Event-Driven

In this briefing:

1. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport
2. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
3. M&A: A Round-Up of Deals in January 2019
4. BGH Lurks As Brookfield Firms Offer For Healthscope
5. Hyundai Heavy/DSME Event – Comprehensive Summary

1. 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.   

2. 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. 

3. 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.

4. BGH Lurks As Brookfield Firms Offer For Healthscope

Healthscope Ltd (HSO AU) 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.

The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.

Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.

Brookfield’s proposals have unanimous HSO Board backing. 

The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.

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.

An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.

Currently trading tight to the Scheme consideration at $2.45/share.

5. Hyundai Heavy/DSME Event – Comprehensive Summary

• Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
• I will provide a trade approach on each name in a follow-up post.

In this briefing:

1. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

1. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in Veriserve Corp (3724 JP).

SCSK currently holds 2,900,000 shares or 55.59% of voting rights. 

The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.

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.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments. 

In this briefing:

1. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
2. M&A: A Round-Up of Deals in January 2019
3. BGH Lurks As Brookfield Firms Offer For Healthscope
4. Hyundai Heavy/DSME Event – Comprehensive Summary
5. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

1. 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. 

2. 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.

3. BGH Lurks As Brookfield Firms Offer For Healthscope

Healthscope Ltd (HSO AU) 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.

The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.

Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.

Brookfield’s proposals have unanimous HSO Board backing. 

The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.

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.

An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.

Currently trading tight to the Scheme consideration at $2.45/share.

4. Hyundai Heavy/DSME Event – Comprehensive Summary

• Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
• I will provide a trade approach on each name in a follow-up post.

5. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in Veriserve Corp (3724 JP).

SCSK currently holds 2,900,000 shares or 55.59% of voting rights. 

The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.

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.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments. 

In this briefing:

1. Share Classifications: Jan 2019 Month-End Snapshot

1. Share Classifications: Jan 2019 Month-End Snapshot

This month-end share class summary is a companion insight to Travis Lundy‘s 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 various share classifications around the region, and comprises four sets of data:

1.  82 ADRs 
2.  104 Korean Prefs 
3.  22 Regional Dual Classes
4.  7 Foreign/Local Thai shares 

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

Source: CapIQ

For a granular breakdown of each data set, PDFs are attached at the bottom of this insight.

In this briefing:

1. BGH Lurks As Brookfield Firms Offer For Healthscope
2. Hyundai Heavy/DSME Event – Comprehensive Summary
3. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)
4. SCSK (9719 JP) Launches Buyout of Subsidiary JIEC
5. Toppan Printing: Money for Nothing (& Your Clicks for Free)

1. BGH Lurks As Brookfield Firms Offer For Healthscope

Healthscope Ltd (HSO AU) 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.

The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.

Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.

Brookfield’s proposals have unanimous HSO Board backing. 

The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.

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.

An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.

Currently trading tight to the Scheme consideration at $2.45/share.

2. Hyundai Heavy/DSME Event – Comprehensive Summary

• Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
• I will provide a trade approach on each name in a follow-up post.

3. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in Veriserve Corp (3724 JP).

SCSK currently holds 2,900,000 shares or 55.59% of voting rights. 

The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.

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.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments. 

4. SCSK (9719 JP) Launches Buyout of Subsidiary JIEC

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC Co Ltd (4291 JP).

SCSK currently holds 4,768,000 shares or 69.52% of voting rights. 

The Tender Offer is at ¥2,750/share which is a 39.3% premium to the last traded price of the day before the announcement (¥1,974), a 38% premium to the one-month average, and a 41% premium to the 3-month and 6-month averages.

It is being done at about 7.5x TTM EV/EBITDA.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

5. Toppan Printing: Money for Nothing (& Your Clicks for Free)

TOPPAN PRINTING (7911 JP) is Japan’s current Negative Enterprise Value ‘champion’. Although only growing in the low single digits and with margins to match, comprehensive income margins and returns are significantly higher, as they take Toppan’s significant investment portfolio gains into account. The investment portfolio 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).

MARKET MYOPIA – Despite the investment portfolio’s ¥411b contribution to Shareholder’s Equity, which has otherwise only increased by ¥98b, the stock market preferred to focus on the stagnating top-line, and the shares have been serial underperformers. Toppan’s 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.  During this period, Toppan’s equity holdings rose from 43% of the company’s market capitalisation to close to parity at the recent market peak in September 2018. 

BOTTOMING OUT – With the upcoming boost to sales in the printing business from the change in Japan’s gengō (元号) or era name on the accession of the new Emperor in April, the shares have finally broken out of a one-year period in the Oversold ‘doldrums’.

SELLING STRATEGIC INVESTMENTS – More importantly, the company has become more proactive in managing equity risk. On 23rd January, Toppan sold 10.5m shares in Recruit Holdings (6098 JP) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. Despite the boilerplate language used to describe the company’s strategy towards strategic shareholdings, Toppan has begun to address the portfolio more proactively and in accordance with the spirit of the new guidelines on Corporate Governance in Japan.

BUYBACK POTENTIAL – With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation, while the company has committed to capital expenditures totalling only ¥125b over the next five years. Toppan last conducted a modest 0.2% share buyback in 2015-Q2, which was ‘unwound’ by a 0.5% reduction in Treasury Stock in 2017-Q3, which was not accompanied by a share cancellation. With just 8% of shares outstanding held in treasury, there is ample room for further buybacks. 

In this briefing:

1. Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings
2. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender
3. Earthport the Winner as Mastercard/Visa Jostle For Position
4. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon

1. Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings

It was reported yesterday after market close that Hyundai Heavy Industries (009540 KS) (HHI) may be interesting in buying Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME). Hyundai Heavy Industries has mentioned that it is reviewing this potential merger but that nothing has been determined so far. Korea Development Bank (KDB) currently owns a 55.7% stake in DSME, which is currently worth 2.3 trillion won as of January 31st. The local media have mentioned there there could be some formal announcement of the deal on March 31st at the HHI’s board meeting. 

We have provided the five major scenarios of the potential deal structure between DSME & HHIH. While we do not rule out a potential rights offering of the common shares, we think that a greater probability is that HHIH may use a combination its treasury shares, cash, and new issue of dividend preferred stock (Scenario V) to complete this purchase of the 55.7% stake of DSME. 

What trade has the best risk/reward? At this point, it would appear that the best trade would be to go long on Samsung Heavy Industries (010140 KS). 

2. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for Ceva Logistics AG (CEVA SW).

Ceva’s Board has concluded that “the offer price of CHF 30 per CEVA share is reasonable from a financial perspective and that the Offer provides a fair exit opportunity for shareholders who wish to receive cash for their CEVA shares”.

However, CEVA Board does not recommend that shareholders tender shares in the belief that shareholders could realise a higher value with their continuing investment, due to:

• the growth potential inherent in the CEVA business.
• the effects of the acquisition of the freight management business of CMA CGM.
• the strategic partnership between CEVA and CMA CGM.

According to Ceva, “the valuation of the revised business plan indicates a midpoint value of 40 francs per share, well above the share price of 30 francs offered“.

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. It is the intention of CMA CGM to maintain CEVA’s listing. 

After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended.

Shares are currently trading (marginally) through terms.

3. Earthport the Winner as Mastercard/Visa Jostle For Position

Mastercard Inc Class A (MA US) has a made a £233mn Offer to take over cross-border payments firm Earthport plc (EPO LN), trumping Visa Inc Class A Shares (V US)‘s offer late last month by 10%.

EPO’s board has recommended Mastercard’s Offer to its shareholders. Visa’s Scheme meeting, initially scheduled for the 21 February, has been adjourned.

Mastercard’s £0.33/share offer compares to Visa’s £0.30/share tilt, and represents a 340% premium over EPO’s undisturbed price of £0.075/share.

The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  Mastercard will move to cancel the shares on AIM if it achieves 75%.

EPO’s shares increased to £0.282 following Visa’s offer, but currently trades at ~£0.37, 12% above the latest offer, suggesting a higher bid is likely, or at least expected. 

Cross-border payments are an estimated US$30tn business and both credit card giants are registering higher annual growth and billions of dollars in fees. EPO is a drop in the ocean for Mastercard (US$205bn market cap) and Visa (US$297bn).

Arguably this deal could run significantly higher – the question is how desperate these two players are towards buying now as opposed to building.

And it’s not just small transactions in the payment industry getting attention, after Fiserv Inc (FISV US)‘s announcement earlier this month it would merge with First Data Corp (FDC US) in a US$22bn transaction, and Paypal Holdings (PYPL US)‘s US$2.2bn acquisition of Sweden’s iZettle last year.

4. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon

• Common was up 4.81% yesterday. 1P went up 2.45%. The duo is now at 232% of σ. Pref discount stands at 40.32%. This is above 120D mean. This much premium on Common is the highest since October. On 120D, price ratio is above 120D mean.
• Current PER on FY19 earnings is 27x. Valuation wise, there doesn’t seem to be much room for further upside. Local sentiments on the fundamentals outlook are relatively divided. This suggests that it’d be hard to build sustainable price momentums.
• I’d trade this duo on the current divergence. Just, we are moving towards March shareholder meeting cycle. Div yield difference on Common/1P is also pretty minimal. I’d have this trade with a very short-term horizon.

In this briefing:

1. StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted
2. TPG Telecom/VHA Merger: A High Stakes Gamble to Abandon Mobile Network Rollout

1. StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

This week in StubWorld …

• Saudi Arabian Oil Co’s 19.9% stake in Hyundai Oilfield spotlights Hyundai Heavy Industries Holdings (267250 KS)‘s deep discount to NAV.
• United Co Rusal (486 HK)‘s discount to NAV narrows after sanctions are lifted, but remains well off its pre-sanctions level.

Preceding my comments on HHI and Rusal 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 as a % – of at least 20%.

2. TPG Telecom/VHA Merger: A High Stakes Gamble to Abandon Mobile Network Rollout

On Tuesday, TPG Telecom Ltd (TPM AU) surprisingly cancelled plans to roll out its mobile network in Australia, blaming the government’s ban on using Huawei Technology (40978Z CH) for 5G equipment for its decision. The market seems to be undecided if TPG’s decision will lead to Australian Competition and Consumer Commission (ACCC) approving the TPG/VHA merger as TPG shares rose 3%, but Hutchison Telecomm (Aust) (HTA AU) (50% owner of VHA) shares declined 4%.

In this briefing:

1. Hyosung Holdings: Current Status & Trade Approach
2. Last Week in Event SPACE: Xiaomi, NTT, Capitaland, Panalpina, Celgene/Bristol Myers, Amorepacific

1. Hyosung Holdings: Current Status & Trade Approach

• Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
• Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
• I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.

2. Last Week in Event SPACE: Xiaomi, NTT, Capitaland, Panalpina, Celgene/Bristol Myers, Amorepacific

Last Week in Event SPACE …

• Do not buy Xiaomi Corp (1810 HK) as there is a LOT of overhang still to come. 
• Indications are a total of ¥550-650bn of buybacks in NTT (Nippon Telegraph & Telephone) (9432 JP) over the next two years, and ¥300-400bn in buybacks from NTT Docomo Inc (9437 JP) in perhaps a slightly shorter period. But the timing is tough to bet on. 
• The Capitaland Ltd (CAPL SP)/ASB deal creates Asia’s largest diversified real estate group.
• The play here is to expect a better bid for Panalpina Welttransport (PWTN SW).

• In an industry that has had more than its share of broken deals, ugly headline risk, political noise and activists, the Bristol Myers Squibb Co (BMY US) and Celgene Corp (CELG US) deal looks attractive.

• The timing looks ripe for an Amorepacific Corp (090430 KS) set-up.

• Plus CCASS 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)

Xiaomi Corp (1810 HK) (Mkt Cap: $30bn; Liquidity: $79mn)

After 6.5bn+ shares came off lockup last week (by Travis Lundy’s estimate), Xiaomi made a placement equal to about 1% of shares outstanding at a sharp discount to the close. This follows a block of 120mm shares last Thursday at HK$8.80 (at a 13+% discount); Apoletto reported a distribution (sale) of 594+mm shares on January 9th to reduce their total position across all funds from 9.25% to 4.99%; and there was a block placement launched earlier in the week for 231mm shares for sale between HK$9.28 and HK$9.60.

• While as much as 1bn shares may have already transacted (assuming most of the 594mm shares distributed by Apoletto have been sold in the market), there were ~6.5 billion shares which could be sold and an additional 1bn+ of additional conversions designed to be sold.
• In another 6 months, there will be another 4bn+ shares which come off LockUp.  In total, that is up to 10-11bn shares coming off lockup between a week ago and 6 months from now. That is four times the total IPO size, and 70-80% of the total position coming off lock-up has an average in-price of HK$2.00 or less. Apoletto’s average in-price was HK$9.72. 
• Travis is also skeptical that the company’s capital deserves a premium to peers, and is not entirely convinced that the pre-IPO profit forecasts are going to be met in the medium-term. In the meantime, a lot of the current capital structure base is looking to get out.
• Nota Bene: Bloomberg’s 3bn-shares-to-come-off-lockup number was confirmed by Travis (the day he published the piece linked below) with the people who tallied the info for the CACS function. They had neglected to count a certain group of shareholders. The actual number will be well north of 6 billion shares. 

(link to Travis’ insight: Early Investors Say “Xiaomi The Money” Post LockUp Expiry)

NTT (Nippon Telegraph & Telephone) (9432 JP) (Mkt Cap: $80bn; Liquidity: $185mn)

After the close of trading on the 15 January,  NTT announced it had repurchased 3.395mm shares for ¥15.349bn in the first 7 trading days of the month, purchasing 10.9% of the volume traded. This announcement was bang in line with Travis’ insight the prior day, where he anticipated the buybacks would soon be done.

• The push to buy shares on-market at NTT vs off-market at NTT Docomo has had some effect but not a huge effect. The NTT/Docomo price ratio is a bit more than 5% off its late October 2018 lows prior to the “Docomo Shock”, but the ratio is off highs. Off the lows, the Stub Trade has done really well. 

• NTT DoCoMo bought back ¥600bn of shares from NTT at the end of 2018. That means NTT DoCoMo could buy back perhaps ¥300-400bn of shares from the market over the next year or so before ‘feeling the need’ to buy back shares from NTT again. NTT will likely buy back at least ¥160bn of NTT shares from the government in FY19 starting April 1st, which means there will be room to buy back another ¥100bn from the government before not having any more room to do so.

• There could be an NTT buyback from the market in FY2019, and one should expect that for the company to buy back shares from the government again, if NTT follows the pattern shown to date, there should be another ¥400-500bn of buybacks from the market over the next two years, and if EPS threatens a further fall on NTT DoCoMo earnings weakness, NTT might boost the buyback to make up for that. 

• The very large sale by NTT of NTT Docomo shares this past December will free up a significant amount of Distributable Capital Surplus.
• On a three-year basis, Travis would rather own NTT than NTT Docomo. But he expects the drift on the ratio will not be overwhelming unless NTT does “something significant”.

(link to Travis’ insight: NTT Buyback Almost Done)  

Capitaland Ltd (CAPL SP) (Mkt Cap: $10.4bn; Liquidity: $16mn)

Singaporean real-estate group Capitaland has entered into a SPA to buy Ascendas-Singbridge (ASB) from its controlling shareholder, Temasek. The proposed acquisition values ASB at an enterprise value of S$10.9bn and equity value of S$6.0bn. Capitaland will fund the acquisition through 50% cash and 50% in shares (862.3mn shares @$3.25/share – ~17% dilution). Capitaland-ASB will have a pro-forma AUM of S$116bn, making it the largest real estate investment manager in Asia and the ninth largest global real estate manager.

(link to Arun George’s insight: Capitaland (CAPL SP): Transformational Acquisition at a Premium)

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

Hitachi Ltd (6501 JP) announced it had received approvals from the relevant government authorities, and its Tender Offer for Yungtay (at TWD 60/share) has now launched.  The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference between the offer details as discussed in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) back in October, is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).

• This deal looks pretty straightforward, but the stock has been trading reasonably tight to terms, with annualized spreads on a reasonable expectation of closing date in the 3.5-4.5% annualized range for a decent part of December, rising into early January before seeing a jump in price and drop in annualized on the second trading day of the year. This shows some expectation of a fight and a bump. 
• To avoid that fight and bump – the Baojia Group, which supported Hsu Tso-Ming’s board revolt last summer (discussed in the previous insight), has reportedly accumulated a 10% stake –  Hitachi has lowered its minimum threshold to complete the deal to get to one-third plus a share. Given that it controls 11.7% itself as the largest shareholder, and has another 4.3% from the chairman in the bag, that means it needs about 17.3% of the remaining 84% to be successful. 
• Because the minimum is only about 21% of the float, this deal has quite decent odds of getting up unless someone makes a more serious run for it.  As an arb, Travis sees a small chance of a bump because of some potential harassment value by Hsu Tso-Ming’s friends at Baojia Group. Hitachi has already taken that into account with the lowering of the minimum, but it is possible that enough noise can be created to obtain a bump. 

(link to Travis’ insight: Hitachi Tender for Yungtay Engineering Launches) 

Courts Asia Ltd (COURTS SP) (Mkt Cap: $58mn; Liquidity: $0.02mn)

Courts, a leading electrical, consumer electronics and furniture retailer predominantly in Singapore and Malaysia, has announced a voluntary conditional offer from Japanese big box electronics retailer Nojima Corp (7419 JP) at $0.205/share, a 34.9% premium to the last closing price. The key condition to the Offer is the valid acceptances of 50% of shares out. Singapore Retail Group, with 73.8%, has given an irrevocable to tender. Once tendered, this offer will become unconditional. The question is whether minorities should hold on. 

• Barings/Topaz-controlled Singapore Retail Group are exiting, having not altered their shareholding since CAL’s 2012 listing. If Nojima receives acceptances from 90% of shareholders, it will move to compulsory delisting of the shares. If the Offer closes with Nojima holding >75% of shares, it could still launch an exit/delisting offer pursuant to Rule 1307 and Rule 1308.
• Long-suffering shareholders may wish to hold on for a potential turnaround should Nojima extract expected synergies.  But this looks like a decent opportunity (of sorts) to also exit along with the controlling shareholder.

(link to my insight: Courts Asia To Be Taken Over By Nojima)

Navitas Ltd (NVT AU) (Mkt Cap: $1.4bn; Liquidity: $3mn)

The board of Navitas, a global education provider, has unanimously backed a revised bid by 18.4% shareholder BGH Consortium of A$5.825/share, 6% higher than its previous rejected offer and a 34% premium to undisturbed price.

• The revised proposal drops the “lock out” conditions attached to BGH Consortium’s previous offer, enabling BGH to support a superior proposal. BGH has also been granted an exclusivity period until the 18 Feb.

(link to Arun George‘s insight: Navitas (NVT AU): A Bid Priced to Go with a Reasonable Chance of a Competing Bid)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $4.2bn; Liquidity: $13mn)

Panalpina Welttransport announced that it had received an unsolicited, non-binding proposal from DSV A/S (DSV DC) to acquire the company at a price of CHF 170 per share, consisting of 1.58 DSV shares and CHF 55 in cash for each Panalpina share.  The offer comes at a premium of 24% to Panalpina’s closing share price of CHF 137.5 as of 11 January 2019 and 31% to the 60-day VWAP of CHF 129.5 as of 11 January 2019. Following the announcement, Panalpina’s shares surged above the terms of the offer implying that the market was anticipating a higher bid from DSV or one of its competitors. 

• Investors lashed out at Panalpina’s board last year (after years of griping by some of the top holders), eventually forcing the main shareholder to support the installation of a new chairman of the board.
• The stock is clearly in play. And the sector is seeing ongoing consolidation. DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’s Ceva Logistics AG (CEVA SW). Media reports suggested Switzerland’s Kuehne & Nagel are also rumoured to be considering an offer for Panalpina.
• Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46%. If EGS wants to see OPMs up at global standards level – in the area of DSV and KNIN – then they may need to see someone else manage the assets.  If EGS is steadfastly against Panalpina losing its independence, a deal will not get done. That said, if a deal does not get done because the board reflects the interest of EGS, that proves the board is not as independent as previously claimed.  But one must imagine there is a right price for everything.

(link to Travis’ insight: Beleaguered Panalpina Gets An Unsolicited Takeover Offer) 

Celgene Corp (CELG US) (Mkt Cap: $60bn; Liquidity: $743mn)

Earlier this month, Bristol Myers Squibb Co (BMY US) and Celgene announced a definitive agreement for BMY to acquire Celgene in a $74bn cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR. The CVR has a binary outcome: it will either be worth zero or will be worth a $9 cash payment upon the FDA approval of three drugs.

• While there don’t appear to be any major problems in commercial products, it remains to be seen whether the antitrust authorities go further into the pipeline to determine whether potential competition from drugs still in clinical trials could present issues in the future.
• Overall, the merger agreement appears fairly standard, but it does (also) require BMY shareholder approval which typically overlays a higher risk premium. For John DeMasi, the attraction for this arb is the current risk/reward.
• ANTYA Investments Inc. chimes in on the deal and considers it unlikely that a suitor for CELG emerges at a higher price, whereas rumours of suitors for BMY abound, and would therefore make a long bet on BMY.

links to
John’s insight: Celgene Acquisition by Bristol-Myers Squibb: A Call to Arbs
Antya’s insight: Celgene and Bristol-Myers Squibb – Undervalued and Underappreciated

Ck Infrastructure Holdings (1038 HK)/Power Assets Holdings (6 HK)

On the 10 January, PAH announced CKI had entered into a placing agreement to sell 43.8mn shares (2.05% of shares out) at HK$52.93/share (a 4.7% discount to last close), reducing CKI’s holding in PAH to 35.96%. This is CKI’s first stake sale in PAH since the 2015 restructuring of the Li Ka Shing group of companies, and it has been over three years since the CKI/PAH scheme merger was blocked by minority shareholders.  It is also around two months since FIRB blocked CKI/PAH/CKA/CKHH in its scheme offer for APA Group (APA AU).

• I don’t see a sale of PAH as being a realistic outcome – this is more likely an opportunity to take some money (the placement is just US$328mn) off the table. CKI remains intertwined with PAH via their utility JVs in Australia, Europe and UK, and in most investments, together they have absolute control. 
• I would also not discount a merger re-load. The pushback in 2015 was that the (revised) merger ratio of 1.066x (PAH/CKI) was too low and took advantage of CKI’s outperformance prior to the announcement. That ratio is now around 0.9x. A relaunched deal at ~1x would probably get up – the average since the deal-break is 1.02x and the 12-month average is 0.95x. And a merger ratio at these levels would ensure Ck Hutchison Holdings (1 HK)‘s holding into the merged entity would be <50%, so it would not be required to consolidate.  This recent sell-down does not, however, elevate the near-term chances of a renewed merger.

(link to my insight: StubWorld: CK Infra/Power Assets, Amorepacific, JCNC) 

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

Following Curtis Lehnert‘s (TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity) and Sanghyun Park‘s (Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific) insights, I analysed Amorepacific’s stub earnings over the past 6 years to see if there was any viable/usable correlation in the implied stub. 

Source: CapIQ

• The takeaway is that the stub is very choppy, it often (but not always) widens after the full-year results, and the highest implied stub/EBITDA occurred outside of FY16, its most profitable year. The downward trend since January last year reflects the anticipated ~17% decline in EBITDA for FY18 to ₩148bn, its lowest level in the past four years.
• Sanghyun mentioned that there are signs of improving fundamentals for local cosmetics stocks (as reflected in CapIQ) and that Holdcos have traditionally been more susceptible to fundamental changes. This should augur a shift to the upside in the implied stub.
• I see the discount to NAV at 27%, right on the 2STD line and compares to a 12-month average of 3%. This looks like an interesting set-up level. 

(link to my insight: StubWorld: CK Infra/Power Assets, Amorepacific, JCNC) 

Briefly …

Sanghyun recommends a long Holdco and go short Sub for Hankook Tire Worldwide (000240 KS). By my calcs – I don’t use a 20MDA – the current discount to NAV is 40% against a one-year average of 38.5%, with a 32%-43% band. My implied stub trades above the one-year average.
(link to Sanghyun’s insight: Hankook Tire Worldwide Stub Trade: Another Quick Mean Reversion The Other Way Around)

• The Offer for Selangor Properties (SPR MK) has been bumped again, to RM6.30 from RM6.00. The original Offer was pitched at RM5.70/share.  This latest proposal is a 55% premium to the undisturbed price and 10% above the initial bid. This is starting to look reasonable, at 0.89x P/B. On balance, this will probably now get up. (link to my earlier insight: Selangor Props – Privatisation Offer Does Not Reflect Full Value) 

• New Sports Group (299 HK) is suspended pending the release of info pursuant to the Code. New Sports forms part of the Huarong-CMB network, according to David Webb.

In a similar vein, LEAP Holdings Group Ltd (1499 HK) is potentially subject to a takeover. Leap is part of Webb”s Enigma Network.

• Yugang International (613 HK) is suspended pursuant to the Takeovers Code.

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.   

• Source: HKEx

In this briefing:

1. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch
2. Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call
3. GER Upcoming EVENTS and Earnings Calendar
4. Bristol Myers Squib – Reaffirming Its View on Celgene Corp
5. KDDI Deal for Kabu.com (8703 JP) Coming?

1. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch

Last Week in Event SPACE …

• The eventual unwind of tension may involve an increase in Nissan Motor (7201 JP)‘s stake in Renault SA (RNO FP) and a decrease in Renault’s stake in Nissan.
• After being in the works for two years (or more), a Mitsubishi UFJ Financial (8306 JP) / Bank Danamon Indonesia Tbk (BDMN IJ) deal has finally come to fruition. 
• Where there is smoke there is often fire. This smells like smoke in the rumoured negotiations between KDDI Corp (9433 JP) and Kabu.Com Securities (8703 JP).
• Bristol Myers Squibb Co (BMY US) talk up the Celgene Corp (CELG US) deal, but remain tight-lipped on regulatory filings. 

• Intouch Holdings (INTUCH TB) pops on rumours of a government-backed takeover of Thaicom Pcl (THCOM TB).

• 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)

Bank Danamon Indonesia (BDMN IJ) (Mkt Cap: $6.2bn; Liquidity: $3.1mn)

In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in BDMN, five years after DBS’ aborted attempt to obtain a majority in the same bank. Mid-week, local papers announced the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019.

• It looks like this is almost completely bedded down. MUFG has a good relationship with Indonesian regulators and it would not have arrived at this Step 3 without pretty clear pre-approval indicated. 
• The result is an effective Tender Offer Trade at IDR 9,590/share for the float of BDMN. With shares up 8% the day of the announcement, there was another 6+% left for payment in three months and a week which comes out to 25.4% annualized in IDR terms through the close. Travis thought this is an excellent return for the risk here.
• Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. The upshot is that if you tender, you will get the Tender Offer consideration. And if EVERY public shareholder tenders, MUFG will have to conduct a selldown of 7.5% within a very short period, and a selldown of 20% within 2 years or up to 5 years (a virtual IPO when it comes), in order to meet the free float requirements.

(link to Travis Lundy‘s insight: BDMN/BBNP Merger Leads to BDMN Buyout Arb)  

Propertylink Group (PLG AU) (Mkt Cap: $497mn; Liquidity: $2.3mn)

ESR has now declared its Offer for Propertylink “to be best and final“, and the Offer has been extended until the 28 February (unless further extended).  After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash. The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG,  together with unanimous PLG board support.

• The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) its 19.5% stake in PLG. 
• Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“. 
• Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Currently trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.

(link to my insight: Propertylink – CNI Shareholders To Vote On ESR’s Final Offer)  

 Shinmaywa Industries (7224 JP) (Mkt Cap: $1.2bn; Liquidity: $0.5mn) 

The company announced a Tender Offer to buy back 26.666mm of its own shares at a roughly 10.5% premium to last trade.  That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding.  Shinmaywa prepared this well because they rearranged their holding grouping to be all held under corporate entities (in many situations, they hold under personal names). For some of us, that should have been a clue.

• The main purpose of this effort is to get rid of Murakami-san, but Travis’ back of the napkin suggests just a 25% gain for Murakami, which is small beer for an investor bullish on the company’s prospects. 
• The outright long prospects do not impress.  There are a lot of companies in the market with 3+% dividend rates and low PERs which are illiquid. The company will go into a net debt situation. That will likely cap future buybacks to the limit of spending this year’s net income. That would be big, but Travis expects with a high dividend, buybacks will be less likely. 
• Overall the business is OK, but it is unlikely to grow dramatically enough to warrant an ROE and margins which would make a price of 1.3-1.5x book appropriate in the near-term.  Travis expects the tender offer to go through, and expects the price to be a bit “sticky” at this level near-term.

(link to Travis’ insight: Shinmaywa Own Share Tender Offer at Premium)

New Sports Group (299 HK) (Mkt Cap: $233mn; Liquidity: $0.5mn)

Huarong-CMB network [HCN] play New Sports announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close. The Offeror (China Goldjoy (1282 HK) – another HCN play) has entered into an SPA to acquire 37.18% of shares out. Upon successful completion of the SPA, Goldjoy will hold 66.44% and be required to make an unconditional general offer for all remaining shares.

• The key condition to the SPA is Goldjoy’s shareholder approval. This should be a simple majority and the major shareholder, Yao Jianhui, has 41.9% in Goldjoy according to HKEx and page 23 of the Offer announcement.
• Despite the potential issues faced by New Sports, this is a very real deal, with financing in place for the cash option.

(link to my insight: Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar)  

Kabu.Com Securities (8703 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

The Nikkei surprised everyone with an article saying KDDI Corp (9433 JP) was holding negotiations to acquire a stake of up to just under 50% in Kabu.com, which is the online brokerage entity of Mitsubishi UFJ Financial Group (8306 JP) with 1.1mn customers. 

• The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” KDDI needs non-telecom revenue channels.  KDDI has a bank, and life insurance, and some investment in asset management channels. It needs more, and better. A broker with a bank attached is a pretty good way to get long-term investment and savings products to customers.
• Kabu.com is not the best one out there in terms of bang for buck. But KDDI already has a JV with kabu.com majority shareholder MUFG and another with kabu.com. If you could buy an online broker, you might choose to buy Rakuten or SBI, but you can’t. You have to buy the rest of the company with them.
• Kabu.com shares were bid limit up all day long after the Nikkei article and closed at ¥462, which is a 10+ year closing high.  You have to believe that KDDI is willing to pay a knock-out price to get this trade done. They may, but that is the bet. But Travis sees no impediment to the deal getting done.

(link to Travis’ insight: KDDI Deal for Kabu.com (8703 JP) Coming?)  

Kosaido Co Ltd (7868 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

Printing and HR services company and funeral parlor operator Kosaido announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement. 

• While the pretense will be that the deal is designed to grow the funeral parlor business (which, given the demographics, should be a decent business over time), 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.

• It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, Travis expect this gets done. 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.

• This is a small deal. It is meaningless in the grand scheme of things. But it is a deal which should not have been done at this price because better governance would have meant the stock traded at better than 0.4x book before the announcement. 

(link to Travis’ insight: Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?)  

Celgene Corp (CELG US) (Mkt Cap: $60.5bn; Liquidity: $762mn)

Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumour mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene acquisition provided further assurance of BMY’s commitment to the deal.

• There was, however, no discussion, in the prepared remarks or the Q&A, of the status of antitrust filings (nor was the question asked in the Q&A). The U.S. Hart-Scott-Rodino antitrust filing should have been made with the FTC/DoJ by January 16^th, 2019 according to the terms of the merger agreement, although this has not been publicly confirmed. The EU Competition web site does not show a competition filing having been made, and I would not have expected one so soon after the announcement of the deal.
• Closing prices equate to annualised rates of return of ~20% / ~26.5%, respectively, by John DeMasi‘s calcs, which is very attractive.

links to
John’s insight: Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call)
ANTYA Investments Inc‘s insight: Bristol Myers Squib – Reaffirming Its View on Celgene Corp 

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Travis succinctly summarised the ongoing saga of governance and control that is the Renault/Nissan Alliance and speculates on the next chapter.

• Carlos Ghosn is likely in more trouble. The release last Friday by Nissan and Mitsubishi makes clear that Ghosn effectively signed contracts to pay himself a very large sum of money from the funds of the Nissan-Mitsubishi Alliance treasury in ways which contravened the rules established for that Joint Venture.
• The other news was that French visitors to Tokyo allegedly informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently, the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. This is, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement.
• Nissan CAN react to any Renault breach of Nissan’s governance by purchasing shares to render Renault’s shares voteless. It can, for example, purchase economic exposure to Renault shares in the form of a cash-settled derivative, where it had neither voting rights nor the access to obtain them. It can do so quickly enough to react to anything that Renault can do by surprise, but it would be a clear breach of the Alliance Agreement to do so quickly.
• Travis reckons Renault and Nissan will not deliberately blow up their Alliance – they will work through their issues slowly and painfully. This will cause uncertainty among investors. IF the two companies ever sort out their relationship and decide to merge, the combined entity is cheap. Very cheap. If they blow up their Alliance, they are both going to turn out to be expensive.

(link to Travis’ insight: Nissan/Renault: French State Intervention Continues)  

TOC Co Ltd (8841 JP) (Mkt Cap: $778mn; Liquidity: $1.3mn)

Earlier this week, TOC announced a ToSTNeT-3 Buyback, to buy up to 4.6mn shares or 4.49% of shares outstanding at ¥778/share. With this latest buyback, TOC has bought back 30% of shares outstanding in the past 14 months after selling a large asset before that. This has resulted in 49.5% of the votes held by the Ohtani family and their namesake companies, another 30% will be held by cross-holders who are loyal to the family, about 8-9% of the company will be owned by passive investors, and 11-13% of shares will be held by everyone else. 

• The company’s largest and most famous asset is a near-50-year-old building. There have been suggestions of redevelopment (discussed in more depth here).  The two family members controlling almost 50% of the shares (plus the New Otani Company parent) are 72 and 66yrs old respectively. A 10-year redevelopment project might outlast them. The project might be better off in other hands. 
• The company has very long-held real estate assets – some of which are fully-depreciated and have very low land price book values. The share price is trading below Tangible Book Value. The shares trade at roughly 8x EBIT, which is very inexpensive for deeply undervalued and still earning real estate assets.
• The stock is illiquid, trading US$1.25mm/day on a three-month average, and sometimes a lot less, but there is considerable asset backing to these shares. Travis would want to be long here. 

(link to Travis’ insight: Another Semi-BIGLY Buyback at TOC: STILL an MBO Candidate)  

Intouch Holdings (INTUCH TB) / Advanced Info Service (ADVANC TB)

Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gained ~10% earlier in the week in response to rumours of a government takeout of Thaicom. I estimate the discount to NAV at ~23%, versus an average of 28%, around its narrowest inside a year. The implied stub is at its narrowest inside a year. It was a decent move, translating to a Bt15.2bn lift in Intouch’s market cap, ~4.5x the value of the holding in Thaicom. That alone would suggest Intouch had been overbought. 

• That the Thai State-run CAT Telecom may take over Thaicom has a ring of truth to it. The military/government uses Thaicom, the only satellite operator in Thailand, and perhaps it is not (finally) comfortable with Singapore’s indirect interest in Thaicom via Singtel (ST SP)‘s stake in Intouch. It is an election year.

• The rumoured price tag is Bt8.50/share or ~28% premium to the undisturbed price. Even a takeover premium north of 50% has no material impact on Intouch, as Thaicom accounts for 2% of NAV/GAV. However, selling Thaicom will further clean up what is already a very straightforward single-stock Holdco structure. 

• Optically Intouch has run its course in response to these Thaicom rumours – Intouch has denied any definitive approach/agreement – however, if a sale unfolds, this may help nudge the discount marginally lower from here.

• Should CAT buy out Intouch’s stake, would it be required to make an Offer for all remaining shares? As the stake is above one of the key thresholds, (that is, 25%, 50% or 75% of its the total voting rights) it would be required to conduct a mandatory tender offer. But CAT may be afforded a partial offer, if Thaicom shareholders approve.

(link to my insight: StubWorld: Intouch Gains On Possible Sale of Thaicom)  

Briefly …

Sanghyun Park recommended an Orion Holdings (001800 KS) unwind trade after Orion Corp (271560 KS)‘s mid-week underperformance. By my calcs, Orin is trading at a 49% discount to NAV against a one year average of 48%.
(link to Sanghyun’s insight: Orion Holdco Trade: Current Status & Trade Approach)  

Samsung Electronics (005930 KS)

With SamE’s1P discount to Common at 16.61%, the lowest since mid-November last year, Sanghyun recommends to go long Common and short 1P with a short term horizon.

(link to Sanghyun’s insight: Samsung Electronics Share Class: Close Prev Position & Initiate New One Reversely)  

• LEAP Holdings Group Ltd (1499 HK) announced an MGO at $0.1585/share vs. the last close of $0.39, but above Anthony Wong’s (the seller) in-price of $0.1236/share. Like Wong, this new Offeror has no experience in LEAP’s business. The Offeror is primarily a vehicle owned by Xu Mingxing, who has experience in blockchain technology. However, a more detailed overview of the Offeror can be found on page 14 of the HKEx link, which provides details of no less than 15 individuals with stakes into the Offeror.

• M1 Ltd (M1 SP)‘s deal price now declared FINAL. Closing extended by two weeks to February 18th.
• The major shareholder of Qianhai Health Holdings (911 HK) has entered into a SPA, the completion of which would trigger a mandatory conditional offer at HK$0.25/share, a 0.3% premium to last close.
• Xingfa Aluminium (98 HK) is currently suspended pursuant to the Code. China Lesso Group Holdings (2128 HK), the second largest shareholder, acquired its shares in April last year. Xingfa was also subject to a (failed) scheme in 2017. 

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.   

• Source: HKEx

2. Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call

Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumor mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene Corp (CELG US) acquisition provided further assurance of BMY’s commitment to the deal.

3. GER Upcoming EVENTS and Earnings Calendar

Next week promises to be a large catalyst driven week, with Apple Inc (AAPL US), NTT Docomo Inc (9437 JP) and Tesla Motors (TSLA US) expected to report results, among others. We have provided a list below of the key equity catalysts for next week as well as potential drivers for M&A deals and stubs. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

4. Bristol Myers Squib – Reaffirming Its View on Celgene Corp

The management of Bristol Myers Squibb Co (BMY US) reiterated its optimistic view regarding the acquisition of Celgene Corp (CELG US) on its Q4-18 earnings conference call today. Unlike most acquisitions that succeed based on cost cuts or revenue synergies, Celgene’s distressed valuation allowed BMY to swoop in and buy a leading bio-tech at a bargain price: if the pipeline succeeds. We are betting it will. If not, the robust cash flows from Revlimid make it a low-risk , low-return deal.  

5. KDDI Deal for Kabu.com (8703 JP) Coming?

Yesterday morning, the Nikkei surprised everyone with an article saying KDDI Corp (9433 JP) was holding negotiations to acquire a stake of up to just under 50% in Kabu.Com Securities (8703 JP), which is the online brokerage entity of Mitsubishi UFJ Financial Group (8306 JP) with 1.1 million customers. 

Kabu.com shares were bid limit up all day long and closed at ¥462, which is a 10+ year closing high. 

The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” 

KDDI already has an investment in an online banking 50/50 joint venture with MUFG called Jibun Bank (“My Bank” or “Myself Bank”) which it launched in 2008. KDDI established a smartphone-based asset management service with Daiwa Securities Group (8601 JP) just under a year ago, where KDDI owns 66.6% and Daiwa 33.4%. This was to attract younger customers to savings products accessible through an app in order to make those customers stickier over the long-term. KDDI also bought into Lifenet Insurance Co (7157 JP) in 2015 through a capital raise, and is now its largest shareholder at just over 25% (a decent (and recent) presentation of the company is here). About six months ago, KDDI injected ¥6bn (link is Japanese) into Japanese financial services company Finatext to help spark their new service of a ¥0 commission brokerage. I would note that Finatext and partner (now sub) NOWCAST launched an algorithmic personal asset management advisory service using for kabu.com Securities in 2016. 

Owning a stake in a broker would go a long ways towards providing comprehensive financial services access by smartphone under a KDDI-owned profit umbrella.

Is a deal like this feasible? Reasonable? Likely?

The two companies’ first response was pretty standard. This was the version from KDDI:

• 当社は、カブドットコム証券と金融事業においてさまざまな可能性を検討していますが、決まった事柄 はございません. 
• KDDI is considering various possibilities in financial business with kabu.com Securities, however, there is no determined facts. [a better translation of the Japanese is “however… no decisions have been made”]

This is pretty standard in Japanese corporate “clarifications.” There are, in fact, no ‘decisions’ unless a board meeting has been convened and put their stamp on it.

But the Japanese market will look at a comment like this and figure that where there is smoke there is fire.

In this briefing:

1. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
2. TPG Telecom/VHA Merger: Risk-Reward Is Skewed Towards the Downside
3. List of 23 Tradable Prefs in Korea: Samsung E-M & CJ CheilJedang Currently Catch the Eye
4. Pioneer Shareholders Approve Deal
5. 31 January TOPIX & JPX Nikkei 400 Major Index Changes

1. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal

• Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
• At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
• Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.

2. TPG Telecom/VHA Merger: Risk-Reward Is Skewed Towards the Downside

On 30 August 2018, TPG Telecom Ltd (TPM AU) announced the recommended merger of equals with Vodafone Hutchison Australia (VHA). The consensus view was that the Australian Competition and Consumer Commission (ACCC) would approve the merger before the release of ACCC’s statement of issues. However, recent events suggest that regulatory approval from the ACCC is far from a sure thing.

3. List of 23 Tradable Prefs in Korea: Samsung E-M & CJ CheilJedang Currently Catch the Eye

• This is the list of the realistically tradable prefs in Korea. Korea has a total 116 perfs. I filtered them by > ₩100bil market cap and > ₩0.2bil DTV. This filtering gives a total 23 pairs for share class trade. It is generally shown that dividend yield difference and liquidity affect pref discount. The higher div yield difference and the higher liquidity are, the less pref discount is.
• Two names are currently catching my eye. Samsung E-M had a major recovery move last Friday mainly on bargain hunting. The duo made +2σ jump in one single day. Common/pref price ratio is now at 142% of σ.  This much premium for Common is something we haven’t seen in nearly 6 months. The recent price rally should be more of a sentimental boost. Short-term correction should be expected.
• CJ CheilJedang is also an interesting one here. The duo made -1.3σ jump last Friday. They are now at -185% of σ. Common/pref price ratio is currently close to 120D low on a 20D MA. The shares have been drifting sideways for almost a year now. There is no signal indicating any distinct trend that will break this sideways drift. This duo is also expected to see a quick mean reversion.

4. Pioneer Shareholders Approve Deal

On Friday 25 January 2019, shareholders of Pioneer Corp (6773 JP) voted to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts. 

In September, Pioneer and BPAE signed a memorandum of understanding whereby Baring Private Equity Asia would lend money to Pioneer and subsequently inject equity capital and keep the company listed. In December, BPAE and Pioneer management decided that the equity injection would push out then-existing shareholders at a steep discount to the lowest share price the stock had theretofore seen in the company’s 50-year-plus history of being listed.

Now that’s done. 

The situation now looks quite a bit like a regular “risk arb” or “wind up” situation, though investors do not have exact understanding of the payment date.

What comes next is outlined below.

5. 31 January TOPIX & JPX Nikkei 400 Major Index Changes

On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction. 

The two companies were LIFULL (2120 JP) and Takeda Pharmaceutical (4502 JP).

The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact. 

The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January. 

Wednesday is going to be a big day.

If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.