A dismal 2018 for the pharmaceutical and bio-tech stocks seems far in the rear view mirror. 2019 began with a bang with two blockbuster deals in the pharmaceutical space within days. In this note, we discuss Bristol Myers Squibb’s Co (BMY US) acquisition of Celgene Corp (CELG US) and outline our view that investors should go long BMY.
Hankook Tire Worldwide (000240 KS) is again in an interesting position. Its sub, Hankook Tire (161390 KS), is up 2.2% today, putting the duo at -2.2σ. Sub had lost nearly 10% on Jan 2~10 mainly on weakening outlook. Sub has then fully recovered this 10% loss this week. This is putting Holdco at a severely undervalued position on a 20D MA. Holdco discount is now at 41% to NAV.
I initiated a reverse stub trade on this duo on Jan 8. It started at a 0.44953 price ratio. We are now at 0.38882. We would have enjoyed 15% tasteful yield if we had held onto this position up to this day. We have no apparent signal of improving fundamentals on Sub. It appears that Sub’s recent gain should be the work of bargain hunters. Holdco discount is at the local peer average. Price ratio is at yearly mean.
Importantly, this is the first time that price ratio is hitting below -2σ since late September last year. We should expect another quick mean reversion at this level. Just, this time it will be the other way. I’d go long Holdco and go short Sub now.
After investors lashed out at Panalpina Welttransport Holding (PWTN SW)‘s board late last year (after years of griping by some of the top holders), forcing the main shareholder to support the installation of a new chairman of the board, management may have thought they had some breathing room.
On January 16th 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.
DSV claimed in its announcement that the “combination of DSV and Panalpina would create a leading global transport and logistics company with significant growth opportunities and potential for value creation” and that the structure of the offer will allow Panalpina’s shareholders to participate in the benefits of the combination.”
They also stated that “the combined business would generate expected revenues of more than DKK 110bn and EBITDA of more than DKK 7bn on a pro-forma 2018 basis (excluding any synergy benefits).”
DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’s Ceva Logistics AG (CEVA SW). Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.
Media reports suggested that Switzerland’s Kuehne & Nagel was also rumored to be considering an offer for Panalpina.
Panalpina’s response is “According to its fiduciary duties, the Board of Directors of Panalpina is reviewing the proposal in conjunction with its professional advisers.”
Amid Panalpina’s struggles in ocean freight, IT system delays and below-average growth, activist investor Cevian Capital, which owns 12.3% of Panalpina has publicly urged Panalpina to be open for a takeover.
Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46% and any deal will depend significantly on its approval.
Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.
This is an interesting situation. The question is whether it gets interestinger.
Hitachi Ltd (6501 JP)announced today after the close that it had received approvals from the relevant government organs for its proposed Tender Offer for Yungtay Engineering (1507 TT) and that the Tender Offer would be launched through Hitachi Elevator Taiwan Co. Ltd at TWD 60/share starting tomorrow. The statement filed by Yungtay on the TWSE website is linked here.
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 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 one detail is different from the original announcement in October, which had set a minimum of 50.1% holding after the tender.
Since the announcement of a deal at a 22% premium, the stock has risen gently from about TWD 56 to just below the TWD 60 Tender Offer price in ever-decreasing volume.
data source: investing.com, TWSE
There has been little to no news on the stock regarding the deal in English, and only limited news in Chinese since the announcement of the deal.
The price evolution makes it look like a pretty straightforward deal. The lowered threshold for success obviously increases the likelihood of success. Weaker markets may also contribute.
But there is a reason why the threshold was lowered.
Post the close of market, Softbank Group (9984 JP) announced a $750mn USD tender offer through an unmodified Dutch auction to purchase a portion of its outstanding USD and EUR senior notes. This could be an interesting deal from a timing perspective and could portend action for the equity – more details below.
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Amorepacific appears very tempting for stub trade. The Amore duo now has the widest price divergence on a 20D MA among Korea’s single-sub holdcos. But I would wait on this name. Locally, signals of improving fundamentals are being heard on the local cosmetics stocks. Holdco has traditionally been more susceptible to fundamentals changes. It is very possible that Amore duo leads to upwardly mean reversion in favor of Holdco in the short-term.
Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.
Source: Internet – Chosungah Beauty
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing.
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value.
In this insight I will detail:
an actionable market-neutral trade idea
an analysis of the various business units of Amorepacific
reasons for the under-performance of Amorepacific parent and a sign of a rebound
a recap of ALL my stub trade ideas on Smartkarma, including track record of performance
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
BGF Retail (282330 KS) was down 12% last week. BGF Co Ltd (027410 KS) was down only 4.5%. Finally, they are now above 20D MA. This happens for the first time since late Nov. But Holdco discount is still at 50%. Similarly, price ratio is still close to the yearly low.
Usually, I’d close a position when I reach ±0.5~0 σ on 20D MA. In this case, Holdco discount is too harsh to do so. Sub price/price ratio has been negatively correlated. Valuation wise, Sub price correction isn’t over yet. PER on FY19e is around 20x. This is about 7% higher than GS Retail (007070 KS) even though GS Retail EBITDA margin is slightly higher.
It also appears that sentiments on the entire retail sector won’t improve any time soon. The government is hinting a possible change on minimum wage. This is positive on Sub. But fundamentally, Korean CCSI is still on the decline. The newly implemented franchisee support measures will further worsen sentiments. I wouldn’t close this position yet.
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On January 3, 2019, Bristol Myers Squibb Co (BMY US) and Celgene Corp (CELG US) announced a definitive agreement for BMY to acquire Celgene in a $74 billion 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 logic behind the transaction is to create a biopharma powerhouse with leading franchises in oncology, immunology and inflammation (autoimmune diseases), and cardiovascular medicine. After completion, BMY will have six expected launches in the next 12-24 months representing over $15 billion in revenue potential, and an early pipeline that includes 50 high potential assets. In addition to amassing a powerhouse biopharma portfolio, the combination is expected to yield annual cost synergies of $2.5 billion by 2022.
Terms of the deal call for each CELG share to be converted into one BMY share and $50 cash, plus one tradeable CVR worth $9 if specific FDA approvals are received for three drugs by certain dates. The 1.0 BMY exchange ratio is fixed. Upon completion of the deal BMY shareholders will own about 69% of the combined company with former CELG shareholders owning the other 31%.
The deal is conditioned on approvals by both CELG and BMY shareholders as well as regulatory approvals that include the U.S. and the EU. Financing is not a condition. The companies expect the complete the deal in the third calendar quarter of 2019.
Ideally, own Bandhan Bank (BANDHAN IN) on a deal break, or wait for this deal and its spread to season a bit.
It’s still not clear that a bump or counterbid will be forthcoming in the M1 Ltd (M1 SP) deal, but at S$2.07, the risks are better than they were higher.
Healius (HLS AU) (unsurprisingly) rejects the indicative offer but Jangho is not out of the picture; nor is the possibility of a third party.
Douglas Kim revisited the news that Kim Jung-Joo wants to sell his stake in the Nexon Group. Travis Lundy also chimed in with his read of the situation. The key questions are whether Kim Jung-Ju would sell NXC (and NXMH) – which holds a 48% stake in Nexon Co – as reported by the local press, or whether NXC and NXMH would sell their stakes in Japan-listed Nexon. The implication being that if they sold the stake in Nexon, it would mean buyers would get a large stake in a single company, whereas there is a bunch of other stuff floating around in NXC and its subsidiaries.
The other question is whether Tencent Holdings (700 HK) or another buyer buying NXC would trigger a mandatory Tender Offer for the shares in Nexon in Japan. The letter of the law in the TOB Rules would indicate not, but Travis reckons Yes. If the Kim family sold their stake in NXC Corporation to a buyer, he thinks it is HIGHLY likely that the buyer would be obliged (by Japanese authorities) to conduct a tender offer for the shares of Nexon that they wanted to buy.
As a trade, this does not look like a great risk arb bet (where you make a bet that a company will get taken over) at first glance if the total trade for NXC is going to be ₩10tn. It would be a good trade if the ₩10tn number were made up of say ₩3tn of assets (in NXC), then the assumption that the current market price adding ₩7tn of assets to arrive at that total of ₩10tn would be an “estimate” of current value rather than an estimate of what it would take to get the deal done, and current market value is a significant premium to book (where NXC has heretofore reported its financials and Nexon). In that case, one might imagine that a bidding war could result in a higher price for Nexon, and an easy exit at ¥2000+/share.
Either way it would be a chunk of change which would make many buyers – even buyers from China thought to be quite wealthy – balk. A priori, Travis would want to own Nexon vs Tencent, Electronic Arts (EA US), Netease Inc (Adr) (NTES US), and others, but it is not necessarily a comfortable trade.
Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). The Close is 4 February, but the Offer is not Final.
If you think there will not be a bump and the deal may or may not go through at S$2.06, unless you are so big that your selling would dramatically impact the price, the right trade here is to sell in the market.
If you think there is a possibility of a bump as the Offeror seeks to a) get Axiata to tender and b) to get everyone else to tender so they can delist and squeeze out minorities, but if no bump there is a quasi-certainty that Konnectivity Pte will gain 50%+1 share at S$2.06, then buying at S$2.07 is not a bad trade depending on your likelihood of bump and bump price.
If Konnectivity bump, they have two choices: Bump a little bit and declare final so that everyone who played for a bump decides to sell (that might mean a bump to S$2.15 or so); or bump a lot and get Axiata out.
Travis believes a bump is certainly possible but also thinks this deal gets done if there is no bump. If Axiata countered at, say S$2.15, he would be inclined to buy at S$2.15 to expect a further counter by Konnectivity.
Bandhan Bank (BANDHAN IN)(“BBL”) and GRUH announced together on January 7th that their respective boards have considered and approved a Scheme of Amalgamation where Bandhan Bank will be the acquiring entity and GRUH Finance will become the acquired entity. At the exchange ratio of 568 Bandhan Bank shares per 1000 GRUH Finance shares, GRUH Finance’s price currently translates to a PER and PBV of 51.8x and 12.5x respectively which is significantly higher than the average for its comparable peers (PER=14.9x; PBV=2.0x).
This is a great deal forHousing Development Finance Corporation (HDFC IN)which currently owns 57.8% of GRUH Finance. It will own 15% of the merged entity. Considering HDFC Ltd already owns 19.72% as the promoter of HDFC bank and that RBI does not allow the promoter of one bank to hold more than 10% in another bank as a promoter, HDFC Ltd will have to divest a stake that is at least equivalent to 5% of the merged entity.
This deal is perhaps less good for Bandhan shareholders. GRUH is being purchased expensively, and minorities are getting hit. This is possibly so that the promoter can get closer to the obligation to the RBI to drop his stake to 40%. That ‘excuse’ is widespread in the media but may not bear up under scrutiny.
Travis thinks both names could have further to fall and sees no compelling reason to expect growth to surprise on the previously expected upside as branch openings are frozen. A deal break would not solve that, but a shareholder disentanglement on the Bandhan side would.
As widely expected, Healius’s board rejected the unsolicited and conditional proposal from Jangho Group Co Ltd A (601886 CH) at A$3.25/share.Pricing under the proposal is okay, at best, valuing Healius roughly in sync with Sonic Healthcare (SHL AU), its nearest peer. Optically, the indicative offer is underwhelming, 20% below the recent high in March last year, and below where Jangho was accumulating its stake in early 2016.
Operationally, Healius is not without issue, including increasing salaries, failure to secure key contracts, an inability to retain doctors at its medical centres, and the forced resignation of its CEO two years ago after he was charged by ASIC.
An offer from Jangho would also fall under FIRB’s remit, specifically sensitive patient data in the hands of a foreign owner, and it is up for debate whether maintaining such information in a secure site in Australia (as applied in Jangho’s acquisition of Vision Eye in 2015) will alleviate these concerns.
This deal is unlikely to get up under the current terms following the board rejection, but I do expect Jangho to bump its offer; or a third party to enter the fray. On a risk/reward basis I still tilt positive at a 18% gross spread (and up 7% from the post-rejection closing price) to the indicative offer.
For those who like plain vanilla, PCI announced Pagani Holding (an SPV indirectly owned by Platinum Equity Advisors) had made a S$1.33/share cash offer for the company by way of a scheme. Chuan Hup Holdings (CH SP), which holds 76.7% in PCI, has given an irrevocable undertaking to vote its stake in favour of the scheme resolution. So this is a done deal. The more interesting facet here is that Chuan Hup is currently trading at discount to its net cash after factoring in the proceeds from the sale of PCI shares.
As anticipated in my insight (DNO Closes In On Faroe) last week, DNO ASA (DNO NO)bumped its Offer for Faroe, which has now been declared unconditional. Tendered shares get paid in 14 days. The final closing date of the offer is the 6 February.
The 5.3% bump to GBP 1.60/share shortly followed a prior announcement from DNO which referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.
The Final Offer price represents a premium of 52.4% to Faroe‘s share price of GBP 1.05 at the close of business on 3 April 2018, and values Faroe at ~£641.7mn. Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender.
DNO now owns or has 76.49% acceptances so can now make preparations to move to delist Faroe. If total acceptances exceed 90% of the voting rights, DNO will exercise its rights to compulsorily acquire the remaining Faroe shares not tendered, also at GBP 1.60/share.
The company bought back 16% of volume in the month (in December), and 15% of rolling 4-week ADV if only the first 20 days were days on which the company bought – which based on execution prices seems likely.
Travis expects a similar rate to continue and expects the lower trading volumes seen in December to continue. The period of excitement is over until Toshiba gives people a reason to get excited.
Travis is not particularly bullish Q3 results or Q4 forecasts for the company and the stock has rebounded perhaps more than the market has off lows. With Apple Inc (AAPL US) guiding suppliers to lower iPhone production yet again, TMC could run into a soft spot.
The key stub assets include South Springs, one of the largest golf resorts in Korea, and brand royalty, each accounting for around 7-8% of NAV. The remaining, immaterial ops include an ad agency, an “Amazon Fresh”-like fresh food delivery start-up, management consulting, dividends, and rent.
This looks like a decent stub-setup, with a likelihood of the discount narrowing from here – typically, the Korean Holdcos trade within a 20-40% discount band – rather than clearing 60%. And there is no tender offer overhang in 2019. But apart from the optics, there are no obvious catalysts at the stub level for the nine-month discount-widening trend to reverse.
Kingboard, which hasn’t been in the news since it sold its 9.6% stake in Cathay Pacific Airways (293 HK) to Qatar Airways back in November 2017, is coming up “expensive” on my monitor, after KBC’s mid-week price outperformance over KBL.
The new news this week is that KBC announced it is acquiring a handful of floors of the Overseas Trust Bank Building here in Hong Kong. Pricing looks okay with reference to property sold nearby, but probably towards the high-end for mid-floor office space in Wan Chai.
This is a connected transaction as the seller of the properties is Hallgain Investments – a vehicle largely owned by senior management of KBC – which owns 39.02% of KBC. The net rental on the properties is $1.35mn or a yield of 0.15%, which hardly augurs a case to go long the stub.
I compiled a summary of the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in 2018, and analysed which sectors attracted the most interest: (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
The premium for Swire’s As over the Bs – [19 HK/(5* 87 HK)] – continues to increase and is now at its highest since October 2003.
Source: CapIQ; RHS represents HK$mn
I tackled this share class last August (Swire’s Interims and Bifurcating Dual Class) when the premium was 18%. Since September 2015, the two classes of shares can be unified leaving John Swire & Sons with 55% of the equity (& 63.7% of the vote). The pushback then, and now, is why bother? And the HKEx giving permission to Xiaomi Corp (1810 HK) to list with dual-class shares lessens the chance of such a unification.
Logically though, this premium should narrow (eventually one would expect) and investors are betting on this. The $ value traded for the Bs on Wednesday was the highest since mid-December 2017, and the third highest $ value traded in 21 years. And volume for the Bs has been increasing recently, having doubled in size in the past year compared to the 5-year average.
As an aside, Swire’s discount to NAV (adjusting for the privatisation of HAECO) is trading at it narrowest inside a year:
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.
Offer close date, (failing which) 31-Jan-2019 – Termination Date
C
Source: Company announcements. E = Smartkarma estimates; C =confirmed
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Trading around its lowest implied stub inside the past five years, improving sentiment toward cosmetic stocks should support an Amorepacific Group (002790 KS) setup.
Preceding my comments on CKI/PAH, Amorepacific and JCNC 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%.
Xiaomi Corp (1810 HK) is likely to break HK$10 this morning again after a placement equal to about 1% of shares outstanding was proposed to buyers last night at a sharp discount to the close. This insight attempts to nail down the shape and size of the ongoing overhang.
After the HK Stock Exchange announced in late April 2018 that it would permit companies with Weighted Voting Rights (WVRs) to list on the HKEx, after sticking to the one-share one-vote principle for years (losing the Alibaba Group Holding (BABA US) listing to NASDAQ in the process), Xiaomi Corp (1810 HK) quickly raised its hand with the prospect of a US$10bn IPO and a US$100bn market cap – heady numbers even for a fast-growing company. This was quickly followed by the launch of the China Depositary Receipt program which saw a quick establishment and even quicker acceptance of a Xiaomi application, potentially setting up a situation where demand was pulled from HK to China.
Then investors got cold feet, and what was a $100bn valuation dropped to $90bn then $70bn. The CSRC also pushed back on the possible CDR issuance to such an extent that Xiaomi withdrew its application, and then pricing delivered a valuation of approximately US$50bn at a sharply reduced IPO price of HK$17/share.
Day1 saw a 6% fall on the open and the shares closed down 1%. After the Day 1 close, fast-track inclusion into the Hang Seng indices was a pleasant and somewhat unexpected surprise for IPO buyers and responded by rising almost 12% on Day 2 on sharply higher volume. MSCI did not follow suit (it had not been expected) but several days later on inclusion day, the stock was 25% higher than the IPO price. 10 days later the over-allotment option had been fully-exercised.
Xiaomi last year grew its ecosystem and its hardware base, but saw lower market share in China (13%) than in 2017 (14%) according to several sources, including Counterpoint Research quoted in the media. The company, which has targeted 50% of revenue from overseas is now just shy of that mark at 44% after ramping up sales in India, Europe, and MENA.
Global weakness in handsets on mobile tech led by Apple did not spare Xiaomi, but MOST notable was the sharp drop in the share price in December from HK$14.30-50 area to just below HK$13 at year end. The first day of the new year saw the shares fall 5.5%, and the next day the price fell another 3.6%. The shares fell a little more in the next few days but somewhat stabilised until the morning of the 8th.
Then the volume picked up. The lockup had expired.
data: capitalIQ, exchange data
In five days, the shares have traded 880mm shares, and that is before a large placement proposed after the close on 15th January.
Capitaland Ltd (CAPL SP), a Singaporean real-estate group, has entered into a sale and purchase agreement to buy Ascendas-Singbridge (ASB) from its controlling shareholder, Temasek. The proposed acquisition values ASB at an enterprise value of S$10.9 billion and equity value of S$6.0 billion. Capitaland will fund the acquisition through 50% cash and 50% in shares.
While we believe that acquisition is transformative, it comes at the cost of a premium valuation. Overall, we advise investors to take a wait-and-see approach before building new positions in Capitaland.
Navitas Ltd (NVT AU), an Australian-listed education company, is subject to a revised bid. On 15 January 2019, the BGH Consortium bid against itself by offering a revised proposal of A$5.825 cash per share, 6% higher than its previous rejected offer.
Navitas’ directors intend to unanimously recommend the revised proposal and have granted the BGH Consortium an exclusivity period. We believe that a binding proposal should materialise and there is also a reasonable chance of a superior proposal from a competing bidder.
Halla has the widest gap now on a 20D MA. It is at -159% of σ. It was down 130pp yesterday alone. It is currently close to yearly mean. Poongsan is also below -1 σ, down 80pp yesterday. BGF and Nexen are above +1 σ.
Amore quickly reduced the gap yesterday. It is at 78% of σ, down 150pp. Amore Holdco stayed relatively strong yesterday. Holdco is at 78% of σ. But I wouldn’t expect a further decline. Price ratio is still close to yearly low. Holdco discount can be misleading as its two unlisted holdings are severely undervalued.
I’d trade Halla with a very short-term horizon for quick mean reversion. I wouldn’t look at long-term horizon on Halla. Single sub dependency is relatively low. Price ratio is a little above yearly mean. 46% holdco discount doesn’t seem to be particularly cheap either.
BGF, I’d continue to hold onto my long position on Holdco. I explained it in the previous BGF insight. Nexen and Poongsan, I’d wait for a bit wider divergence.
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Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. Healius just took four days to reject Jangho Group Co Ltd A (601886 CH)’s 3 January 2018 proposal of A$3.25 cash per share as it “is opportunistic and fundamentally undervalues Healius.”
We believe that rejection of Jangho’s proposal provides shareholders with option value. If Healius’ growth initiatives generate value, we believe that the shares will be worth more than Jangho’s proposal. If Healius’ growth initiatives stall and the shares slide, we believe that Jangho will once again table a proposal.
Poongsan Holdings (005810 KS) is another clear-cut target of stub trade in Korea. Poongsan Corp (103140 KS) is responsible for nearly 80% of the sub holdings. Holdco is currently at a 53% discount to NAV. Holdco discount has narrowed. But it is still substantially higher than the local average of 40%.
Sub is having a run today. It went as high as 6% today. Currently, it is up 4%. Holdco is up 2%. They are now close to -1 σ on a 20D MA. Poongsan business is highly exposed to copper price and US ammunition demand. It still appears that Poongsan is suffering from a weaker copper price and falling demand of ammunition in US.
I’d make a trade on a short-term horizon. I’d capitalize on a divergence on a 20D MA. I’d wait a bit until later today when there is a little greater price divergence on the duo. I’d make a stub trade when the price ratio on a 20D MA once again enters < -1 σ territory.
Healius (HLS AU) (until last month known as Primary Health Care Limited), a leading owner of general practice clinics and pathology centres in Australia, announced an unsolicited and conditional proposal (including DD) from Jangho Group Co Ltd A (601886 CH) at A$3.25/share (~10x FY19 EV/EBITDA) in a A$2.0bn deal. Jangho currently holds a 15.9% stake in Healius and has been on the shareholder register for two years.
The Offer price translates to a 33.2% premium to the undisturbed price but below the 12-month high of A$4.09 in March 2018. Optically and when referenced to closest peer Sonic Healthcare (SHL AU), the offer price appears light.
Reflecting the long laundry list of conditions attached to this indicative offer, such as securing debt financing and various regulatory approvals in China and Australia, notably data security, this indicative deal is trading wide at a gross/annualized spread of 25%/47%, assuming a deal completion date in early August.
This proposal does, however, indicate Healius was probably oversold.
This morning, Healius’ board rejected the proposal as it was considered opportunistic and fundamentally undervalued the company.
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Amorepacific appears very tempting for stub trade. The Amore duo now has the widest price divergence on a 20D MA among Korea’s single-sub holdcos. But I would wait on this name. Locally, signals of improving fundamentals are being heard on the local cosmetics stocks. Holdco has traditionally been more susceptible to fundamentals changes. It is very possible that Amore duo leads to upwardly mean reversion in favor of Holdco in the short-term.
Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.
Source: Internet – Chosungah Beauty
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing.
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value.
In this insight I will detail:
an actionable market-neutral trade idea
an analysis of the various business units of Amorepacific
reasons for the under-performance of Amorepacific parent and a sign of a rebound
a recap of ALL my stub trade ideas on Smartkarma, including track record of performance
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
BGF Retail (282330 KS) was down 12% last week. BGF Co Ltd (027410 KS) was down only 4.5%. Finally, they are now above 20D MA. This happens for the first time since late Nov. But Holdco discount is still at 50%. Similarly, price ratio is still close to the yearly low.
Usually, I’d close a position when I reach ±0.5~0 σ on 20D MA. In this case, Holdco discount is too harsh to do so. Sub price/price ratio has been negatively correlated. Valuation wise, Sub price correction isn’t over yet. PER on FY19e is around 20x. This is about 7% higher than GS Retail (007070 KS) even though GS Retail EBITDA margin is slightly higher.
It also appears that sentiments on the entire retail sector won’t improve any time soon. The government is hinting a possible change on minimum wage. This is positive on Sub. But fundamentally, Korean CCSI is still on the decline. The newly implemented franchisee support measures will further worsen sentiments. I wouldn’t close this position yet.
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Woori Bank (000030 KS)‘s stock purchase period ended last Friday. We will enter trade suspension starting Jan 9 and until Feb 12. Dilution is only 0.6%. But overhang would be an issue.
Local hedge fund-like institutions are shorting it mainly on overhang risk. Woori Investment Bank (010050 KS) and Woori Card moving up will worsen this overhang risk. Stock purchase is now over. The need to boost the price must have gone as well.
I’d also short Woori Bank at this point. Jan 9~Feb 12 trade suspension would be too long to go without a hedge. Industrial Bank Of Korea (024110 KS) would make a good hedge. Woori and IBK have traditionally been highly correlated. They are also seen sufficiently cointegrated.
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Healius (HLS AU) (until last month known as Primary Health Care Limited), a leading owner of general practice clinics and pathology centres in Australia, announced an unsolicited and conditional proposal (including DD) from Jangho Group Co Ltd A (601886 CH) at A$3.25/share (~10x FY19 EV/EBITDA) in a A$2.0bn deal. Jangho currently holds a 15.9% stake in Healius and has been on the shareholder register for two years.
The Offer price translates to a 33.2% premium to the undisturbed price but below the 12-month high of A$4.09 in March 2018. Optically and when referenced to closest peer Sonic Healthcare (SHL AU), the offer price appears light.
Reflecting the long laundry list of conditions attached to this indicative offer, such as securing debt financing and various regulatory approvals in China and Australia, notably data security, this indicative deal is trading wide at a gross/annualized spread of 25%/47%, assuming a deal completion date in early August.
This proposal does, however, indicate Healius was probably oversold.
This morning, Healius’ board rejected the proposal as it was considered opportunistic and fundamentally undervalued the company.
Singapore telecom firm M1 announced on the 28th of December 2018 that Konnectivity Pte. Ltd. (a company jointly owned by Keppel Corp Ltd (KEP SP)and Singapore Press Holdings (SPH SP)) had made a Voluntary Conditional General Offer following the satisfaction of the pre-condition (IMDA approval) mentioned in the pre-conditional offer made in September.
The offer is to buy a minimum of 16.69% of the total share capital of M1 at a price of S$2.06 in order to increase the collective holding of the acquirer and its related parties from the current level of 33.32% to 50+% of FD shares. The Offerors will buy all shares tendered if they get to a minimum of 50+%.
The offer price of S$2.06 translated to a premium of 26.4% to the undisturbed price before the trading halt for the pre-conditional offer. At the time of writing, the stock is trading at S$2.08 which is higher than the proposed Offer Price, indicating the market is expecting a bump or an overbid.
M1 has seen ~175mm shares traded since the initial announcement – all at prices above the proposed Offer Price of S$2.06. In that time, Starhub has popped and fallen back, and SingTel has fallen almost 10% to its lowest level in seven years.
Clearly, there is expectation that either Axiata will counter or Keppel and SPH will raise the Offer to bring Axiata onside. Travis Lundy doesn’t see who would join Axiata in bidding for M1 at a price of 8+x TTM EBITDA when there is price competition to come. He thinks it more likely that a small kiss (perhaps even a decent bump to S$2.30 or even more) to the price is made by the Offerors SPH and Keppel to get Axiata over the line. However, he does not think the Offerors need to offer that much to dislodge retail shareholders if the IFA comes out and says “increased competition puts the dividend in danger“.
Healius, a leading Australian owner of GP clinics and pathology centres, announced an unsolicited and conditional proposal from Jangho Group Co Ltd A (601886 CH) for A$3.25/share (~9.6x FY19 EV/EBITDA) in a A$2.0bn deal. Jangho currently holds a 15.9% stake in Healius and could potentially go hostile here.
Pricing looks off according to Arun George, at a 15% discount to peers on a CY2019 EV/EBITDA metric.
Still, Healius is not without issues, having to pay a backpay bill to staff last year, bump salaries for workers at its Victorian pathology division, while also losing a lucrative national bowel screening contract in 2017.
Notwithstanding the price, as Healius is an owner of sensitive medical data, the FIRB would take a very close look at this transaction, especially one where the acquirer is a Chinese entity, given the recent rejection of the CKI/APA Group (APA AU) deal and Huawei’s 5G.
As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, Athaporn Arayasantiparb, CFA tackles the obvious questions – what price and what benefits?
Based on his estimates, the potential improvements in ROE from the merger and potential divestment of Thanachart’s 19% stake in MBK, he thinks it justifies a Bt11.1/sh premium or Bt64.25/sh. Anything above that would feasibly be value destroying.
In terms of benefits, Thanachart has a higher ROE than TMB and appears smaller but better managed. The merger would allow TMB to re-enter the securities business (more cross-selling), enlarge its asset management franchise, and scale up the deposit base for both banks.
Reportedly Nexon’s founder Kim Jung-Joo and other related parties plan to sell their 98.64% stake in NXC Corp, which owns a 47.98% stake in Nexon. Nexon has a market cap of $11.6bn but the rumoured price tag for the 47.98% take is $8.9bn implying a significant management premium.
Initially launched as a voluntary conditional Offer late November, DNO ASA (DNO NO)crept over 30% in Faroe this week and is now required to launch an MGO. The Offer price remains the same at GBP 1.52/share, however, the acceptance condition falls to 50% from 57.5% previously.
Faroe’s pushback on the Offer – that the 21% premium offered to pre-announcement price is only “about half the average premium paid on all UK takeovers over the last 10 years” – is disingenuous. DNO built a 27.68% stake in a matter of days back in April 2018, clearly telescoping that a full-blown Offer was a possibility (although denying it at the time). The unaffected price prior to the acquisition of that stake should be used as a reference point for the current Offer. This translates to a 44.8% premium.
DNO has 43.1% in the bag, close to the 50% needed. There are investors (like Cavendish, holding 1.38%) who side with Faroe saying that the Offer is too low. With shares trading through terms, my bet is that DNO may need to kiss this offer, say 5-10%, to get it over the line.
Curtis Lehnert recommends closing out the set-up trade, now that he sees the stub having reverted to its long-term average level. Since his recommendation, the trade has made a notional gain of 5% in a two and a half month time span. As an aside I back out a discount to NAV of 21%, off its recent low of ~28% in early Nov, and compares to a 12-month average of 19%.
Back in September, I discussed in StubWorld: Matheson Unloads JLT, Unwind Takarathat Matheson may use the net proceeds of £1.7bn (US$2.2bn) from selling its 40.16% stake in Jardine Lloyd Thompson Group P (JLT LN)into Marsh & Mclennan Cos (MMC US)‘sOffer, towards increasing its stake in JS, as there was/is still some room before the maximum 85% ownership level was reached. This is what happened (or at least a token amount of the proceeds), with Matheson buying ~2.5mn shares in Strategic for ~US90mn in early October. Matheson now holds a little less than 84% by my calculation – the group unhelpfully states it holds 84% without going into decimal places.
After touching a 17-year low ratio level of 1.41x (JM/JS) last September, that has blown out to 1.83x, having closed the year at 1.89x, a two-and-a-half year high, and compares to the long-term average of 1.7x.
Strategic continues to trade “cheap” at ~44% discount to NAV, adjusted for the cross-holding. The spread between Matheson and Strategic is around its widest inside a year. Furthermore, as Matheson increased its stake, Strategic also acquired shares in Matheson earlier last year. Both elevate the cross-holding, which in principle you would expect the two companies to become even more closely aligned.
I’d recommend buying into Strategic for its attractive NAV discount and further share acquisitions from Matheson.
Stub Wrap
Using a basket of 40 Holdcos I constructed, the average NAV discount in 2018 steadily widened throughout the year. Elsewhere:
Passive, tech-related and illiquid Holdcos widened most; while cross-border and property Holdcos were the best of the worst.
Illiquid, property, and passive Holdcos’ underperformance (or widening) was more pronounced in the first half. Tech Holdcos primarily widened in the second half.
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.
Woori Bank (000030 KS)‘s stock purchase period ended last Friday. We will enter trade suspension starting Jan 9 and until Feb 12. Dilution is only 0.6%. But overhang would be an issue.
Local hedge fund-like institutions are shorting it mainly on overhang risk. Woori Investment Bank (010050 KS) and Woori Card moving up will worsen this overhang risk. Stock purchase is now over. The need to boost the price must have gone as well.
I’d also short Woori Bank at this point. Jan 9~Feb 12 trade suspension would be too long to go without a hedge. Industrial Bank Of Korea (024110 KS) would make a good hedge. Woori and IBK have traditionally been highly correlated. They are also seen sufficiently cointegrated.
I initiated SamE short Common/long 1P trade on Nov 29. This trade delivered the highest yield on Dec 13 at 4.55% with Nov 29 as the reference date. We are now slightly below +1 σ.
Common/1P relative price gap should get narrower. Price wise, 1P discount started at 19.81% on Nov 29 and reached the lowest at 16.38% on Dec 13. It reverted back to 18.69%, down 1.12%p. Market cap wise, Common/1P ratio is still higher than Nov 29. This suggests 1P’s catching up job isn’t over yet.
Div yield difference is still at a record high for 1P. CJ Corp (001040 KS)‘s recent class B pref issuance should be another plus. It will play in favor of those ownership transfer related prefs. I’d continue to hold onto this position until we move into March OGM cycle.
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In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
BGF Retail (282330 KS) was down 12% last week. BGF Co Ltd (027410 KS) was down only 4.5%. Finally, they are now above 20D MA. This happens for the first time since late Nov. But Holdco discount is still at 50%. Similarly, price ratio is still close to the yearly low.
Usually, I’d close a position when I reach ±0.5~0 σ on 20D MA. In this case, Holdco discount is too harsh to do so. Sub price/price ratio has been negatively correlated. Valuation wise, Sub price correction isn’t over yet. PER on FY19e is around 20x. This is about 7% higher than GS Retail (007070 KS) even though GS Retail EBITDA margin is slightly higher.
It also appears that sentiments on the entire retail sector won’t improve any time soon. The government is hinting a possible change on minimum wage. This is positive on Sub. But fundamentally, Korean CCSI is still on the decline. The newly implemented franchisee support measures will further worsen sentiments. I wouldn’t close this position yet.
On January 3, 2019, Bristol Myers Squibb Co (BMY US) and Celgene Corp (CELG US) announced a definitive agreement for BMY to acquire Celgene in a $74 billion 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 logic behind the transaction is to create a biopharma powerhouse with leading franchises in oncology, immunology and inflammation (autoimmune diseases), and cardiovascular medicine. After completion, BMY will have six expected launches in the next 12-24 months representing over $15 billion in revenue potential, and an early pipeline that includes 50 high potential assets. In addition to amassing a powerhouse biopharma portfolio, the combination is expected to yield annual cost synergies of $2.5 billion by 2022.
Terms of the deal call for each CELG share to be converted into one BMY share and $50 cash, plus one tradeable CVR worth $9 if specific FDA approvals are received for three drugs by certain dates. The 1.0 BMY exchange ratio is fixed. Upon completion of the deal BMY shareholders will own about 69% of the combined company with former CELG shareholders owning the other 31%.
The deal is conditioned on approvals by both CELG and BMY shareholders as well as regulatory approvals that include the U.S. and the EU. Financing is not a condition. The companies expect the complete the deal in the third calendar quarter of 2019.
Ideally, own Bandhan Bank (BANDHAN IN) on a deal break, or wait for this deal and its spread to season a bit.
It’s still not clear that a bump or counterbid will be forthcoming in the M1 Ltd (M1 SP) deal, but at S$2.07, the risks are better than they were higher.
Healius (HLS AU) (unsurprisingly) rejects the indicative offer but Jangho is not out of the picture; nor is the possibility of a third party.
Douglas Kim revisited the news that Kim Jung-Joo wants to sell his stake in the Nexon Group. Travis Lundy also chimed in with his read of the situation. The key questions are whether Kim Jung-Ju would sell NXC (and NXMH) – which holds a 48% stake in Nexon Co – as reported by the local press, or whether NXC and NXMH would sell their stakes in Japan-listed Nexon. The implication being that if they sold the stake in Nexon, it would mean buyers would get a large stake in a single company, whereas there is a bunch of other stuff floating around in NXC and its subsidiaries.
The other question is whether Tencent Holdings (700 HK) or another buyer buying NXC would trigger a mandatory Tender Offer for the shares in Nexon in Japan. The letter of the law in the TOB Rules would indicate not, but Travis reckons Yes. If the Kim family sold their stake in NXC Corporation to a buyer, he thinks it is HIGHLY likely that the buyer would be obliged (by Japanese authorities) to conduct a tender offer for the shares of Nexon that they wanted to buy.
As a trade, this does not look like a great risk arb bet (where you make a bet that a company will get taken over) at first glance if the total trade for NXC is going to be ₩10tn. It would be a good trade if the ₩10tn number were made up of say ₩3tn of assets (in NXC), then the assumption that the current market price adding ₩7tn of assets to arrive at that total of ₩10tn would be an “estimate” of current value rather than an estimate of what it would take to get the deal done, and current market value is a significant premium to book (where NXC has heretofore reported its financials and Nexon). In that case, one might imagine that a bidding war could result in a higher price for Nexon, and an easy exit at ¥2000+/share.
Either way it would be a chunk of change which would make many buyers – even buyers from China thought to be quite wealthy – balk. A priori, Travis would want to own Nexon vs Tencent, Electronic Arts (EA US), Netease Inc (Adr) (NTES US), and others, but it is not necessarily a comfortable trade.
Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). The Close is 4 February, but the Offer is not Final.
If you think there will not be a bump and the deal may or may not go through at S$2.06, unless you are so big that your selling would dramatically impact the price, the right trade here is to sell in the market.
If you think there is a possibility of a bump as the Offeror seeks to a) get Axiata to tender and b) to get everyone else to tender so they can delist and squeeze out minorities, but if no bump there is a quasi-certainty that Konnectivity Pte will gain 50%+1 share at S$2.06, then buying at S$2.07 is not a bad trade depending on your likelihood of bump and bump price.
If Konnectivity bump, they have two choices: Bump a little bit and declare final so that everyone who played for a bump decides to sell (that might mean a bump to S$2.15 or so); or bump a lot and get Axiata out.
Travis believes a bump is certainly possible but also thinks this deal gets done if there is no bump. If Axiata countered at, say S$2.15, he would be inclined to buy at S$2.15 to expect a further counter by Konnectivity.
Bandhan Bank (BANDHAN IN)(“BBL”) and GRUH announced together on January 7th that their respective boards have considered and approved a Scheme of Amalgamation where Bandhan Bank will be the acquiring entity and GRUH Finance will become the acquired entity. At the exchange ratio of 568 Bandhan Bank shares per 1000 GRUH Finance shares, GRUH Finance’s price currently translates to a PER and PBV of 51.8x and 12.5x respectively which is significantly higher than the average for its comparable peers (PER=14.9x; PBV=2.0x).
This is a great deal forHousing Development Finance Corporation (HDFC IN)which currently owns 57.8% of GRUH Finance. It will own 15% of the merged entity. Considering HDFC Ltd already owns 19.72% as the promoter of HDFC bank and that RBI does not allow the promoter of one bank to hold more than 10% in another bank as a promoter, HDFC Ltd will have to divest a stake that is at least equivalent to 5% of the merged entity.
This deal is perhaps less good for Bandhan shareholders. GRUH is being purchased expensively, and minorities are getting hit. This is possibly so that the promoter can get closer to the obligation to the RBI to drop his stake to 40%. That ‘excuse’ is widespread in the media but may not bear up under scrutiny.
Travis thinks both names could have further to fall and sees no compelling reason to expect growth to surprise on the previously expected upside as branch openings are frozen. A deal break would not solve that, but a shareholder disentanglement on the Bandhan side would.
As widely expected, Healius’s board rejected the unsolicited and conditional proposal from Jangho Group Co Ltd A (601886 CH) at A$3.25/share.Pricing under the proposal is okay, at best, valuing Healius roughly in sync with Sonic Healthcare (SHL AU), its nearest peer. Optically, the indicative offer is underwhelming, 20% below the recent high in March last year, and below where Jangho was accumulating its stake in early 2016.
Operationally, Healius is not without issue, including increasing salaries, failure to secure key contracts, an inability to retain doctors at its medical centres, and the forced resignation of its CEO two years ago after he was charged by ASIC.
An offer from Jangho would also fall under FIRB’s remit, specifically sensitive patient data in the hands of a foreign owner, and it is up for debate whether maintaining such information in a secure site in Australia (as applied in Jangho’s acquisition of Vision Eye in 2015) will alleviate these concerns.
This deal is unlikely to get up under the current terms following the board rejection, but I do expect Jangho to bump its offer; or a third party to enter the fray. On a risk/reward basis I still tilt positive at a 18% gross spread (and up 7% from the post-rejection closing price) to the indicative offer.
For those who like plain vanilla, PCI announced Pagani Holding (an SPV indirectly owned by Platinum Equity Advisors) had made a S$1.33/share cash offer for the company by way of a scheme. Chuan Hup Holdings (CH SP), which holds 76.7% in PCI, has given an irrevocable undertaking to vote its stake in favour of the scheme resolution. So this is a done deal. The more interesting facet here is that Chuan Hup is currently trading at discount to its net cash after factoring in the proceeds from the sale of PCI shares.
As anticipated in my insight (DNO Closes In On Faroe) last week, DNO ASA (DNO NO)bumped its Offer for Faroe, which has now been declared unconditional. Tendered shares get paid in 14 days. The final closing date of the offer is the 6 February.
The 5.3% bump to GBP 1.60/share shortly followed a prior announcement from DNO which referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.
The Final Offer price represents a premium of 52.4% to Faroe‘s share price of GBP 1.05 at the close of business on 3 April 2018, and values Faroe at ~£641.7mn. Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender.
DNO now owns or has 76.49% acceptances so can now make preparations to move to delist Faroe. If total acceptances exceed 90% of the voting rights, DNO will exercise its rights to compulsorily acquire the remaining Faroe shares not tendered, also at GBP 1.60/share.
The company bought back 16% of volume in the month (in December), and 15% of rolling 4-week ADV if only the first 20 days were days on which the company bought – which based on execution prices seems likely.
Travis expects a similar rate to continue and expects the lower trading volumes seen in December to continue. The period of excitement is over until Toshiba gives people a reason to get excited.
Travis is not particularly bullish Q3 results or Q4 forecasts for the company and the stock has rebounded perhaps more than the market has off lows. With Apple Inc (AAPL US) guiding suppliers to lower iPhone production yet again, TMC could run into a soft spot.
The key stub assets include South Springs, one of the largest golf resorts in Korea, and brand royalty, each accounting for around 7-8% of NAV. The remaining, immaterial ops include an ad agency, an “Amazon Fresh”-like fresh food delivery start-up, management consulting, dividends, and rent.
This looks like a decent stub-setup, with a likelihood of the discount narrowing from here – typically, the Korean Holdcos trade within a 20-40% discount band – rather than clearing 60%. And there is no tender offer overhang in 2019. But apart from the optics, there are no obvious catalysts at the stub level for the nine-month discount-widening trend to reverse.
Kingboard, which hasn’t been in the news since it sold its 9.6% stake in Cathay Pacific Airways (293 HK) to Qatar Airways back in November 2017, is coming up “expensive” on my monitor, after KBC’s mid-week price outperformance over KBL.
The new news this week is that KBC announced it is acquiring a handful of floors of the Overseas Trust Bank Building here in Hong Kong. Pricing looks okay with reference to property sold nearby, but probably towards the high-end for mid-floor office space in Wan Chai.
This is a connected transaction as the seller of the properties is Hallgain Investments – a vehicle largely owned by senior management of KBC – which owns 39.02% of KBC. The net rental on the properties is $1.35mn or a yield of 0.15%, which hardly augurs a case to go long the stub.
I compiled a summary of the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in 2018, and analysed which sectors attracted the most interest: (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
The premium for Swire’s As over the Bs – [19 HK/(5* 87 HK)] – continues to increase and is now at its highest since October 2003.
Source: CapIQ; RHS represents HK$mn
I tackled this share class last August (Swire’s Interims and Bifurcating Dual Class) when the premium was 18%. Since September 2015, the two classes of shares can be unified leaving John Swire & Sons with 55% of the equity (& 63.7% of the vote). The pushback then, and now, is why bother? And the HKEx giving permission to Xiaomi Corp (1810 HK) to list with dual-class shares lessens the chance of such a unification.
Logically though, this premium should narrow (eventually one would expect) and investors are betting on this. The $ value traded for the Bs on Wednesday was the highest since mid-December 2017, and the third highest $ value traded in 21 years. And volume for the Bs has been increasing recently, having doubled in size in the past year compared to the 5-year average.
As an aside, Swire’s discount to NAV (adjusting for the privatisation of HAECO) is trading at it narrowest inside a year:
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.
Godrej Agrovet is a large conglomerate operating in various business verticals in the agriculture sector. It is looking to merge with Astec LifeSciences which is a pure agro-chemical company that focusses on Chemical molecule production and formulation for domestic and export markets. In this report, we analyze the implications of the merger as well as the impact on minority shareholders in both companies.
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On January 3, 2019, Bristol Myers Squibb Co (BMY US) and Celgene Corp (CELG US) announced a definitive agreement for BMY to acquire Celgene in a $74 billion 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 logic behind the transaction is to create a biopharma powerhouse with leading franchises in oncology, immunology and inflammation (autoimmune diseases), and cardiovascular medicine. After completion, BMY will have six expected launches in the next 12-24 months representing over $15 billion in revenue potential, and an early pipeline that includes 50 high potential assets. In addition to amassing a powerhouse biopharma portfolio, the combination is expected to yield annual cost synergies of $2.5 billion by 2022.
Terms of the deal call for each CELG share to be converted into one BMY share and $50 cash, plus one tradeable CVR worth $9 if specific FDA approvals are received for three drugs by certain dates. The 1.0 BMY exchange ratio is fixed. Upon completion of the deal BMY shareholders will own about 69% of the combined company with former CELG shareholders owning the other 31%.
The deal is conditioned on approvals by both CELG and BMY shareholders as well as regulatory approvals that include the U.S. and the EU. Financing is not a condition. The companies expect the complete the deal in the third calendar quarter of 2019.
Ideally, own Bandhan Bank (BANDHAN IN) on a deal break, or wait for this deal and its spread to season a bit.
It’s still not clear that a bump or counterbid will be forthcoming in the M1 Ltd (M1 SP) deal, but at S$2.07, the risks are better than they were higher.
Healius (HLS AU) (unsurprisingly) rejects the indicative offer but Jangho is not out of the picture; nor is the possibility of a third party.
Douglas Kim revisited the news that Kim Jung-Joo wants to sell his stake in the Nexon Group. Travis Lundy also chimed in with his read of the situation. The key questions are whether Kim Jung-Ju would sell NXC (and NXMH) – which holds a 48% stake in Nexon Co – as reported by the local press, or whether NXC and NXMH would sell their stakes in Japan-listed Nexon. The implication being that if they sold the stake in Nexon, it would mean buyers would get a large stake in a single company, whereas there is a bunch of other stuff floating around in NXC and its subsidiaries.
The other question is whether Tencent Holdings (700 HK) or another buyer buying NXC would trigger a mandatory Tender Offer for the shares in Nexon in Japan. The letter of the law in the TOB Rules would indicate not, but Travis reckons Yes. If the Kim family sold their stake in NXC Corporation to a buyer, he thinks it is HIGHLY likely that the buyer would be obliged (by Japanese authorities) to conduct a tender offer for the shares of Nexon that they wanted to buy.
As a trade, this does not look like a great risk arb bet (where you make a bet that a company will get taken over) at first glance if the total trade for NXC is going to be ₩10tn. It would be a good trade if the ₩10tn number were made up of say ₩3tn of assets (in NXC), then the assumption that the current market price adding ₩7tn of assets to arrive at that total of ₩10tn would be an “estimate” of current value rather than an estimate of what it would take to get the deal done, and current market value is a significant premium to book (where NXC has heretofore reported its financials and Nexon). In that case, one might imagine that a bidding war could result in a higher price for Nexon, and an easy exit at ¥2000+/share.
Either way it would be a chunk of change which would make many buyers – even buyers from China thought to be quite wealthy – balk. A priori, Travis would want to own Nexon vs Tencent, Electronic Arts (EA US), Netease Inc (Adr) (NTES US), and others, but it is not necessarily a comfortable trade.
Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). The Close is 4 February, but the Offer is not Final.
If you think there will not be a bump and the deal may or may not go through at S$2.06, unless you are so big that your selling would dramatically impact the price, the right trade here is to sell in the market.
If you think there is a possibility of a bump as the Offeror seeks to a) get Axiata to tender and b) to get everyone else to tender so they can delist and squeeze out minorities, but if no bump there is a quasi-certainty that Konnectivity Pte will gain 50%+1 share at S$2.06, then buying at S$2.07 is not a bad trade depending on your likelihood of bump and bump price.
If Konnectivity bump, they have two choices: Bump a little bit and declare final so that everyone who played for a bump decides to sell (that might mean a bump to S$2.15 or so); or bump a lot and get Axiata out.
Travis believes a bump is certainly possible but also thinks this deal gets done if there is no bump. If Axiata countered at, say S$2.15, he would be inclined to buy at S$2.15 to expect a further counter by Konnectivity.
Bandhan Bank (BANDHAN IN)(“BBL”) and GRUH announced together on January 7th that their respective boards have considered and approved a Scheme of Amalgamation where Bandhan Bank will be the acquiring entity and GRUH Finance will become the acquired entity. At the exchange ratio of 568 Bandhan Bank shares per 1000 GRUH Finance shares, GRUH Finance’s price currently translates to a PER and PBV of 51.8x and 12.5x respectively which is significantly higher than the average for its comparable peers (PER=14.9x; PBV=2.0x).
This is a great deal forHousing Development Finance Corporation (HDFC IN)which currently owns 57.8% of GRUH Finance. It will own 15% of the merged entity. Considering HDFC Ltd already owns 19.72% as the promoter of HDFC bank and that RBI does not allow the promoter of one bank to hold more than 10% in another bank as a promoter, HDFC Ltd will have to divest a stake that is at least equivalent to 5% of the merged entity.
This deal is perhaps less good for Bandhan shareholders. GRUH is being purchased expensively, and minorities are getting hit. This is possibly so that the promoter can get closer to the obligation to the RBI to drop his stake to 40%. That ‘excuse’ is widespread in the media but may not bear up under scrutiny.
Travis thinks both names could have further to fall and sees no compelling reason to expect growth to surprise on the previously expected upside as branch openings are frozen. A deal break would not solve that, but a shareholder disentanglement on the Bandhan side would.
As widely expected, Healius’s board rejected the unsolicited and conditional proposal from Jangho Group Co Ltd A (601886 CH) at A$3.25/share.Pricing under the proposal is okay, at best, valuing Healius roughly in sync with Sonic Healthcare (SHL AU), its nearest peer. Optically, the indicative offer is underwhelming, 20% below the recent high in March last year, and below where Jangho was accumulating its stake in early 2016.
Operationally, Healius is not without issue, including increasing salaries, failure to secure key contracts, an inability to retain doctors at its medical centres, and the forced resignation of its CEO two years ago after he was charged by ASIC.
An offer from Jangho would also fall under FIRB’s remit, specifically sensitive patient data in the hands of a foreign owner, and it is up for debate whether maintaining such information in a secure site in Australia (as applied in Jangho’s acquisition of Vision Eye in 2015) will alleviate these concerns.
This deal is unlikely to get up under the current terms following the board rejection, but I do expect Jangho to bump its offer; or a third party to enter the fray. On a risk/reward basis I still tilt positive at a 18% gross spread (and up 7% from the post-rejection closing price) to the indicative offer.
For those who like plain vanilla, PCI announced Pagani Holding (an SPV indirectly owned by Platinum Equity Advisors) had made a S$1.33/share cash offer for the company by way of a scheme. Chuan Hup Holdings (CH SP), which holds 76.7% in PCI, has given an irrevocable undertaking to vote its stake in favour of the scheme resolution. So this is a done deal. The more interesting facet here is that Chuan Hup is currently trading at discount to its net cash after factoring in the proceeds from the sale of PCI shares.
As anticipated in my insight (DNO Closes In On Faroe) last week, DNO ASA (DNO NO)bumped its Offer for Faroe, which has now been declared unconditional. Tendered shares get paid in 14 days. The final closing date of the offer is the 6 February.
The 5.3% bump to GBP 1.60/share shortly followed a prior announcement from DNO which referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.
The Final Offer price represents a premium of 52.4% to Faroe‘s share price of GBP 1.05 at the close of business on 3 April 2018, and values Faroe at ~£641.7mn. Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender.
DNO now owns or has 76.49% acceptances so can now make preparations to move to delist Faroe. If total acceptances exceed 90% of the voting rights, DNO will exercise its rights to compulsorily acquire the remaining Faroe shares not tendered, also at GBP 1.60/share.
The company bought back 16% of volume in the month (in December), and 15% of rolling 4-week ADV if only the first 20 days were days on which the company bought – which based on execution prices seems likely.
Travis expects a similar rate to continue and expects the lower trading volumes seen in December to continue. The period of excitement is over until Toshiba gives people a reason to get excited.
Travis is not particularly bullish Q3 results or Q4 forecasts for the company and the stock has rebounded perhaps more than the market has off lows. With Apple Inc (AAPL US) guiding suppliers to lower iPhone production yet again, TMC could run into a soft spot.
The key stub assets include South Springs, one of the largest golf resorts in Korea, and brand royalty, each accounting for around 7-8% of NAV. The remaining, immaterial ops include an ad agency, an “Amazon Fresh”-like fresh food delivery start-up, management consulting, dividends, and rent.
This looks like a decent stub-setup, with a likelihood of the discount narrowing from here – typically, the Korean Holdcos trade within a 20-40% discount band – rather than clearing 60%. And there is no tender offer overhang in 2019. But apart from the optics, there are no obvious catalysts at the stub level for the nine-month discount-widening trend to reverse.
Kingboard, which hasn’t been in the news since it sold its 9.6% stake in Cathay Pacific Airways (293 HK) to Qatar Airways back in November 2017, is coming up “expensive” on my monitor, after KBC’s mid-week price outperformance over KBL.
The new news this week is that KBC announced it is acquiring a handful of floors of the Overseas Trust Bank Building here in Hong Kong. Pricing looks okay with reference to property sold nearby, but probably towards the high-end for mid-floor office space in Wan Chai.
This is a connected transaction as the seller of the properties is Hallgain Investments – a vehicle largely owned by senior management of KBC – which owns 39.02% of KBC. The net rental on the properties is $1.35mn or a yield of 0.15%, which hardly augurs a case to go long the stub.
I compiled a summary of the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in 2018, and analysed which sectors attracted the most interest: (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
The premium for Swire’s As over the Bs – [19 HK/(5* 87 HK)] – continues to increase and is now at its highest since October 2003.
Source: CapIQ; RHS represents HK$mn
I tackled this share class last August (Swire’s Interims and Bifurcating Dual Class) when the premium was 18%. Since September 2015, the two classes of shares can be unified leaving John Swire & Sons with 55% of the equity (& 63.7% of the vote). The pushback then, and now, is why bother? And the HKEx giving permission to Xiaomi Corp (1810 HK) to list with dual-class shares lessens the chance of such a unification.
Logically though, this premium should narrow (eventually one would expect) and investors are betting on this. The $ value traded for the Bs on Wednesday was the highest since mid-December 2017, and the third highest $ value traded in 21 years. And volume for the Bs has been increasing recently, having doubled in size in the past year compared to the 5-year average.
As an aside, Swire’s discount to NAV (adjusting for the privatisation of HAECO) is trading at it narrowest inside a year:
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.
Godrej Agrovet is a large conglomerate operating in various business verticals in the agriculture sector. It is looking to merge with Astec LifeSciences which is a pure agro-chemical company that focusses on Chemical molecule production and formulation for domestic and export markets. In this report, we analyze the implications of the merger as well as the impact on minority shareholders in both companies.
Hansae Yes24 Holdings Co, Ltd. (016450 KS) is a small cap holdco stock in Korea. Hansae Co Ltd (105630 KS) takes up half of Holdco NAV. Sub is Korea’s largest clothing OEM company. Holdco is currently at a 50% discount to NAV. This is the highest in 5 years. Discount was up nearly 10%p in the last 2 months.
Sub is taking a hit today. The share is down 5.56% now. Holdco is down only 1.21%. Macy’s unpleasant guidance revision is pulling down Sub price. We are now a little above -1 σ on a 20D MA. Sub shares have rebounded lately with the expectation on improving margins in the US. But weak holiday sales numbers in the US would be more than enough to kiss off this expectation.
I’d initiate a stub trade even though the duo has narrowed the gap today. It is still a long way to get reverted back to where they were two months ago.
In November 2017, Toshiba Corp (6502 JP) bowed to the inevitable and issued shares in order to shore up shareholder equity ahead of the 31 March 2018 deadline where if the company had not announced a positive shareholder equity number, it would have been delisted according to the Enforcement Rules of the Tokyo Stock Exchange.
So it issued ¥600 billion of equity in an accelerated privately-negotiated placement to hedge funds. There was some jawboning later from domestic institutions who had not gotten the show on the deal, but they would do well to remember that when Toshiba was in dire straits earlier that year, and continued listing was not guaranteed because of accounting issues which were later overcome (before the equity issuance), it was the hedge funds who bought dozens of percent of the company – not domestic financial institutions. In any case, the equity was predictably needed, but as a way of making it clear that it would not be forever, the release accompanying the financing said the company would accelerate returns to shareholders once the sale of Toshiba Memory Corporation was complete.
That return of capital to shareholders was announced in June 2018 after the closing of the TMC transaction had been confirmed. Toshiba would buy back ¥700 billion of shares. At the time, that was up to 40% of shares outstanding, but the shares rose as the shares of companies with large buyback plans do, and it took until November to dot the “i”s and cross the “t”s on making sure that the cash in the bank account was deemed distributable capital surplus. On November 8th, a year after announcing the sale of equity, Toshiba announced the start of a Very Large Buyback. A few days later the company announced a large ToSTNeT-3 buyback, offering to buy back all ¥700 billion of shares the following morning at that day’s close. A week later the company had bought back ¥243 billion or more than 35% of the total buyback then announced further purchases would be made in the market.
That’s when the fun began.
For previous recent treatment on the Toshiba buyback, see the following:
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