Event-Driven

In this briefing:

1. Bank Danamon Goes Ex-Rights
2. Nutrien’s Move On Ruralco Makes Agronomic Sense
3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
4. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership
5. Diageo Proposes Another Partial Tender for Sichuan Swellfun

1. Bank Danamon Goes Ex-Rights

The process of the merger between Bank Danamon Indonesia (BDMN IJ) and Mitsubishi Ufj Financial (8306 JP)‘s local unit Bank Nusantara Parahyangan (BBNP IJ) is proceeding apace.

Today, the shares go ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected. 

2. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

4. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership

In this report, we provide the one year share price comparisons of the holdcos and the opcos in both table and chart formats as well as changes to the foreign ownership stakes of these companies YTD. Significant, rapid changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

Among these 30 pair of companies, five pairs in particular are interesting where the difference in their share prices have diverged significantly in the past year (by 30% or more). These five pairs of companies include the following:  

• Hyosung Corp vs. Hyosung Advanced Materials  
• BGF Retail vs. BGF Co.  
• Doosan Corp vs. Doosan Heavy Industries Corp.  
• Cuckoo Holdings vs. Cuckoo Homesys  
• Orion Holdings vs. Orion Corp

5. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

In this briefing:

1. Nutrien’s Move On Ruralco Makes Agronomic Sense
2. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
3. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership
4. Diageo Proposes Another Partial Tender for Sichuan Swellfun
5. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

1. Nutrien’s Move On Ruralco Makes Agronomic Sense

Ruralco Holdings (RHL AU) has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer values Ruralco at A$469mn and an enterprise value of $615mn.

A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

The Scheme is subject to shareholder approval, and approval from the ACCC and FIRB. Previous commentary bv ACCC’s Rod Sims would indicate this regulatory approval will not be an issue.

Ruralco’s directors unanimously recommend the Offer in the absence of a superior proposal and a favourable independent expert opinion.

Concerning shareholder reception to the Scheme, Ruralco’s CEO Travis Dillon said “The feedback we’ve had … with all stakeholders, but including our shareholders (has been) overwhelmingly positive.“

This is a pretty clean deal and the gross/annualised spread of 1.4%/4.1%, assuming late June completion, reflects this.

A counter offer from Elders Ltd (ELD AU) cannot be ruled out. But given its comparative size, Nutrien would be the likely winner in such a scrap, potentially reducing the likelihood of Elders making an offer.

2. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

3. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership

In this report, we provide the one year share price comparisons of the holdcos and the opcos in both table and chart formats as well as changes to the foreign ownership stakes of these companies YTD. Significant, rapid changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

Among these 30 pair of companies, five pairs in particular are interesting where the difference in their share prices have diverged significantly in the past year (by 30% or more). These five pairs of companies include the following:  

• Hyosung Corp vs. Hyosung Advanced Materials  
• BGF Retail vs. BGF Co.  
• Doosan Corp vs. Doosan Heavy Industries Corp.  
• Cuckoo Holdings vs. Cuckoo Homesys  
• Orion Holdings vs. Orion Corp

4. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

5. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

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

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

In this briefing:

1. Hyundai Motor Share Class: Time to Short Common & Long Pref
2. Yungtay Noises Haven’t Produced a Result Yet
3. Kosaido (7868 JP) TOB Extended
4. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating
5. Panalpina To Have EGM to Approve One Share One Vote

1. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

2. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

3. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

4. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating

This week in StubWorld …

• Select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW Ltd (8 HK)‘s stub ops.

Preceding my comments on PCCW and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

5. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

In this briefing:

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
2. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership
3. Diageo Proposes Another Partial Tender for Sichuan Swellfun
4. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
5. Hanergy’s Hobson’s Choice

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

2. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership

In this report, we provide the one year share price comparisons of the holdcos and the opcos in both table and chart formats as well as changes to the foreign ownership stakes of these companies YTD. Significant, rapid changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

Among these 30 pair of companies, five pairs in particular are interesting where the difference in their share prices have diverged significantly in the past year (by 30% or more). These five pairs of companies include the following:  

• Hyosung Corp vs. Hyosung Advanced Materials  
• BGF Retail vs. BGF Co.  
• Doosan Corp vs. Doosan Heavy Industries Corp.  
• Cuckoo Holdings vs. Cuckoo Homesys  
• Orion Holdings vs. Orion Corp

3. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

4. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

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

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

5. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

In this briefing:

1. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership
2. Diageo Proposes Another Partial Tender for Sichuan Swellfun
3. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
4. Hanergy’s Hobson’s Choice
5. Hyundai Motor Share Class: Time to Short Common & Long Pref

1. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership

In this report, we provide the one year share price comparisons of the holdcos and the opcos in both table and chart formats as well as changes to the foreign ownership stakes of these companies YTD. Significant, rapid changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades. 

Among these 30 pair of companies, five pairs in particular are interesting where the difference in their share prices have diverged significantly in the past year (by 30% or more). These five pairs of companies include the following:  

• Hyosung Corp vs. Hyosung Advanced Materials  
• BGF Retail vs. BGF Co.  
• Doosan Corp vs. Doosan Heavy Industries Corp.  
• Cuckoo Holdings vs. Cuckoo Homesys  
• Orion Holdings vs. Orion Corp

2. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

3. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

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

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

4. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

5. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

In this briefing:

1. Diageo Proposes Another Partial Tender for Sichuan Swellfun
2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
3. Hanergy’s Hobson’s Choice
4. Hyundai Motor Share Class: Time to Short Common & Long Pref
5. Yungtay Noises Haven’t Produced a Result Yet

1. Diageo Proposes Another Partial Tender for Sichuan Swellfun

UK alcoholic drinks conglomerate Diageo Plc (DGE LN) bought a stake in Sichuan Swellfun Co Ltd A (600779 CH) in 2007, then through a 49% stake in Sichuan Chengdu Quanxing Group which owned ~40% of the Chinese baiju maker. In 2011 Diageo raised its stake in Sichuan Chengdu Quanxing Group from 49% to 53% by paying US$21mm to Chengdu Yingsheng Investment Holding Co. which lowered its stake to 47%.

In 2013, Diageo spent £233m to buy out Chengdu Yingsheng Investment Holding Co.’s 47% to go from a consolidated 21.05% to 39.71% in Swellfun (which is also named Sichuan Shui Jing Fang, after one of its brands).

Last summer, Diageo offered to buy 20.29% of the shares outstanding in a Partial Tender Offer (PTO) which was announced June 25th leading to a brief pop to RMB 60.0, and then launched a few weeks later at RMB 62.00 a share, which was a 22.6% premium to the then-current share price. The shares paid a RMB 0.62 dividend on August 1st and the PTO price was lowered to RMB 61.38 accordingly.

Last year’s Partial Tender was for 99,127,820 shares to be acquired out of a total free-float of 294,546,100 shares, which gave a minimum pro-ration of 36.65%. Surprisingly, pro-ration ended up being quite low at ~40.1%. The shares fell sharply and buy-and-tender trades done at the low were OK but in the mid 50s were not.

The shares languished as the economy softened, real estate transactions slowed, and conspicuous consumption continued to be frowned upon, and buy-and-tender-and-own-back-end trades did not do well (though owning A-shares in general did not do well either) as the shares troughed at less than half the tender offer price.

The New News

On 26 February 2019, Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

The proposal was announced on the Shanghai Stock Exchange as well in Chinese.

This deal obviously has a lower minimum pro-ration, and the shares have jumped limit up this morning to RMB 41.48 leaving only 8.49% upside if you can buy at limit up today. At 25% pro-ration, breakeven is RMB 40.31, 6.9% higher than yesterday’s close. Assuming yesterday’s close is The Right Price, today’s limit up would give an implied expected pro-ration of 55%, implying only 18.2% of the remaining 40% of shares outstanding would tender. 

What To Do? 

That is the question. A-shares are on a tear, with the SSE-SZSE 300 up 23% ytd. Historically, bull markets are good to buy. Consensus forecasts have come down so there is a reason why the shares fell to where they did, but even though consensus EPS for 2019 as of six months ago is now the consensus EPS estimate for Dec 2020, on 2019 the shares at the Proposed Tender Offer Price are at less than 30x PER and less than 24x Dec 2020.

If you are buying these to get the minimum pro-ration on a target price equivalent to the offered Tender Offer Price, don’t bother. If you are looking at this as a cheap put because you may decide to downsize your position if the A-share rally sees the brakes applied, this is more interesting.

This is a trader’s trade rather than an arbitrageur’s trade and should be dealt with accordingly.

Breakeven Arb Grids for Price, PER, PBR, EV/EBITDA below.

2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

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

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

3. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

4. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

5. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

In this briefing:

1. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
2. Hanergy’s Hobson’s Choice
3. Hyundai Motor Share Class: Time to Short Common & Long Pref
4. Yungtay Noises Haven’t Produced a Result Yet
5. Kosaido (7868 JP) TOB Extended

1. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

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

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

2. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

3. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

4. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

5. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

In this briefing:

1. Hanergy’s Hobson’s Choice
2. Hyundai Motor Share Class: Time to Short Common & Long Pref
3. Yungtay Noises Haven’t Produced a Result Yet
4. Kosaido (7868 JP) TOB Extended
5. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating

1. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

2. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.

3. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

4. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

5. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating

This week in StubWorld …

• Select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW Ltd (8 HK)‘s stub ops.

Preceding my comments on PCCW and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

In this briefing:

1. Yungtay Noises Haven’t Produced a Result Yet
2. Kosaido (7868 JP) TOB Extended
3. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating
4. Panalpina To Have EGM to Approve One Share One Vote
5. Golden Land: Less An Offer, More A Consolidation Of Interests

1. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

2. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

3. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating

This week in StubWorld …

• Select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW Ltd (8 HK)‘s stub ops.

Preceding my comments on PCCW and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

4. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

5. Golden Land: Less An Offer, More A Consolidation Of Interests

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for Golden Land Prop Dvlp (GOLD TB) at Bt8.50/share, ~2.4% premium to last close.

Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. There were no specific minimum acceptance conditions attached to the tender offer mentioned in the announcement.

Should FPP secure 90% of GOLD in the tender offer, it may proceed with its delisting. A voluntary delisting is still achievable with ~80% in the bag, but that is conditional on <10% of shareholders not voting against.

Preconditions to the commencement of the tender offer include the approval from disinterested shareholders in FPP, approval from “relevant contractual parties of GOLD and GOLD’s subsidiaries” and the approval from the Office of Trade Competition Commission.

The fact the Sirivadhanabhakdi family already holds, directly/indirectly ~80% in GOLD, such regulatory approvals should be forthcoming.

This appears a done deal. The only apparent risk is the expected shareholder vote of Univentures wherein Panote will likely need to abstain.

Currently trading at a gross/annualized spread of 1.8%/4.3% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

In this briefing:

1. Kosaido (7868 JP) TOB Extended
2. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating
3. Panalpina To Have EGM to Approve One Share One Vote
4. Golden Land: Less An Offer, More A Consolidation Of Interests
5. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

1. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

2. StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating

This week in StubWorld …

• Select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW Ltd (8 HK)‘s stub ops.

Preceding my comments on PCCW and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

3. Panalpina To Have EGM to Approve One Share One Vote

Yesterday, Panalpina Welttransport Holding (PWTN SW)‘s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation, made a formal request to the directors of Panalpina to hold an Extraordinary General Meeting to be held prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights enshrined in Article 5 be abolished and a “One Share One Vote” structure be adopted.

The directors complied with this request.

The limit to now has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the Ernst Göhner Foundation which were deemed “grandfathered” prior to the change. The directors have the right to grant exceptions to this 5% rule, as discussed in The Panalpina Conundrum a bit over a week ago, but have not, leaving the combined 24+% total held by Cevian and Artisan Partners with only ~11.6% of the vote.

This move by the EGF is both “sneaky” AND interesting (and bullish) news. Given the current shareholder vote structure, it wouldn’t be impossible for the EGF to vote it down in the EGM, but I think EGF very specifically do not want to vote it down because the alternative is worse. But getting this passed would suddenly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance.

4. Golden Land: Less An Offer, More A Consolidation Of Interests

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for Golden Land Prop Dvlp (GOLD TB) at Bt8.50/share, ~2.4% premium to last close.

Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. There were no specific minimum acceptance conditions attached to the tender offer mentioned in the announcement.

Should FPP secure 90% of GOLD in the tender offer, it may proceed with its delisting. A voluntary delisting is still achievable with ~80% in the bag, but that is conditional on <10% of shareholders not voting against.

Preconditions to the commencement of the tender offer include the approval from disinterested shareholders in FPP, approval from “relevant contractual parties of GOLD and GOLD’s subsidiaries” and the approval from the Office of Trade Competition Commission.

The fact the Sirivadhanabhakdi family already holds, directly/indirectly ~80% in GOLD, such regulatory approvals should be forthcoming.

This appears a done deal. The only apparent risk is the expected shareholder vote of Univentures wherein Panote will likely need to abstain.

Currently trading at a gross/annualized spread of 1.8%/4.3% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

5. DSME Perpetual CBs Owned by Korea Eximbank: Situational Assessment & Trade Approach

• DSME has this ₩2.3tril worth of CBs that carry a 30 year maturity. Korea Eximbank is the holder. HHI wants no change. Eximbank wants out as soon as possible. Current price of ₩32,600 is nearly a 20% discount to the conversion price of ₩40,350. It’d be still better for Eximbank to do conversion/sale even at this price. This is 27.54%. It will create huge overhang.
• HHI should be given much higher priority than DSME even when they are under the same roof. DSME acquisition is supposed to help HHI first, not the other way around. HHI shouldn’t be much incentivized to help turn around DSME in the short-term. Not only that, pressing down DSME price would probably be the only way for HHI to prevent Eximbank’s stake dumping.
• In a longer time horizon, things would depend on the outlook of the entire shipbuilding sector. To minimize risks, I’d go for long/short with HHI. What should be at least clear at this point is that HHI should be outperforming DSME in whatever fundamentals situations we are dealing with.