the Holdco/Sub ratio  is at -227% of σ or a 120D low. Using his numbers, I see the discount to NAV at 49% against a one-year average of 44%; while the implied stub is at a one-year low. (link to Sanghyun’s insight: Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here)

Hyundai Glovis (086280 KS) / Hyundai Mobis (012330 KS)

There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.

• Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt.  Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
• This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.

(link to Sanghyun’s insight: Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation)

• Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.

• Hopewell Holdings (54 HK) and the Offeror are still in the course of finalising the information to be included in the Scheme Document. No date for the dispatch has been announced.

• ESR’s offer for Propertylink Group (PLG AU) has turned unconditional after Centuria Capital (CNI AU) tendered. 

• The composite doc for Harbin Electric Co Ltd H (1133 HK), initially due out this past week, has been further postponed until the 29 March – on or before – ostensibly to incorporate the FY18 financials.

• Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme.  The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED,  holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.

• MYOB Group Ltd (MYO AU) announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal.  At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.

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.   

In this briefing:

1. Nintendo Offering & Buyback: The Import & The Dynamics
2. NTT Docomo Share Cancellation
3. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

1. Nintendo Offering & Buyback: The Import & The Dynamics

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 real reason why this selldown is happening – also noted in the Offering Document “reason for the offering” – is because of the heightened focus on policy cross-holdings highlighted in the changes to the Corporate Governance Code (especially Principle 1.4) which went live June 1 2018. The major changes were discussed in Japan’s Corporate Governance Code Amendments – A Much Bigger Stick for Activists and Stewards at that time, but the hint of how this might play out was discussed in Japan Crossholdings: Japan Exchange’s Sale of SGX Shares Sets A Precedent – Watch Closely from 1 April 2018. In an announcement after the close on the last day of the last fiscal year, Japan Exchange Group (8697 JP) announced it would sell down its 4.95% stake in Singapore Exchange (SGX SP) over the space of three years. 

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.

2. NTT Docomo Share Cancellation

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.

3. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

Last Week in Event SPACE …

• The question mark over the size of Rakuten Inc (4755 JP)‘s stake in Lyft may be known in the coming two weeks.
• Delta Electronics Thai (DELTA TB)‘s Tender Off document fails to clarify how the FY18 dividend will be treated.
• An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
• Ophir Energy (OPHR LN)‘s shareholders ratchet up their opposition to Medco Energi Internasional T (MEDC IJ)‘s Offer.
• A bump seems envisaged against an already healthy price, but it may not need be a big one to get the Dairy Crest (DCG LN) deal done.
  
• DSV A/S (DSV DC)‘s Offer either comes down to price, or it comes down to loyalty to Panalpina Welttransport Holding (PWTN SW)‘s management.
• The BGF Co Ltd (027410 KS) set up trade has provided a decent return recently, but could still run further.
• Plus 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)

Rakuten Inc (4755 JP) (Mkt Cap: $10.2bn; Liquidity: $51mn)

Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.

• As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn. 
• A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.

(link to Travis’ insight: Will Rakuten Get A Near-Term Lyft?) 

Doosan Heavy Industries (034020 KS) (Mkt Cap: $868mn; Liquidity: $78.5mn)
Doosan Engineering & Construction (011160 KS) (Mkt Cap: $91mn; Liquidity: $0.4mn)

DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.

• For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
• For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.

link to Sanghyun Park‘s insights:
Doosan E&C Rights Offer: Conditions & Timetable
DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable.

Delta Electronics Thai (DELTA TB) (Mkt Cap: $2.8bn; Liquidity: $3mn)

The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.

• Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
• Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.

(link to my insight: Delta Thailand’s Tender Offer: Updated Timetable)

M1 Ltd (M1 SP) (Mkt Cap: $1.4bn; Liquidity: $3mn)

The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK) made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.

• If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out). 
• So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.

(link to Travis’ insight: M1 Offer Unconditional as Axiata Tenders)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $160mn; Liquidity: $1mn)

When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.

• Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough. 
• This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
• The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself. 

(link to Travis’ insight: Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO)

Briefly …

• After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
• Xingfa Aluminium (98 HK) announced both China Lesso Group Holdings (2128 HK) (26.3% shareholder) and Sure Keen (11.5%, ED Liao Yuqing’s vehicle), collectively holding  37.81% of shares out, will NOT tender their shares into the offer. (Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium)

Dairy Crest (DCG LN) (Mkt Cap: $1.3bn; Liquidity: $4.5mn)

Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.

• At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
• Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
• One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017.  Doable, but as it is an agreed deal, Travis doesn’t see the need to push it. 

(link to Travis’ insight: Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump)

Ophir Energy (OPHR LN) (Mkt Cap: $509mn; Liquidity: $6mn)

Petrus Advisors (3.5% shareholder) has dialed up the pressure on its opposition to Medco Energi Internasional T (MEDC IJ)‘s £0.55/share offer for Ophir Energy (OPHR LN), specifically calling into question Bill Schrader’s (Ophir’s Chairman) business acumen.

• In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
• Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier –  alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
• Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.

(link to my insight: Petrus Doubles Down On Ophir Energy)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $22mn)

Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done.  45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?

• Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
• DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
• It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
• If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop. 

(link to Travis’ insight: The Panalpina Conundrum)

Mahindra & Mahindra (MM IN) 

Curtis Lehnert backs out a discount to NAV of 42%, the widest since at least 2015. His proposal to structure the trade is to use a market-cap weighted hedge on the two largest listed subsidiaries, Tech Mahindra (TECHM IN) and Mahindra & Mahindra Fin Services Ltd. (MMFS IN) along with a core business hedge using Maruti Suzuki India (MSIL IN) to hedge the core automotive business. 

• Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
• The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.

(link to Curtis’ insight: TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise)

BGF Co Ltd (027410 KS) / Bgf Retail (282330 KS)

On January 8th, Douglas Kim initiated a setup trade of going long BGF Co and going short BGF Retail. (Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail) This setup has worked out well (7.5% return) and he now think this is a good time to close the trade.

• In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).

links to:
Douglas’ insight: Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail
Sanghyun’s insight: BGF Duo Stub Trade: Short Sub / Long Holdco with a Very Short-Term Horizon

Can One Bhd (CAN MK) / Kian Joo Can Factory (KJC MK)

Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.

• This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
• For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.

(link to my insight: StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels)

Briefly …

• Sanghyun recommended long Hansae Yes24 Holdings Co, Ltd. (016450 KS), short Hansae Co Ltd (105630 KS), now that the Holdco/Sub ratio  is at -227% of σ or a 120D low. Using his numbers, I see the discount to NAV at 49% against a one-year average of 44%; while the implied stub is at a one-year low. (link to Sanghyun’s insight: Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here)

Hyundai Glovis (086280 KS) / Hyundai Mobis (012330 KS)

There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.

• Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt.  Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
• This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.

(link to Sanghyun’s insight: Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation)

• Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.

• Hopewell Holdings (54 HK) and the Offeror are still in the course of finalising the information to be included in the Scheme Document. No date for the dispatch has been announced.

• ESR’s offer for Propertylink Group (PLG AU) has turned unconditional after Centuria Capital (CNI AU) tendered. 

• The composite doc for Harbin Electric Co Ltd H (1133 HK), initially due out this past week, has been further postponed until the 29 March – on or before – ostensibly to incorporate the FY18 financials.

• Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme.  The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED,  holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.

• MYOB Group Ltd (MYO AU) announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal.  At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.

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.   

In this briefing:

1. DHICO Rights Offer: Ceiling Price at ₩5,550 & Today Is Last Day Before Ex-Rights
2. Last Week in GER Research: Navitas, Mindtree, PG&E, Delta Electronics, GDS, Myob, Sigma and Ruhnn
3. Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price
4. Kosaido (7868 JP) Reaches Value You Can Sell
5. Hitachi Bumps Yungtay Bid to NT$65. Take It.

1. DHICO Rights Offer: Ceiling Price at ₩5,550 & Today Is Last Day Before Ex-Rights

• 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.

2. Last Week in GER Research: Navitas, Mindtree, PG&E, Delta Electronics, GDS, Myob, Sigma and Ruhnn

Below is a recap of the key Event-driven, IPO and placement research produced by the Global Equity Research team. This week we highlight Arun’s analysis on the takeover deals for Navitas Ltd (NVT AU) and Mindtree Ltd (MTCL IN) and the valuation range for Delta Electronics Thai (DELTA TB) . In addition, Arun recommends taking the Gds Holdings (Adr) (GDS US) placement while recommending the deal for MYOB Group Ltd (MYO AU) and contends investors may need to be patient for the rejected Sigma Healthcare (SIG AU) deal. Venkat looks into the bankruptcy arbitrage situation for P G & E Corp (PCG US) and contends PG&E has no equity value due to pending litigation risks. Finally, Arun initiates on the IPO of Chinese e-commerce company Ruhnn Holding Ltd (RUHN US)

Best of luck for the new week – Arun, Venkat and Rickin

3. Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price

• 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.
• SamE got up 6.5% since the Micron announcement. It still seems to have more upside potential even at the current price. Common-1P perspective, I’d wrap up my previous position Samsung Electronics Share Class Trade: Common at +2σ, Expect Reversion After AGM This Week. This paid a 3.3% return. I’d initiate a new one reversely. Common is now at -1.65σ.

4. Kosaido (7868 JP) Reaches Value You Can Sell

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.

And now there is more below.

5. Hitachi Bumps Yungtay Bid to NT$65. Take It.

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.

Past coverage of this situation can be found at:
28 Oct 2018 – Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)
17 Jan 2019 – Hitachi Tender for Yungtay Engineering Launches
26 Feb 2019 – Yungtay Noises Haven’t Produced a Result Yet
18 Mar 2019 – Yungtay Tummy Rumblings Continue But Not Clear To What Avail

In this briefing:

1. Last Week in GER Research: Navitas, Mindtree, PG&E, Delta Electronics, GDS, Myob, Sigma and Ruhnn
2. Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price
3. Kosaido (7868 JP) Reaches Value You Can Sell
4. Hitachi Bumps Yungtay Bid to NT$65. Take It.
5. Last Week in Event SPACE: Navitas, Harbin Electric, Yungtay, Kosaido, Ophir, Tesla/CATL, Ecopro

1. Last Week in GER Research: Navitas, Mindtree, PG&E, Delta Electronics, GDS, Myob, Sigma and Ruhnn

Below is a recap of the key Event-driven, IPO and placement research produced by the Global Equity Research team. This week we highlight Arun’s analysis on the takeover deals for Navitas Ltd (NVT AU) and Mindtree Ltd (MTCL IN) and the valuation range for Delta Electronics Thai (DELTA TB) . In addition, Arun recommends taking the Gds Holdings (Adr) (GDS US) placement while recommending the deal for MYOB Group Ltd (MYO AU) and contends investors may need to be patient for the rejected Sigma Healthcare (SIG AU) deal. Venkat looks into the bankruptcy arbitrage situation for P G & E Corp (PCG US) and contends PG&E has no equity value due to pending litigation risks. Finally, Arun initiates on the IPO of Chinese e-commerce company Ruhnn Holding Ltd (RUHN US)

Best of luck for the new week – Arun, Venkat and Rickin

2. Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price

• 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.
• SamE got up 6.5% since the Micron announcement. It still seems to have more upside potential even at the current price. Common-1P perspective, I’d wrap up my previous position Samsung Electronics Share Class Trade: Common at +2σ, Expect Reversion After AGM This Week. This paid a 3.3% return. I’d initiate a new one reversely. Common is now at -1.65σ.

3. Kosaido (7868 JP) Reaches Value You Can Sell

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.

And now there is more below.

4. Hitachi Bumps Yungtay Bid to NT$65. Take It.

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.

Past coverage of this situation can be found at:
28 Oct 2018 – Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)
17 Jan 2019 – Hitachi Tender for Yungtay Engineering Launches
26 Feb 2019 – Yungtay Noises Haven’t Produced a Result Yet
18 Mar 2019 – Yungtay Tummy Rumblings Continue But Not Clear To What Avail

5. Last Week in Event SPACE: Navitas, Harbin Electric, Yungtay, Kosaido, Ophir, Tesla/CATL, Ecopro

Last Week in Event SPACE …

• Agreed deal with no rival bidders coming, expect Navitas Ltd (NVT AU) to trade tight.
• The risk/reward is simply not present in Harbin Electric Co Ltd H (1133 HK)‘s low-ball offer.
• One wonders if there is a “gotcha” coming against the foreigner in Hitachi Ltd (6501 JP)‘s tilt for Yungtay Engineering (1507 TT) 
• We should have seen this coming as Murakami-San Goes Hostile on Kosaido Co Ltd (7868 JP).
  
• Medco Energi Internasional T (MEDC IJ)‘s offer for Ophir Energy (OPHR LN) should get up after a small bump and a chunk of the registry giving an irrevocable undertaking.
• A Tesla Motors (TSLA US) / CATL (A) (300750 CH) tie-in lacks credibility.

• Ecopro Co Ltd (086520 KS) is looking “cheap” as 56%-held Ecopro BM Co Ltd (247540 KS) pops 48% since its IPO, and now is now worth 115% of its market cap.

• 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

Navitas Ltd (NVT AU) (Mkt Cap: $1.4bn; Liquidity: $4mn)

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.

(link to Travis’ insight: Navitas Gets An Agreed Deal with BGH)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $898mn; Liquidity: $4mn)

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.

(link to my insight: Harbin Electric’s Offer: One For The Brave)

Yungtay Engineering (1507 TT) (Mkt Cap: $793mn; Liquidity: $1mn)

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.

(link to Travis’ insights:
Yungtay Tummy Rumblings Continue But Not Clear To What Avail
Hitachi Bumps Yungtay Bid to NT$65. Take It.

Kosaido Co Ltd (7868 JP) (Mkt Cap: $165mn; Liquidity: $2mn)

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.

link to Travis’ insight:
Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer.
Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
Kosaido (7868 JP) Reaches Value You Can Sell

Villa World Ltd (VLW AU) (Mkt Cap: $200mn; Liquidity: $1mn)

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.

(link to my insight: Ho Bee Ups Stake In Villa World After AVID Lobs An Offer)

Aveo Group (AOG AU) (Mkt Cap: $806mn; Liquidity: $3mn)

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. 

(link to my insight: Aveo: Take Advantage of the Lull To Take a Second Crack)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $7mn)

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.”

(link to Travis’ insight: Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait)

CATL (A) (300750 CH) (Mkt Cap: $28.5bn; Liquidity: $95mn)

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.

(link to LightStream Research‘s insight: CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?)

Ophir Energy (OPHR LN) (Mkt Cap: $525mn; Liquidity: $7mn)

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.

(link to my insight: Medco’s Bump For Ophir Won’t Sway Petrus)

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $5mn)

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%.

(link to my insight: CEVA Logistics: Okay, Now You Can Tender)

Ecopro Co Ltd (086520 KS)/Ecopro BM Co Ltd (247540 KS)

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.

(link to Douglas’ insight: Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM)

Amorepacific Group (002790 KS)/Amorepacific Corp (090430 KS)

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.
• The pair trade made 2.84% ex-costs in two months.

(link to Curtis’ insight: TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade)

Hyosung Corporation (004800 KS)/Hyosung TNC Co Ltd (298020 KS)

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.

(link to Douglas’ insight: Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp)

Linkbal Inc (6046 JP)(Mkt Cap: $4.2bn; Liquidity: $5mn)

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.

(link to Travis’ insight: Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?)

• 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.

• Xenith Ip (XIP AU) has surprisingly concluded IPH’s proposal is not superior to the offer by Qantm Intellectual Property (QIP AU). Also the ACCC will not oppose the Qantm/ Xenith merger. Separately, IPH Ltd (IPH AU) encourages XIP shareholders to vote against the QANTM merger, stating its offer is superior in value.

• 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%.

• Kian Joo Can Factory (KJC MK)‘s offer is now unconditional.

• China Power New Energy Development Co (735 HK) is suspended pending an announcement pursuant to he takeovers Code.
• Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector, to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN)through a three-step transaction – 20.3% from Mindtree’s largest shareholder, V G Siddhartha, 15% from the open market, and an open offer for 31%. All purchases up to Rs980/share, a 4% premium to the undisturbed price. (link to Arun George ‘s insight: Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit)

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.   

In this briefing:

1. NTT Docomo Share Cancellation
2. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

1. NTT Docomo Share Cancellation

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.

2. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

Last Week in Event SPACE …

• The question mark over the size of Rakuten Inc (4755 JP)‘s stake in Lyft may be known in the coming two weeks.
• Delta Electronics Thai (DELTA TB)‘s Tender Off document fails to clarify how the FY18 dividend will be treated.
• An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
• Ophir Energy (OPHR LN)‘s shareholders ratchet up their opposition to Medco Energi Internasional T (MEDC IJ)‘s Offer.
• A bump seems envisaged against an already healthy price, but it may not need be a big one to get the Dairy Crest (DCG LN) deal done.
  
• DSV A/S (DSV DC)‘s Offer either comes down to price, or it comes down to loyalty to Panalpina Welttransport Holding (PWTN SW)‘s management.
• The BGF Co Ltd (027410 KS) set up trade has provided a decent return recently, but could still run further.
• Plus 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)

Rakuten Inc (4755 JP) (Mkt Cap: $10.2bn; Liquidity: $51mn)

Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.

• As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn. 
• A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.

(link to Travis’ insight: Will Rakuten Get A Near-Term Lyft?) 

Doosan Heavy Industries (034020 KS) (Mkt Cap: $868mn; Liquidity: $78.5mn)
Doosan Engineering & Construction (011160 KS) (Mkt Cap: $91mn; Liquidity: $0.4mn)

DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.

• For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
• For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.

link to Sanghyun Park‘s insights:
Doosan E&C Rights Offer: Conditions & Timetable
DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable.

Delta Electronics Thai (DELTA TB) (Mkt Cap: $2.8bn; Liquidity: $3mn)

The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.

• Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
• Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.

(link to my insight: Delta Thailand’s Tender Offer: Updated Timetable)

M1 Ltd (M1 SP) (Mkt Cap: $1.4bn; Liquidity: $3mn)

The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK) made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.

• If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out). 
• So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.

(link to Travis’ insight: M1 Offer Unconditional as Axiata Tenders)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $160mn; Liquidity: $1mn)

When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.

• Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough. 
• This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
• The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself. 

(link to Travis’ insight: Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO)

Briefly …

• After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
• Xingfa Aluminium (98 HK) announced both China Lesso Group Holdings (2128 HK) (26.3% shareholder) and Sure Keen (11.5%, ED Liao Yuqing’s vehicle), collectively holding  37.81% of shares out, will NOT tender their shares into the offer. (Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium)

Dairy Crest (DCG LN) (Mkt Cap: $1.3bn; Liquidity: $4.5mn)

Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.

• At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
• Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
• One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017.  Doable, but as it is an agreed deal, Travis doesn’t see the need to push it. 

(link to Travis’ insight: Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump)

Ophir Energy (OPHR LN) (Mkt Cap: $509mn; Liquidity: $6mn)

Petrus Advisors (3.5% shareholder) has dialed up the pressure on its opposition to Medco Energi Internasional T (MEDC IJ)‘s £0.55/share offer for Ophir Energy (OPHR LN), specifically calling into question Bill Schrader’s (Ophir’s Chairman) business acumen.

• In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
• Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier –  alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
• Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.

(link to my insight: Petrus Doubles Down On Ophir Energy)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $22mn)

Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done.  45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?

• Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
• DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
• It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
• If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop. 

(link to Travis’ insight: The Panalpina Conundrum)

Mahindra & Mahindra (MM IN) 

Curtis Lehnert backs out a discount to NAV of 42%, the widest since at least 2015. His proposal to structure the trade is to use a market-cap weighted hedge on the two largest listed subsidiaries, Tech Mahindra (TECHM IN) and Mahindra & Mahindra Fin Services Ltd. (MMFS IN) along with a core business hedge using Maruti Suzuki India (MSIL IN) to hedge the core automotive business. 

• Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
• The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.

(link to Curtis’ insight: TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise)

BGF Co Ltd (027410 KS) / Bgf Retail (282330 KS)

On January 8th, Douglas Kim initiated a setup trade of going long BGF Co and going short BGF Retail. (Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail) This setup has worked out well (7.5% return) and he now think this is a good time to close the trade.

• In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).

links to:
Douglas’ insight: Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail
Sanghyun’s insight: BGF Duo Stub Trade: Short Sub / Long Holdco with a Very Short-Term Horizon

Can One Bhd (CAN MK) / Kian Joo Can Factory (KJC MK)

Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.

• This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
• For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.

(link to my insight: StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels)

Briefly …

• Sanghyun recommended long Hansae Yes24 Holdings Co, Ltd. (016450 KS), short Hansae Co Ltd (105630 KS), now that the Holdco/Sub ratio  is at -227% of σ or a 120D low. Using his numbers, I see the discount to NAV at 49% against a one-year average of 44%; while the implied stub is at a one-year low. (link to Sanghyun’s insight: Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here)

Hyundai Glovis (086280 KS) / Hyundai Mobis (012330 KS)

There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.

• Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt.  Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
• This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.

(link to Sanghyun’s insight: Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation)

• Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.

• Hopewell Holdings (54 HK) and the Offeror are still in the course of finalising the information to be included in the Scheme Document. No date for the dispatch has been announced.

• ESR’s offer for Propertylink Group (PLG AU) has turned unconditional after Centuria Capital (CNI AU) tendered. 

• The composite doc for Harbin Electric Co Ltd H (1133 HK), initially due out this past week, has been further postponed until the 29 March – on or before – ostensibly to incorporate the FY18 financials.

• Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme.  The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED,  holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.

• MYOB Group Ltd (MYO AU) announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal.  At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.

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.   

In this briefing:

1. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

1. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

Last Week in Event SPACE …

• The question mark over the size of Rakuten Inc (4755 JP)‘s stake in Lyft may be known in the coming two weeks.
• Delta Electronics Thai (DELTA TB)‘s Tender Off document fails to clarify how the FY18 dividend will be treated.
• An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
• Ophir Energy (OPHR LN)‘s shareholders ratchet up their opposition to Medco Energi Internasional T (MEDC IJ)‘s Offer.
• A bump seems envisaged against an already healthy price, but it may not need be a big one to get the Dairy Crest (DCG LN) deal done.
  
• DSV A/S (DSV DC)‘s Offer either comes down to price, or it comes down to loyalty to Panalpina Welttransport Holding (PWTN SW)‘s management.
• The BGF Co Ltd (027410 KS) set up trade has provided a decent return recently, but could still run further.
• Plus 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)

Rakuten Inc (4755 JP) (Mkt Cap: $10.2bn; Liquidity: $51mn)

Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.

• As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn. 
• A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.

(link to Travis’ insight: Will Rakuten Get A Near-Term Lyft?) 

Doosan Heavy Industries (034020 KS) (Mkt Cap: $868mn; Liquidity: $78.5mn)
Doosan Engineering & Construction (011160 KS) (Mkt Cap: $91mn; Liquidity: $0.4mn)

DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.

• For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
• For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.

link to Sanghyun Park‘s insights:
Doosan E&C Rights Offer: Conditions & Timetable
DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable.

Delta Electronics Thai (DELTA TB) (Mkt Cap: $2.8bn; Liquidity: $3mn)

The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.

• Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
• Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.

(link to my insight: Delta Thailand’s Tender Offer: Updated Timetable)

M1 Ltd (M1 SP) (Mkt Cap: $1.4bn; Liquidity: $3mn)

The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK) made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.

• If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out). 
• So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.

(link to Travis’ insight: M1 Offer Unconditional as Axiata Tenders)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $160mn; Liquidity: $1mn)

When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.

• Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough. 
• This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
• The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself. 

(link to Travis’ insight: Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO)

Briefly …

• After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
• Xingfa Aluminium (98 HK) announced both China Lesso Group Holdings (2128 HK) (26.3% shareholder) and Sure Keen (11.5%, ED Liao Yuqing’s vehicle), collectively holding  37.81% of shares out, will NOT tender their shares into the offer. (Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium)

Dairy Crest (DCG LN) (Mkt Cap: $1.3bn; Liquidity: $4.5mn)

Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.

• At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
• Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
• One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017.  Doable, but as it is an agreed deal, Travis doesn’t see the need to push it. 

(link to Travis’ insight: Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump)

Ophir Energy (OPHR LN) (Mkt Cap: $509mn; Liquidity: $6mn)

Petrus Advisors (3.5% shareholder) has dialed up the pressure on its opposition to Medco Energi Internasional T (MEDC IJ)‘s £0.55/share offer for Ophir Energy (OPHR LN), specifically calling into question Bill Schrader’s (Ophir’s Chairman) business acumen.

• In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
• Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier –  alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
• Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.

(link to my insight: Petrus Doubles Down On Ophir Energy)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $22mn)

Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done.  45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?

• Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
• DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
• It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
• If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop. 

(link to Travis’ insight: The Panalpina Conundrum)

Mahindra & Mahindra (MM IN) 

Curtis Lehnert backs out a discount to NAV of 42%, the widest since at least 2015. His proposal to structure the trade is to use a market-cap weighted hedge on the two largest listed subsidiaries, Tech Mahindra (TECHM IN) and Mahindra & Mahindra Fin Services Ltd. (MMFS IN) along with a core business hedge using Maruti Suzuki India (MSIL IN) to hedge the core automotive business. 

• Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
• The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.

(link to Curtis’ insight: TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise)

BGF Co Ltd (027410 KS) / Bgf Retail (282330 KS)

On January 8th, Douglas Kim initiated a setup trade of going long BGF Co and going short BGF Retail. (Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail) This setup has worked out well (7.5% return) and he now think this is a good time to close the trade.

• In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).

links to:
Douglas’ insight: Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail
Sanghyun’s insight: BGF Duo Stub Trade: Short Sub / Long Holdco with a Very Short-Term Horizon

Can One Bhd (CAN MK) / Kian Joo Can Factory (KJC MK)

Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.

• This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
• For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.

(link to my insight: StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels)

Briefly …

• Sanghyun recommended long Hansae Yes24 Holdings Co, Ltd. (016450 KS), short Hansae Co Ltd (105630 KS), now that the Holdco/Sub ratio  is at -227% of σ or a 120D low. Using his numbers, I see the discount to NAV at 49% against a one-year average of 44%; while the implied stub is at a one-year low. (link to Sanghyun’s insight: Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here)

Hyundai Glovis (086280 KS) / Hyundai Mobis (012330 KS)

There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.

• Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt.  Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
• This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.

(link to Sanghyun’s insight: Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation)

• Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.

• Hopewell Holdings (54 HK) and the Offeror are still in the course of finalising the information to be included in the Scheme Document. No date for the dispatch has been announced.

• ESR’s offer for Propertylink Group (PLG AU) has turned unconditional after Centuria Capital (CNI AU) tendered. 

• The composite doc for Harbin Electric Co Ltd H (1133 HK), initially due out this past week, has been further postponed until the 29 March – on or before – ostensibly to incorporate the FY18 financials.

• Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme.  The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED,  holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.

• MYOB Group Ltd (MYO AU) announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal.  At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.

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.   

In this briefing:

1. Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price
2. Kosaido (7868 JP) Reaches Value You Can Sell
3. Hitachi Bumps Yungtay Bid to NT$65. Take It.
4. Last Week in Event SPACE: Navitas, Harbin Electric, Yungtay, Kosaido, Ophir, Tesla/CATL, Ecopro
5. CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?

1. Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price

• 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.
• SamE got up 6.5% since the Micron announcement. It still seems to have more upside potential even at the current price. Common-1P perspective, I’d wrap up my previous position Samsung Electronics Share Class Trade: Common at +2σ, Expect Reversion After AGM This Week. This paid a 3.3% return. I’d initiate a new one reversely. Common is now at -1.65σ.

2. Kosaido (7868 JP) Reaches Value You Can Sell

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.

And now there is more below.

3. Hitachi Bumps Yungtay Bid to NT$65. Take It.

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.

Past coverage of this situation can be found at:
28 Oct 2018 – Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)
17 Jan 2019 – Hitachi Tender for Yungtay Engineering Launches
26 Feb 2019 – Yungtay Noises Haven’t Produced a Result Yet
18 Mar 2019 – Yungtay Tummy Rumblings Continue But Not Clear To What Avail

4. Last Week in Event SPACE: Navitas, Harbin Electric, Yungtay, Kosaido, Ophir, Tesla/CATL, Ecopro

Last Week in Event SPACE …

• Agreed deal with no rival bidders coming, expect Navitas Ltd (NVT AU) to trade tight.
• The risk/reward is simply not present in Harbin Electric Co Ltd H (1133 HK)‘s low-ball offer.
• One wonders if there is a “gotcha” coming against the foreigner in Hitachi Ltd (6501 JP)‘s tilt for Yungtay Engineering (1507 TT) 
• We should have seen this coming as Murakami-San Goes Hostile on Kosaido Co Ltd (7868 JP).
  
• Medco Energi Internasional T (MEDC IJ)‘s offer for Ophir Energy (OPHR LN) should get up after a small bump and a chunk of the registry giving an irrevocable undertaking.
• A Tesla Motors (TSLA US) / CATL (A) (300750 CH) tie-in lacks credibility.

• Ecopro Co Ltd (086520 KS) is looking “cheap” as 56%-held Ecopro BM Co Ltd (247540 KS) pops 48% since its IPO, and now is now worth 115% of its market cap.

• 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

Navitas Ltd (NVT AU) (Mkt Cap: $1.4bn; Liquidity: $4mn)

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.

(link to Travis’ insight: Navitas Gets An Agreed Deal with BGH)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $898mn; Liquidity: $4mn)

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.

(link to my insight: Harbin Electric’s Offer: One For The Brave)

Yungtay Engineering (1507 TT) (Mkt Cap: $793mn; Liquidity: $1mn)

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.

(link to Travis’ insights:
Yungtay Tummy Rumblings Continue But Not Clear To What Avail
Hitachi Bumps Yungtay Bid to NT$65. Take It.

Kosaido Co Ltd (7868 JP) (Mkt Cap: $165mn; Liquidity: $2mn)

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.

link to Travis’ insight:
Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer.
Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
Kosaido (7868 JP) Reaches Value You Can Sell

Villa World Ltd (VLW AU) (Mkt Cap: $200mn; Liquidity: $1mn)

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.

(link to my insight: Ho Bee Ups Stake In Villa World After AVID Lobs An Offer)

Aveo Group (AOG AU) (Mkt Cap: $806mn; Liquidity: $3mn)

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. 

(link to my insight: Aveo: Take Advantage of the Lull To Take a Second Crack)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $7mn)

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.”

(link to Travis’ insight: Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait)

CATL (A) (300750 CH) (Mkt Cap: $28.5bn; Liquidity: $95mn)

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.

(link to LightStream Research‘s insight: CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?)

Ophir Energy (OPHR LN) (Mkt Cap: $525mn; Liquidity: $7mn)

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.

(link to my insight: Medco’s Bump For Ophir Won’t Sway Petrus)

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $5mn)

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%.

(link to my insight: CEVA Logistics: Okay, Now You Can Tender)

Ecopro Co Ltd (086520 KS)/Ecopro BM Co Ltd (247540 KS)

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.

(link to Douglas’ insight: Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM)

Amorepacific Group (002790 KS)/Amorepacific Corp (090430 KS)

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.
• The pair trade made 2.84% ex-costs in two months.

(link to Curtis’ insight: TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade)

Hyosung Corporation (004800 KS)/Hyosung TNC Co Ltd (298020 KS)

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.

(link to Douglas’ insight: Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp)

Linkbal Inc (6046 JP)(Mkt Cap: $4.2bn; Liquidity: $5mn)

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.

(link to Travis’ insight: Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?)

• 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.

• Xenith Ip (XIP AU) has surprisingly concluded IPH’s proposal is not superior to the offer by Qantm Intellectual Property (QIP AU). Also the ACCC will not oppose the Qantm/ Xenith merger. Separately, IPH Ltd (IPH AU) encourages XIP shareholders to vote against the QANTM merger, stating its offer is superior in value.

• 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%.

• Kian Joo Can Factory (KJC MK)‘s offer is now unconditional.

• China Power New Energy Development Co (735 HK) is suspended pending an announcement pursuant to he takeovers Code.
• Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector, to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN)through a three-step transaction – 20.3% from Mindtree’s largest shareholder, V G Siddhartha, 15% from the open market, and an open offer for 31%. All purchases up to Rs980/share, a 4% premium to the undisturbed price. (link to Arun George ‘s insight: Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit)

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. CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?

The news released on the 11^th 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.

In this briefing:

1. Saputo to Buy Dairy Crest; Initial Market Response Wants a Bump

1. Saputo to Buy Dairy Crest; Initial Market Response Wants a Bump

Saputo Inc (SAP CN) and Dairy Crest (DCG LN) today announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement which the two parties say is likely to close in Q2 2019.

Saputo is a Canada-listed dairy company which has grown through serial acquisition – more than 30 acquisitions in the last twenty years – but curiously none of the acquisitions have left it with any operations in the UK. Dairy Crest is a leading UK-based dairy and cooking staples company whose best-known products are Cathedral City Cheddar Cheese, Clover margarine, Country Life butter, and Frylight cooking oil as well as other minor butter-similars and butter-replacement spreads.

This would be Saputo’s largest purchase in ten years – by a factor of three over their second largest – the purchase of Warrnambool Cheese & Butter Factory in Q1 2014.

Shares are trading through terms early, perhaps on expectations the wide open register means shareholders can try to hold out for a higher price. 

At a decent premium (13.9x TTM EV/EBITDA at 620p) to where the rest of the smaller-cap dairy products sector trades (below 10x on a median basis), and the highest EV/Revenue or EV/EBITDA multiple that I can find Saputo having paid, asking for more may not get you more, but investors clearly think it worth a try. 

An extra 10% would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017. It would put March 2019 PER at just under 20x and just under 13.9x March 2019 expected EV/EBITDA.

In this briefing:

1. Kosaido (7868 JP) Reaches Value You Can Sell
2. Hitachi Bumps Yungtay Bid to NT$65. Take It.
3. Last Week in Event SPACE: Navitas, Harbin Electric, Yungtay, Kosaido, Ophir, Tesla/CATL, Ecopro
4. CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?
5. Navitas Gets An Agreed Deal with BGH

1. Kosaido (7868 JP) Reaches Value You Can Sell

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.

And now there is more below.

2. Hitachi Bumps Yungtay Bid to NT$65. Take It.

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.

Past coverage of this situation can be found at:
28 Oct 2018 – Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)
17 Jan 2019 – Hitachi Tender for Yungtay Engineering Launches
26 Feb 2019 – Yungtay Noises Haven’t Produced a Result Yet
18 Mar 2019 – Yungtay Tummy Rumblings Continue But Not Clear To What Avail

3. Last Week in Event SPACE: Navitas, Harbin Electric, Yungtay, Kosaido, Ophir, Tesla/CATL, Ecopro

Last Week in Event SPACE …

• Agreed deal with no rival bidders coming, expect Navitas Ltd (NVT AU) to trade tight.
• The risk/reward is simply not present in Harbin Electric Co Ltd H (1133 HK)‘s low-ball offer.
• One wonders if there is a “gotcha” coming against the foreigner in Hitachi Ltd (6501 JP)‘s tilt for Yungtay Engineering (1507 TT) 
• We should have seen this coming as Murakami-San Goes Hostile on Kosaido Co Ltd (7868 JP).
  
• Medco Energi Internasional T (MEDC IJ)‘s offer for Ophir Energy (OPHR LN) should get up after a small bump and a chunk of the registry giving an irrevocable undertaking.
• A Tesla Motors (TSLA US) / CATL (A) (300750 CH) tie-in lacks credibility.

• Ecopro Co Ltd (086520 KS) is looking “cheap” as 56%-held Ecopro BM Co Ltd (247540 KS) pops 48% since its IPO, and now is now worth 115% of its market cap.

• 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

Navitas Ltd (NVT AU) (Mkt Cap: $1.4bn; Liquidity: $4mn)

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.

(link to Travis’ insight: Navitas Gets An Agreed Deal with BGH)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $898mn; Liquidity: $4mn)

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.

(link to my insight: Harbin Electric’s Offer: One For The Brave)

Yungtay Engineering (1507 TT) (Mkt Cap: $793mn; Liquidity: $1mn)

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.

(link to Travis’ insights:
Yungtay Tummy Rumblings Continue But Not Clear To What Avail
Hitachi Bumps Yungtay Bid to NT$65. Take It.

Kosaido Co Ltd (7868 JP) (Mkt Cap: $165mn; Liquidity: $2mn)

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.

link to Travis’ insight:
Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer.
Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
Kosaido (7868 JP) Reaches Value You Can Sell

Villa World Ltd (VLW AU) (Mkt Cap: $200mn; Liquidity: $1mn)

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.

(link to my insight: Ho Bee Ups Stake In Villa World After AVID Lobs An Offer)

Aveo Group (AOG AU) (Mkt Cap: $806mn; Liquidity: $3mn)

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. 

(link to my insight: Aveo: Take Advantage of the Lull To Take a Second Crack)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $7mn)

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.”

(link to Travis’ insight: Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait)

CATL (A) (300750 CH) (Mkt Cap: $28.5bn; Liquidity: $95mn)

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.

(link to LightStream Research‘s insight: CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?)

Ophir Energy (OPHR LN) (Mkt Cap: $525mn; Liquidity: $7mn)

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.

(link to my insight: Medco’s Bump For Ophir Won’t Sway Petrus)

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $5mn)

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%.

(link to my insight: CEVA Logistics: Okay, Now You Can Tender)

Ecopro Co Ltd (086520 KS)/Ecopro BM Co Ltd (247540 KS)

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.

(link to Douglas’ insight: Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM)

Amorepacific Group (002790 KS)/Amorepacific Corp (090430 KS)

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.
• The pair trade made 2.84% ex-costs in two months.

(link to Curtis’ insight: TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade)

Hyosung Corporation (004800 KS)/Hyosung TNC Co Ltd (298020 KS)

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.

(link to Douglas’ insight: Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp)

Linkbal Inc (6046 JP)(Mkt Cap: $4.2bn; Liquidity: $5mn)

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.

(link to Travis’ insight: Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?)

• 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.

• Xenith Ip (XIP AU) has surprisingly concluded IPH’s proposal is not superior to the offer by Qantm Intellectual Property (QIP AU). Also the ACCC will not oppose the Qantm/ Xenith merger. Separately, IPH Ltd (IPH AU) encourages XIP shareholders to vote against the QANTM merger, stating its offer is superior in value.

• 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%.

• Kian Joo Can Factory (KJC MK)‘s offer is now unconditional.

• China Power New Energy Development Co (735 HK) is suspended pending an announcement pursuant to he takeovers Code.
• Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector, to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN)through a three-step transaction – 20.3% from Mindtree’s largest shareholder, V G Siddhartha, 15% from the open market, and an open offer for 31%. All purchases up to Rs980/share, a 4% premium to the undisturbed price. (link to Arun George ‘s insight: Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit)

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. CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?

The news released on the 11^th 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.

5. Navitas Gets An Agreed Deal with BGH

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.

In this briefing:

1. Nintendo Offering & Buyback: The Import & The Dynamics
2. NTT Docomo Share Cancellation
3. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF
4. Saputo to Buy Dairy Crest; Initial Market Response Wants a Bump

1. Nintendo Offering & Buyback: The Import & The Dynamics

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 real reason why this selldown is happening – also noted in the Offering Document “reason for the offering” – is because of the heightened focus on policy cross-holdings highlighted in the changes to the Corporate Governance Code (especially Principle 1.4) which went live June 1 2018. The major changes were discussed in Japan’s Corporate Governance Code Amendments – A Much Bigger Stick for Activists and Stewards at that time, but the hint of how this might play out was discussed in Japan Crossholdings: Japan Exchange’s Sale of SGX Shares Sets A Precedent – Watch Closely from 1 April 2018. In an announcement after the close on the last day of the last fiscal year, Japan Exchange Group (8697 JP) announced it would sell down its 4.95% stake in Singapore Exchange (SGX SP) over the space of three years. 

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.

2. NTT Docomo Share Cancellation

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.

3. Last Week in Event SPACE: Rakuten/Lyft, Delta, Kosaido, Ophir, Dairy Crest, Panalpina, BGF

Last Week in Event SPACE …

• The question mark over the size of Rakuten Inc (4755 JP)‘s stake in Lyft may be known in the coming two weeks.
• Delta Electronics Thai (DELTA TB)‘s Tender Off document fails to clarify how the FY18 dividend will be treated.
• An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
• Ophir Energy (OPHR LN)‘s shareholders ratchet up their opposition to Medco Energi Internasional T (MEDC IJ)‘s Offer.
• A bump seems envisaged against an already healthy price, but it may not need be a big one to get the Dairy Crest (DCG LN) deal done.
  
• DSV A/S (DSV DC)‘s Offer either comes down to price, or it comes down to loyalty to Panalpina Welttransport Holding (PWTN SW)‘s management.
• The BGF Co Ltd (027410 KS) set up trade has provided a decent return recently, but could still run further.
• Plus 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)

Rakuten Inc (4755 JP) (Mkt Cap: $10.2bn; Liquidity: $51mn)

Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.

• As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn. 
• A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.

(link to Travis’ insight: Will Rakuten Get A Near-Term Lyft?) 

Doosan Heavy Industries (034020 KS) (Mkt Cap: $868mn; Liquidity: $78.5mn)
Doosan Engineering & Construction (011160 KS) (Mkt Cap: $91mn; Liquidity: $0.4mn)

DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.

• For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
• For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.

link to Sanghyun Park‘s insights:
Doosan E&C Rights Offer: Conditions & Timetable
DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable.

Delta Electronics Thai (DELTA TB) (Mkt Cap: $2.8bn; Liquidity: $3mn)

The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.

• Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
• Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.

(link to my insight: Delta Thailand’s Tender Offer: Updated Timetable)

M1 Ltd (M1 SP) (Mkt Cap: $1.4bn; Liquidity: $3mn)

The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK) made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.

• If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out). 
• So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.

(link to Travis’ insight: M1 Offer Unconditional as Axiata Tenders)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $160mn; Liquidity: $1mn)

When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.

• Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough. 
• This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
• The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself. 

(link to Travis’ insight: Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO)

Briefly …

• After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
• Xingfa Aluminium (98 HK) announced both China Lesso Group Holdings (2128 HK) (26.3% shareholder) and Sure Keen (11.5%, ED Liao Yuqing’s vehicle), collectively holding  37.81% of shares out, will NOT tender their shares into the offer. (Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium)

Dairy Crest (DCG LN) (Mkt Cap: $1.3bn; Liquidity: $4.5mn)

Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.

• At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
• Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
• One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017.  Doable, but as it is an agreed deal, Travis doesn’t see the need to push it. 

(link to Travis’ insight: Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump)

Ophir Energy (OPHR LN) (Mkt Cap: $509mn; Liquidity: $6mn)

Petrus Advisors (3.5% shareholder) has dialed up the pressure on its opposition to Medco Energi Internasional T (MEDC IJ)‘s £0.55/share offer for Ophir Energy (OPHR LN), specifically calling into question Bill Schrader’s (Ophir’s Chairman) business acumen.

• In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
• Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier –  alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
• Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.

(link to my insight: Petrus Doubles Down On Ophir Energy)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $22mn)

Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done.  45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?

• Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
• DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
• It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
• If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop. 

(link to Travis’ insight: The Panalpina Conundrum)

Mahindra & Mahindra (MM IN) 

Curtis Lehnert backs out a discount to NAV of 42%, the widest since at least 2015. His proposal to structure the trade is to use a market-cap weighted hedge on the two largest listed subsidiaries, Tech Mahindra (TECHM IN) and Mahindra & Mahindra Fin Services Ltd. (MMFS IN) along with a core business hedge using Maruti Suzuki India (MSIL IN) to hedge the core automotive business. 

• Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
• The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.

(link to Curtis’ insight: TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise)

BGF Co Ltd (027410 KS) / Bgf Retail (282330 KS)

On January 8th, Douglas Kim initiated a setup trade of going long BGF Co and going short BGF Retail. (Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail) This setup has worked out well (7.5% return) and he now think this is a good time to close the trade.

• In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).

links to:
Douglas’ insight: Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail
Sanghyun’s insight: BGF Duo Stub Trade: Short Sub / Long Holdco with a Very Short-Term Horizon

Can One Bhd (CAN MK) / Kian Joo Can Factory (KJC MK)

Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.

• This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
• For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.

(link to my insight: StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels)

Briefly …

• Sanghyun recommended long Hansae Yes24 Holdings Co, Ltd. (016450 KS), short Hansae Co Ltd (105630 KS), now that the Holdco/Sub ratio  is at -227% of σ or a 120D low. Using his numbers, I see the discount to NAV at 49% against a one-year average of 44%; while the implied stub is at a one-year low. (link to Sanghyun’s insight: Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here)

Hyundai Glovis (086280 KS) / Hyundai Mobis (012330 KS)

There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.

• Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt.  Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
• This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.

(link to Sanghyun’s insight: Glovis/Mobis Pair Trade: Glovis Being Overpriced Relative to Mobis on Unsubstantiated Speculation)

• Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.

• Hopewell Holdings (54 HK) and the Offeror are still in the course of finalising the information to be included in the Scheme Document. No date for the dispatch has been announced.

• ESR’s offer for Propertylink Group (PLG AU) has turned unconditional after Centuria Capital (CNI AU) tendered. 

• The composite doc for Harbin Electric Co Ltd H (1133 HK), initially due out this past week, has been further postponed until the 29 March – on or before – ostensibly to incorporate the FY18 financials.

• Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme.  The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED,  holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.

• MYOB Group Ltd (MYO AU) announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal.  At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.

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. Saputo to Buy Dairy Crest; Initial Market Response Wants a Bump

Saputo Inc (SAP CN) and Dairy Crest (DCG LN) today announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement which the two parties say is likely to close in Q2 2019.

Saputo is a Canada-listed dairy company which has grown through serial acquisition – more than 30 acquisitions in the last twenty years – but curiously none of the acquisitions have left it with any operations in the UK. Dairy Crest is a leading UK-based dairy and cooking staples company whose best-known products are Cathedral City Cheddar Cheese, Clover margarine, Country Life butter, and Frylight cooking oil as well as other minor butter-similars and butter-replacement spreads.

This would be Saputo’s largest purchase in ten years – by a factor of three over their second largest – the purchase of Warrnambool Cheese & Butter Factory in Q1 2014.

Shares are trading through terms early, perhaps on expectations the wide open register means shareholders can try to hold out for a higher price. 

At a decent premium (13.9x TTM EV/EBITDA at 620p) to where the rest of the smaller-cap dairy products sector trades (below 10x on a median basis), and the highest EV/Revenue or EV/EBITDA multiple that I can find Saputo having paid, asking for more may not get you more, but investors clearly think it worth a try. 

An extra 10% would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017. It would put March 2019 PER at just under 20x and just under 13.9x March 2019 expected EV/EBITDA.