Event-Driven

In this briefing:

1. Itochu and Descente: Gloves Off
2. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
3. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

1. Itochu and Descente: Gloves Off

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

2. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

3. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

In this briefing:

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

In this briefing:

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. Kosaido: Activism Drives Price 30+% Through Terms

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

4. Kosaido: Activism Drives Price 30+% Through Terms

In my piece Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? discussing the Kosaido Co Ltd (7868 JP) MBO by Bain, even the title suggested it was a lowball bid with the wrong price.

The deal was announced at ¥610/share which was a 40+% premium to last, but it was still being done at a 44% discount to Tangible Book Value Per Share. I mentioned in the conclusions the following four points…

• This is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.

• This company is an example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

• It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A.”

• If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher. As of today’s close, the stock is 28% through terms.

Yesterday the shares briefly traded almost 40% through terms.

Something is up.

In this briefing:

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. Kosaido: Activism Drives Price 30+% Through Terms
5. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

4. Kosaido: Activism Drives Price 30+% Through Terms

In my piece Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? discussing the Kosaido Co Ltd (7868 JP) MBO by Bain, even the title suggested it was a lowball bid with the wrong price.

The deal was announced at ¥610/share which was a 40+% premium to last, but it was still being done at a 44% discount to Tangible Book Value Per Share. I mentioned in the conclusions the following four points…

• This is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.

• This company is an example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

• It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A.”

• If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher. As of today’s close, the stock is 28% through terms.

Yesterday the shares briefly traded almost 40% through terms.

Something is up.

5. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

In this briefing:

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance
2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
3. Baidu: Time to Swoop In, with NAV Discount Widening Substantially
4. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation

• Hyundai Motor 1P/2PB price ratio is currently at 152% of σ on a 20D MA. This is the highest since late Nov last year. Price ratio wise, they are now slightly above 120D average.
• 1P/2PB div yield difference on FY19e is -0.34%p. This is lower than last year’s yearend level. Hyundai Motor Common has been drifting sideways for a while lately. 2PB has generally been more quickly responding to Common’s price movement. This led to a higher-than-usual price divergence on 1P/2PB. 1P should be following Common/2PB at this point.
• It is locally being speculated that HMG will announce a revised restructuring plan as early as next month. When this happened last time, 2PB responded first and 1P followed suit. This market speculation will also serve to boost 2PB in the short-term. I’d go long 2PB and short 1P.

3. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.   

4. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

With the shares hitting all-time highs, Pinduoduo (PDD US) announced a follow-on public offering to raise net proceeds (potentially of $1.1 billion) from the sale of 37 million ADS along with the placing of 14.8 million ADS from existing shareholders (post-lockup expiry).

In this briefing:

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially
2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors
3. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade
5. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.   

2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

With the shares hitting all-time highs, Pinduoduo (PDD US) announced a follow-on public offering to raise net proceeds (potentially of $1.1 billion) from the sale of 37 million ADS along with the placing of 14.8 million ADS from existing shareholders (post-lockup expiry).

3. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
• On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
• We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.

4. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade

In my original insight on December 11, 2018 TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of Toyota Industries (6201 JP) that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, Toyota Industries (6201 JP) has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn’t exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-mortem trade analysis on the Toyota Industries stub
• alternative data support for my actions

5. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed

A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. 

This was more than a little confusing.

Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.

Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.

But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.

The New News

This morning, Panalpina offered a press release saying…

Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.

According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.

The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive. 

At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher.  If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.

The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.

In this briefing:

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

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

2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, finally received a firm but marginally lower offer from Brookfield Asset Management (BAM US) through a recommended implementation deed.

In this briefing:

1. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
2. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade
3. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed
4. Medco’s “Okay” Offer For Ophir After Fortuna Setback
5. RPC Group PLC – It Ain’t Over ’til It’s Over

1. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
• On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
• We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.

2. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade

In my original insight on December 11, 2018 TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of Toyota Industries (6201 JP) that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, Toyota Industries (6201 JP) has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn’t exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-mortem trade analysis on the Toyota Industries stub
• alternative data support for my actions

3. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed

A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. 

This was more than a little confusing.

Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.

Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.

But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.

The New News

This morning, Panalpina offered a press release saying…

Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.

According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.

The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive. 

At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher.  If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.

The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.

4. Medco’s “Okay” Offer For Ophir After Fortuna Setback

On 30th January 2019, Indonesian oil and gas company Medco Energi Internasional T (MEDC IJ) announced an agreement to acquire Ophir Energy (OPHR LN) in a £390mn cash deal (at an offer price of £0.55/share).  

Medco initially made an unsolicited approach for Ophir at £0.58/share on 22nd October 2018, and indicated a “willingness to consider offering Ophir’s shareholders additional potential consideration via contingent value rights in relation to the Fortuna LNG asset in Equatorial Guinea (which at the time was awaiting an extension approval) subject to further analysis and due diligence“. Given uncertainty that persevered on Fortuna’s license extension, Medco revised its bid to £0.538/share on 20th December 2018.

On 7th January 2019, Ophir announced that it was recording a $300mn non-cash impairment following the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. Ophir had previously written down $310mn back in September. Subsequently, Medco revised its bid further down to £0.485 on 11th January 2019 but this offer was rejected by Ophir’s board.

Medco’s latest offer of £0.55/share is a 66% premium to the closing price of £0.33 on 28 December 2018.  Ophir’s board has unanimously recommended the latest offer stating that the deal offered “upfront cash value” to its shareholders and that the offer price “reflects the future prospects of Ophir’s high-quality assets“.

The deal is conditional on receiving 75% shareholder approval, receiving of clearances from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

Medco’s offer does provide long-suffering Ophir shareholders with an okay exit in a less-than-ideal situation. Ophir’s shares have been trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder may warrant such an outcome. But I’d be disinclined to chase through terms.

5. RPC Group PLC – It Ain’t Over ’til It’s Over

RPC Group PLC (RPC LN) (“RPC” or the “Company”) is a leading global plastic products design and engineering company based in Rushden, Northamptonshire, less than two hours north of London, and has over 188 operations in 33 countries with FYE March ’18 sales of £3.75 billion. RPC’s products are used in food and non-food packaging, including in beverage, health care and personal care.

After media speculation, RPC confirmed on September 10, 2018 that preliminary discussions were taking place with each of Apollo Global Management (APO US) and Bain Capital which may result in an offer for the Company. After five “put up or shut up” (“PUSU”) extensions, the Company issued a Rule 2.7 announcement of a recommended final cash offer for RPC Group PLC by a unit of Apollo on January 23, 2019 for 782p cash per share intended to be implemented by way of a scheme of arrangement.

The price of 782p was a disappointment to some, with two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, expressing disappointment with the offer valuation.

On January 31, 2019 Berry Global Group, Inc. a former Apollo Global Management portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence information from RPC for this purpose. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.

The shares closed Friday, February 1^st at 793p, 1.4% above the agreed deal price. In this piece we’ll get up to speed with the relevant facts and explore how things might play out from here.

In this briefing:

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

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

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

In this briefing:

1. RPC Group PLC – It Ain’t Over ’til It’s Over
2. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
3. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer
4. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport
5. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

1. RPC Group PLC – It Ain’t Over ’til It’s Over

RPC Group PLC (RPC LN) (“RPC” or the “Company”) is a leading global plastic products design and engineering company based in Rushden, Northamptonshire, less than two hours north of London, and has over 188 operations in 33 countries with FYE March ’18 sales of £3.75 billion. RPC’s products are used in food and non-food packaging, including in beverage, health care and personal care.

After media speculation, RPC confirmed on September 10, 2018 that preliminary discussions were taking place with each of Apollo Global Management (APO US) and Bain Capital which may result in an offer for the Company. After five “put up or shut up” (“PUSU”) extensions, the Company issued a Rule 2.7 announcement of a recommended final cash offer for RPC Group PLC by a unit of Apollo on January 23, 2019 for 782p cash per share intended to be implemented by way of a scheme of arrangement.

The price of 782p was a disappointment to some, with two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, expressing disappointment with the offer valuation.

On January 31, 2019 Berry Global Group, Inc. a former Apollo Global Management portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence information from RPC for this purpose. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.

The shares closed Friday, February 1^st at 793p, 1.4% above the agreed deal price. In this piece we’ll get up to speed with the relevant facts and explore how things might play out from here.

2. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

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

3. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, finally received a firm but marginally lower offer from Brookfield Asset Management (BAM US) through a recommended implementation deed.

4. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport

Last Week in Event SPACE …

• Toppan Printing (7911 JP)‘s management prefers to run a long/short fund rather than support the company’s long-suffering shareholders. 

• Hyundai Heavy Industries Holdings (267250 KS) discount to NAV was all set to narrow after Aramco’s intention to acquire 19.9% in Hyundai Oilbank Co; then 31%-held Hyundai Heavy Industries (009540 KS) announced a multi-step split-off, payment in kind and rights issue.

• Following Itochu Corp (8001 JP)‘s partial offer, Descente Ltd (8114 JP) has the ability to play dirty and investors and traders should be aware of that.

• Brookfield firms up a reduced offer for Healthscope Ltd (HSO AU), however the BGH-consortium is not out of the picture.

• Mcmillan Shakespeare (MMS AU) pushes back on Eclipx (ECX AU)‘s first court date, but MACs have not been triggered.

• Pioneer Corp (6773 JP)‘s shareholders vote to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts. 

• Bidding could still go crazily higher from here as Mastercard Inc Class A (MA US) and Visa Inc Class A Shares (V US) wrestle for Earthport plc (EPO LN).
• 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)

Toppan Printing (7911 JP) (Mkt Cap: $5.3bn; Liquidity: $14mn)

Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. 

• Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
• The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP) (its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
• Toppan’s business and investment portfolio should be radically pruned or eliminated.  Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.   

(link to Campbell’s insight: Toppan Printing: Money for Nothing (& Your Clicks for Free)

Hyundai Heavy Industries (009540 KS) (HHIC) (Mkt Cap: $8.1bn; Liquidity: $37mn)

HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.

• Next the Korean Dev Bank will exchange its 55.7% stake in Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME) for 15.2mn shares in the intermediate holdco (21.5% of shares out) via a payment in kind.
• Following which, the intermediate holdco will do a ₩1.25tn rights offer to its shareholders, including Hyundai Heavy Industries Holdings (267250 KS).
• Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.

links to:
Sanghyun’s insight: Hyundai Heavy/DSME Event – Comprehensive Summary
Douglas Kim‘s insight: Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings.

Nexon Co Ltd (3659 JP) (Mkt Cap: $8.1bn; Liquidity: $37mn)

Netmarble Games (251270 KS) officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:

• To avoid the cultural backlash from Korean gamers.
• Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

(link to Douglas’ insight: Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?) 

Descente Ltd (8114 JP) (Mkt Cap: $1.9bn; Liquidity: $3mn)

Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.

• Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason. 
• Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top. 
• Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience. 

links to:
Travis’ insight: No Détente for Descente: Itochu Launches Partial Tender
Michael Causton‘s insight: Wacoal and Descente Agree Partial Merger to Head Off Itochu

Healthscope Ltd (HSO AU) (Mkt Cap: $3.1bn; Liquidity: $25mn)

Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

• HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
• The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
• Shares are trading  at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.

(link to my insight: BGH Lurks As Brookfield Firms Offer For Healthscope) 

Clarion Co Ltd (6796 JP) (Mkt Cap: $1.3bn; Liquidity: $10mn)

On 26 October Hitachi Ltd (6501 JP) and  Faurecia (EO FP) announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence.  Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days). 

• This deal is quite straightforward. The deal is on schedule and coming through as planned.
• Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
• At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.

(link to Travis’ insight: Faurecia Launches Tender Offer for Clarion) 

Eclipx (ECX AU) (Mkt Cap: $520mn; Liquidity: $3mn)

Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

• Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
• But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
• Still, at a 15% gross spread to terms and trading ~5% above  its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

(link to my insight: McMillan’s Offer For Eclipx Wobbles) 

Pioneer Corp (6773 JP) (Mkt Cap: $228mn; Liquidity: $3.7mn)

The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process. 

• For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.

(link to Travis’ insight: Pioneer Shareholders Approve Deal | What Next?) 

Veriserve Corp (3724 JP) (Mkt Cap: $270mn; Liquidity: $1mn)

SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.

• The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
• Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
• There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)) 

Jiec Co Ltd (4291 JP) (Mkt Cap: $147mn; Liquidity: $.03mn)

Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.

• The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
• But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders. 
• So you suck it up and buy and tender, or tender what you own.  And then you write a public comment to the METI Fair M&A process.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary JIEC)

Earthport plc (EPO LN) (Mkt Cap: $304mn; Liquidity: $2mn)

Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumping Visa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected. 

• For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.

• A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
• There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.

(link to my insight: Earthport the Winner as Mastercard/Visa Jostle For Position)  

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $13mn)

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

• CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing. 

(link to my insight: CEVA’s Fair & Reasonable Offer; But Please Don’t Tender)

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.

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

Hyundai Heavy Industries Holdings (267250 KS)/Hyundai Heavy Industries (009540 KS)

As widely reported in the press and discussed by Douglas Kim (Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank) and Sanghyun Park (Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal), Aramco announced an intention to acquire a 19.9% equity investment in Hyundai Oilbank Co (HOC) for US$1.6bn. This places an overall value for HOC at ₩8.98tn (the media is reporting that Aramco plans to value HOC at ₩10tn) or ₩8.2tn for HHI’s current 91.13% stake. This is HHI’s largest investment, accounting for 83%/67% of NAV/GAV. 

• HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year. 
• Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
• But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue.  Please refer to this development in the “Events” section above.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted) 

United Co Rusal (486 HK)/Mmc Norilsk Nickel Pjsc (Adr) (MNOD LI)

The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force. 

• Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
  • The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later.  This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)). 
  • As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
• Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.

The average premium/discount for each set over a one-year period is graphed below.

(link to my insight: Share Classifications: Jan 2019 Month-End Snapshot) 

Briefly …

• Sanghyun recommended a long Common and short 1P, after LG Chem Ltd (051910 KS) Common/1P is touched levels last seen in mid October last year. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point.

By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday. 

• Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP) buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
• A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.

(link to Travis’ insight: 31 January TOPIX & JPX Nikkei 400 Major Index Changes)

• The Greencross Ltd (GXL AU)/TPG transaction has now received FIRB approval. The scheme meeting is scheduled for the 6 Feb.

• The Bank Tabungan Pensiunan Nasional (BTPN IJ) deal with Sumitomo Mitsui Financial (8316 JP) went through. SMFG paid IDR 4,282 and almost all BTPN shareholders took them up on it. 
• The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 
• Minebea Co Ltd (6479 JP) announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
• The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).

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. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.