Event-Driven

In this briefing:

1. GER Upcoming EVENTS Calendar
2. M1 Offer Despatched – Dynamics Still Iffy
3. DNO/Faroe – And That’s A Wrap
4. Would a Sale of Founder’s Holdco NXC Corp Trigger a Tender Offer for Nexon (3659 JP)?
5. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard

1. GER Upcoming EVENTS Calendar

We have received requests to provide a calendar of upcoming catalysts for near-term M&A, stubs and erstwhile event-driven names. Below is a list of catalysts over the near-term for such names as below. 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

2. M1 Offer Despatched – Dynamics Still Iffy

On January 7th after the close of trading, Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). 

The closing date, as clear there, is 4 February. 

After three-plus months of speculation that Axiata Group (AXIATA MK) was unhappy with the price and might make a counter-offer, no offer has been forthcoming. 

After I wrote on the 2nd in M1 Offer Coming – Market Odds Suggest a Bump But… that the reward/risk did not look that great, shares drifted downward from the S$2.09-2.11 area and into the afternoon of the 7th, traded in the S$2.05-2.07 range, which was the first time in months the shares had traded at or below the prospective offer price. 

Some 20mm+ shares (5.5% of the shares out other than the three major holders) traded between 3pm Singapore time on the 7th and a few minutes after the open the day after the announcement. Then part-way through the day, someone bought a large number of shares lifting the share price two spreads for a while. Since then, the shares have settled back down to the $2.07-2.08 range.

Depending on your opinion of the likelihood of a bump, your execution strategy will differ. It’s still not clear that a bump or counterbid will be forthcoming, but at S$2.07, the risks are better than they were higher. 

3. DNO/Faroe – And That’s A Wrap

In my insight (DNO Closes In On Faroe) last week, I concluded a slight kiss to DNO ASA (DNO NO)‘s Offer for Faroe Petroleum (FPM LN), would get it over the line and this is exactly what transpired.

On January 8th, DNO 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.

Shortly after that statement, on the same day, DNO capitalised on this negative newsflow and announced it had increased its (final) cash Offer to GBP 1.60/share, 5.3% above the initial Offer of GBP 1.52/share. DNO subsequently reported on January 9th that it had gained additional acceptances from shareholders representing ~8.65% of shares out, taking total acceptances to 52.44%. The offer will now become unconditional on January 11th (tomorrow) upon the settlement of these additional acceptances.  

Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender. 

Shares last closed at a price of GBP 1.61 and the final closing date is 1.00 p.m. (London time) on 23 January 2019.

4. Would a Sale of Founder’s Holdco NXC Corp Trigger a Tender Offer for Nexon (3659 JP)?

It was reported on January 3rd that Korean founder and heretofore effective controller of Nexon Co Ltd (3659 JP) Mr. Kim Jung-Ju and family, who exercise their ownership of Nexon through near 100% (98.64% according to Douglas Kim) control of NXC Corp (Korea) and NXC’s control of NXMH B.V.B.A (Belgium), planned to sell their stakes in NXC for up to 10 trillion won (US$8.9 billion).

Those two companies – NXC Corp (Korea) and NXMH (Belgium) – own 253.6mm shares and 167.2mm shares respectively, or direct and indirect ownership by NXC of just under a 48% stake in Nexon (3659 JP). Yoo Junghyun (Kim Jung-Ju’s wife) directly holds another 5.12mm shares at last look. 

The speculation is that it might be sold to Tencent Holdings (700 HK) or another global buyer because it might be too big a mouthful to swallow for NCsoft Corp (036570 KS) and Netmarble Games (251270 KS), each of which have a market cap in the area of 10 trillion won themselves. 

Nexon was founded in Korea in 1994 and moved its headquarters from Seoul to Tokyo in 2005, listing itself on the TSE in December 2011. The company is a well-known gamemaker (over 80 PC and online/mobile games), with famous games such as MapleStory, Dungeon & Fighter, and Counter Strike.

Douglas Kim has started the discussion of this situation in Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon? and Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?. 

The Korea Economic Daily said in its report on the 3rd of January that Deutsche Bank and Morgan Stanley had been selected as advisors to run a sale process, and a formal non-binding offer to potential bidders was expected next month. A Korea Herald article suggested that “potential buyers, according to industry speculation, include China’s Tencent, Korea’s Netmarble Games, China’s NetEase and Electronic Arts of the US.”

The Big Question

In the second piece, Douglas Kim questions whether Kim Jung-Ju would sell NXC (and NXMH) 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 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 changed a bit over 10 years ago would indicate not, but there are questions (and precedents) here.

Discussion ensues.

5. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard

This week in StubWorld …

• With concerns over its tender offer for BGF Retail (282330 KS) now behind it, now may be the time for a BGF Co Ltd (027410 KS) setup.
• Kingboard Chemical (148 HK) gets a boost after buying properties from its major shareholder, however, the implied yield is uninspiring.

Preceding my comments on BGF and KBC 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%.

In this briefing:

1. HDC Holdings Stub Trade: Current Status & Trade Approach
2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War
3. Bandhan Bank To Buy GRUH: A Pricey Bank/NBFC Deal
4. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?
5. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model

1. HDC Holdings Stub Trade: Current Status & Trade Approach

• HDC Holdings (012630 KS) and HDC-OP (294870 KS) price gap is now at a nearly record high. Holdco discount is now 60% to NAV. On a 20D MA, Holdco and Sub are currently below -1 σ.
• I initiated a stub trade on the duo on Dec 11. It paid off on a short term horizon until the duo reached within -0.5~0 σ on a 20D MA. Yield peaked at 4.6% on Dec 14. If you approached with a longer term horizon, things wouldn’t have been as enjoyable.
• The only possibly explainable factor for the recent price divergence is HDC I-Controls’ need to dump a 1.78% Holdco stake. 1.78% overhang risk is not enough to sustain this much divergence and current 60% Holdco discount.
• The duo has again entered < -1 σ territory at yesterday’s closing prices. I’d first make another short-term stub trade. I’d hold onto the position until they reach within -0.5~0 σ on a 20D MA with a loss cut at -5%. But a little longer term approach to hunt for a higher yield wouldn’t be a bad idea at this point.

2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a bid. On 7 January 2019, Konnectivity launched a voluntary conditional offer (VGO) at S$2.06 cash per share. Konnectivity is jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP).

3. Bandhan Bank To Buy GRUH: A Pricey Bank/NBFC Deal

Bandhan Bank (BANDHAN IN) (“BBL”) and Gruh Finance (GRHF IN) (“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. All media sources suggest it was something of a surprise to GRUH personnel and management.

The exchange ratio has been set at 568 Bandhan Bank shares per 1000 GRUH Finance shares. 

Following the announcement, the shares of Bandhan Bank and GRUH Finance have declined by 4.8% and 16.4% respectively. The deal is trading at a gross/annualised spread of 10%/13+% assuming a deal completion date in late September as of Tuesday’s close (but not assuming any dividends). 

The deal is conditional on receiving approvals from the Reserve Bank of India (RBI), Competition Commission India (CCI), National Company Law Tribunal (NCLT) and other relevant regulatory authorities. 

Indicative Timeline

Note that Indian Schemes of Amalgamation also require 75% shareholder approval from all combining parties. The vote for Bandhan shareholders is a foregone conclusion as the promoter Bandhan Financial Holdings has 82.3%. The GRUH vote is not certain but HDFC has 57.8% of the 75% required. 

This deal is really pricey, and some shareholders of Bandhan Bank who will get diluted have voted with their feet. It is a pretty great exit from GRUH for HDFC. While the prima facie evidence suggests that the deal was done to appease the RBI and get closer to the promoter shareholder limit required in October last year, the shareholder structure and CEO Ghosh’s own personal history suggests that neither the 40% rule nor the salary freeze are real hurdles (though the branch opening freeze may be something BBL wants to lift).

4. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?

According to a local media outlet called Chosun Daily, it stated that one of the bankers in the deal (Deutsche Bank), already sent teaser letters of this deal to Tencent Holdings (700 HK) and KKR and in the teaser letter, it mentioned about potentially selling nearly 47% of Nexon Co Ltd (3659 JP) (Japan).

The question about whether or not Kim Jung-Joo decides to sell NXC Corp (Korea) or Nexon Co Ltd (3659 JP) (Japan) has important consequences not just for him and his family but also to the minority shareholders of Nexon Co Ltd (3659 JP). If Kim Jung-Joo decides to sell NXC Corp (Korea), there may not be much upside for the minority shareholders of Nexon Co Ltd (3659 JP) since current regulations do not require the buyers to pay potentially additional control premium to the minority shareholders as well. 

However, if Kim Jung-Joo decides to sell Nexon Co Ltd (3659 JP) (Japan), there may be an opportunity for the minority shareholders to gain from an additional control premium. We think that this is one of the reasons why Nexon Co Ltd (3659 JP) shares are up 13% YTD as some of the investors may think that there could be a higher probability that Kim Jung-Joo ends up selling Nexon Co Ltd (3659 JP) (Japan), instead of NXC Corp (Korea). 

5. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model

Would Wal Mart Stores (WMT US) have paid USD16 bn last year for Flipkart, a leading online Indian retailer, if the recent clarification on India’s policy on FDI in e-commerce were in place back then? Foreign owned online retailers in India ( Amazon.com Inc (AMZN US) , Wal Mart Stores (WMT US) and Alibaba Group Holding (BABA US)  ) will need to rejig their operating models and may face prospects of slower growth and even more distant breakeven targets, if the Indian Government is indeed determined to enforce its policy that e-commerce ‘Marketplaces’ operate only as platforms for third party vendors. Unsurprisingly, Amazon.com Inc (AMZN US) and Wal Mart Stores (WMT US) have reportedly teamed up to lobby the government on these regulations. 

The Indian Government had posted a one-page circular on Dec 26th giving further clarifications to its existing policy on foreign owned e-commerce entities. The detailing of policy specifics seems to be an attempt to enforce the existing policy restrictions on foreign owned online retailers; compliance has so far been sketchy. India do not allow majority foreign ownership in multi brand retail stores and online retailers are allowed to operate only as ‘Marketplaces’ and not as B2C entities. With national elections due in next few months, the Government cannot ignore demands from domestic lobby groups to reign in free play by deep pocketed foreign operators that have been hurting local retailers.

In the detailed note below, we present (1) an overview of the regulatory framework and restrictions under which online retailers operate in India (2) the updated policy and its impact on operating models of Amazon and Walmart in India (3) expectations for India’s e-commerce players. Also, there is a likely gainer from all these – a listed Indian player aspiring to trump global majors in India’s online retail turf.

In this briefing:

1. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments
2. PCI Ltd – All Over Before It Starts
3. Softbank: Reduced Yield Competitiveness, End of Passive Buying and Softbank Group’s Hunger for Cash
4. Hankook Tire Worldwide Stub Reverse Trade: Massive Price Divergence Is Created Today
5. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not

1. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments

In this report, we discuss some of the major changes in regulation and recent important news related to the Korea National Pension Fund Service (NPS), including changes to the voting rights of outsourced Korean equity investments by NPS as well as how it may deal with the Hanjin Kal Corp (180640 KS) corporate governance issues. 

It was reported yesterday that the NPS will allow 57 trillion won ($51 billion) of Korean equity investments which are currently managed indirectly by numerous outsourced asset management companies to have their own respective voting rights. The Financial Services Commission (FSC) announced yesterday that an amendment to the enforcement ordinance of the Capital Market Act was passed allowing NPS’s indirectly managed Korean equity investments’ voting rights to be exercised by the outsourced asset managers rather than by NPS itself passed the Cabinet meeting. 

What are the major implication? As a result of this move, this will act as a key positive catalyst spurring on greater corporate activism since NPS’s outsourced fund managers will have greater freedom to make more aggressive decisions to improve shareholder value of Korean companies. In addition, it also reduces the overall responsibility of carrying out the Stewardship Code changes to not just on NPS but on the rest of the major asset management companies in Korea. 

2. PCI Ltd – All Over Before It Starts

After gaining 22.5% over seven trading days back in mid-September, Pci Ltd (PCI SP) responded to an SGX query over this price action that “it has been approached by a third party in connection with a potential transaction in relation to the securities of the Company. The discussions are on-going …“.

All was revealed on 4th January 2019, when PCI announced that Pagani Holding  (a 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, and to reject or vote against any competing offers. PCI’s executive chairman, Peh Kwee Chim, is Chuan Hup’s majority owner. 

The price presents a ~18% premium to the last close, but a 49% premium to the “undisturbed” price back in early September and a 60% premium over the 12-month VWAP. The Offer values PCI at US$195mn.

With the 75%-for scheme condition satisfied and a lifetime-high takeover price, this is a done deal, and is duly reflected in the gross/annualised spread of 2.3%/6.8%, assuming mid-May completion.

3. Softbank: Reduced Yield Competitiveness, End of Passive Buying and Softbank Group’s Hunger for Cash

We are once again turning negative on Softbank Corp (9434 JP) as the stock price is now 18% above the ¥1,200 level which we mentioned looked cheap, outperforming Topix by 20% and the Nikkei by 21%. 

Softbank Corp: When Does It Become a Buy?

In our view this IPO was oversold and probably to numerous weak hands who may now be looking at the large price drops that Softbank Group has occasionally suffered. We would hazard a guess that many of the individuals looking to flip the shares may still not have sold, however, if the stock dips below ¥1,200 we believe risk-reward would tilt positive until the passive buying is complete. Our view on this large drop is mostly that Softbank over-reached in terms of the size of the sale and the valuation.

The business, while subject to various headwinds should still be highly cash generative and at the current price is on just under 13x EV/OP. That’s not particularly cheap but nor is it ridiculously expensive if you believe OP will not drop (we believe it will). With a bit more of a discount and once the initial selling pressure from flippers dies down we believe the yield and passive buying should help the stock find a temporary floor. We do not view this as an attractive long-term holding in any way shape or form, but as a short-term trade the potential to make a 5-10% return on the back of a bounce following panic selling by retail supported by the yield and passive buying seems reasonably good.

Prior to that, we had flagged that retail demand for the IPO could be fragile in Softbank IPO: Signs Point to Risk of Early IPO Price Break and while there was a stronger sell-off than we expected immediately post listing, we would hazard a guess that there could still be an overhang close to the IPO price as there could be significant latent sell volume from retailers hoping to break-even and if that opportunity opens up in a weak market we believe many could choose to sell despite the rebound.

We would point to the news today regarding Softbank Group lowering its planned investment in WeWork from $16bn to just $2bn due to investors in the Vision Fund balking. As perhaps the most aggressive tech investor of the last few years, Softbank stepping back is not a good sign overall and raises questions about the viability of the valuations that other companies in its investment portfolio, namely Uber, are targeting for their upcoming IPOs. With news sources suggesting that Softbank Group is also looking to offload its Nvidia Corp (NVDA US) stake, the tide appears to have truly turned for tech in general and the chronically unprofitable platform companies such as Uber and WeWork in particular.

This raises the governance risks we initially highlighted regarding the use of Softbank Corp for funding the overall Softbank Group. As such, despite a final round of passive buying for Topix buying at the end of the month, the stock price looks vulnerable here.

4. Hankook Tire Worldwide Stub Reverse Trade: Massive Price Divergence Is Created Today

• Hankook Tire Worldwide (000240 KS) is another local single sub dependent holdco in Korea. Hankook Tire (161390 KS) accounts for nearly 90% of the sub holdings. Holdco is now at a 35% discount to NAV. This is substantially better than the local peer average.
• Sub is taking a harsh hit now mainly on concerns over 4Q results. It is currently down 7% today. In contrast, Holdco is holding steady. It is rather up 1%. This is creating a massive price divergence. As of now, they are close to +3 σ on a 20D MA.
• Holdco’s real world float is much less than 10% of total shares. This often serves to help Holdco stave off market volatility like today’s. But this much divergence is a rare one. Sub’s current PER on FY19e is at 7x. This is 20% less than its usual level. It should be that Sub is being oversold.
• I’d make a very short-term trade at this point. I’d go short Holdco and long Sub for a quick mean reversion.

5. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not

This insight briefly summarises the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in  2018.

Transactions discussed were typically Asia-Pacific-centric or concerned an outbound transaction initiated from an Asia-Pacific-listed company. The majority of these deals involved a market cap/deal size in excess of US$100mn.

The mega deals of Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN), Sprint Corp (S US)/T Mobile Us Inc (TMUS US) and Intl Business Machines (IBM US)/Red Hat Inc (RHT US) were first discussed in May, June and November respectively.

• The most generous country? The average premium for Australian and Hong Kong deals was almost identical at 38%.
• The stingiest? Singapore with 16%.
• The graveyard award? 49 deals were completed with 35 ongoing. Australia had four deals (out of a total of 29, the most for any country) that were abandoned for various reasons – such as CKI getting dinged by FIRB in its tilt for APA Group (APA AU). But in terms of outright fails, Hong Kong takes home that award following the failures in Pou Sheng Intl Holdings (3813 HK), Guoco Group Ltd (53 HK) and Spring Real Estate Investment Trust (1426 HK).

During the year a number of large, high profile transactions were completed that were also extensively analysed and discussed on Smartkarma. However, if the initial discussions between the two parties (acquirer & target) took place pre-2018, they are not included in the charts above. A selection of these include (in no particular order): 

Broadcom Corp Cl A (BRCM US)/Qualcomm Inc (QCOM US)
Alps Electric (6770 JP)/Alpine Electronics (6816 JP)
Westfield Corp (WFD AU)/Unibail-Rodamco SE (UL FP)
Idemitsu Kosan (5019 JP)/Showa Shell Sekiyu Kk (5002 JP)
Orient Overseas International (316 HK)

In this briefing:

1. Woori Bank Holdco Conversion: Current Status & Trade Approach
2. Samsung Electronics Share Class: Current Status & Trade Approach
3. DNO Closes In On Faroe
4. Healius (HLS AU): An Unattractive Bid

1. Woori Bank Holdco Conversion: Current Status & Trade Approach

• 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.

2. Samsung Electronics Share Class: Current Status & Trade Approach

• 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.

3. DNO Closes In On Faroe

On 26 November 2018, 28.22%-shareholder DNO ASA (DNO NO) announced a cash offer for Faroe Petroleum (FPM LN) of GBP 1.52/share,  a 21% premium to the pre-announcement price on November 23rd, but a 44.8% premium to Faroe’s share price of GBP 1.05 as at 3 April 2018, the last business day before DNO announced its first acquisition of shares in Faroe. 

This is a hostile offer with DNO openly criticising the management’s corporate-governance culture, share performance, operational abilities, and deal-making. An indication of the level of this hostility can be found in the circular to shareholders (page 9):  “Since listing, no dividends have been paid and no capital otherwise returned to shareholders. Meanwhile, back at the ranch, the Faroe directors have been awarded a high number of share options at nil cost.” In response, Faroe’s board describes the deal as “opportunistic, unsolicited, and inadequate”, and has advised the shareholders to reject the offer. 

The deal was initially conditional on receiving a minimum acceptance of 57.5% of Faroe’s total issued share capital; however after acquiring shares in the market, DNO announced yesterday it held 30% of issued shares in Faroe, triggering a mandatory offer, and Faroe is now therefore subject to takeover regulation, and the deal requires a lower acceptance threshold of 50%.

Currently trading slightly through terms. Together with shares accepting its offer, DNO currently has 43.1%. 

The offer has now automatically been extended until the 18 January and DNO has until the 27 January to improve or revise the Offer. This may need a slight kiss to push it over the line. 

4. Healius (HLS AU): An Unattractive Bid

Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. On 3 January 2018, Healius received an unsolicited and highly conditional proposal from Jangho Group Co Ltd A (601886 CH) for A$3.25 cash per share.

In this briefing:

1. Healius (HLS AU): Bid Rejection Provides Option Value
2. Poongsan Holdings Stub Trade: Current Status & Trade Approach
3. The GER Weekly EVENTS Wrap: Healius, FamilyMart, Healthscope, Myob and Hitachi
4. Healius And The (Likely) First Salvo
5. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines

1. Healius (HLS AU): Bid Rejection Provides Option Value

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.”

2. Poongsan Holdings Stub Trade: Current Status & Trade Approach

• 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.

3. The GER Weekly EVENTS Wrap: Healius, FamilyMart, Healthscope, Myob and Hitachi

Happy New Year! Below is a recap of the key event-driven research produced by the Global Equity Research team. This week we dig into the potential low-ball bid for Healius (HLS AU) , we update our view on the messy deal between Familymart Uny Holdings (8028 JP) and Don Quijote Holdings (7532 JP) as the deal shifts to earnings dislocation. In addition, we question the economics of a material bump for Healthscope Ltd (HSO AU), assess the reduced bid (and great call by Arun) on MYOB Group Ltd (MYO AU) and finally dig into the potentially risky acquisition by Hitachi Ltd (6501 JP) of ABB Ltd (ABBN VX)‘s power grids. 

The rest of our event-driven research can be found below

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

4. Healius And The (Likely) First Salvo

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.

5. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines

Last Week in Event SPACE …

• On a Risk/Reward basis, the arb is not very attractive at M1 Ltd (M1 SP)‘s current price. 
• Pricing aside, Jangho Group Co Ltd A (601886 CH)‘s potential tilt for Healius (HLS AU) may get dinged by the regulator.
• DNO ASA (DNO NO) edges closer to completing its hostile offer for Faroe Petroleum (FPM LN).
• Unwind the Jardine Cycle & Carriage (JCNC SP) setup for those who entered at the recent low.
• Jardine Matheson Hldgs (JM SP)‘s outperformance of Jardine Strategic Hldgs (JS SP) is unjustified.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

• 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. 

(link to Arun George ‘s insight: Healius (HLS AU): An Unattractive Bid)

Thanachart Capital (TCAP TB) (Mkt Cap: $1.8bn; Liquidity: $4.5mn)

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. 

(link to Athaporn’s insight: Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?)  

Nexon Co Ltd (3659 JP) (Mkt Cap: $11.4bn; Liquidity: $33mn)

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.

• Given the size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not expected to bid. Douglas Kim believes the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK). 

(link to Douglas’ insight: Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?)  

Faroe Petroleum (FPM LN) (Mkt Cap: $721mn; Liquidity: $5.5mn)

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. 

(link to my insight: DNO Closes In On Faroe)  

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

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%.

(link to Curtis’ insight: Jardine C&C (JCNC SP): Close the Stub Trade)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

Back in September, I discussed in StubWorld: Matheson Unloads JLT, Unwind Takara that 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)‘s Offer, 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.
• Worst performers (discount widening): In absolute % terms, United Co Rusal Plc (486 HK) and Asm International Nv (ASM NA) roughly shared the largest moves; while Dah Sing Financial (440 HK), First Pacific Co (142 HK), Genting Bhd (GENT MK) and Pasona Group (2168 JP) are trading at or near their 52-week wides and 52-week low prices.
• Best performers (discount narrowing): China Conch Venture Holdings Ltd (586 HK) is the only Holdco in positive territory; while Japan Post Holdings (6178 JP) is trading closest to its narrowest level in the last 12 months.

(link to my insight: StubWorld: A 2018 Review In Charts)  

Briefly …

Nong Shim Holdings Co (072710 KS)‘s 32.72% stake in Nongshim Co Ltd (004370 KS) accounts for ~70% of its NAV. Sanghyun Park backs out a current discount to NAV of 54%, a 2-year low. Using his numbers, I see the Holdco at 2STD to the 12-month average. The problem is the parent’s liquidity or lack of it.
(link to Sanghyun’s insight: Nongshim Holdings Stub Trade: Time for Holdco To Catch Up) 

Ke Yan, CFA, FRM looked at the southbound flow for the month of December. Shandong Gold Mining Co Ltd (1787 HK) topped the list of Southbound inflow amongst the big cap names, followed by Shanghai Fosun Pharmaceutical (Group) (2196 HK) and Guangzhou Baiyunshan Phrmcl Hldgs (874 HK). In the mid-cap space, Yichang Hec Changjiang Pharm (1558 HK) saw a big increase of holdings by mainland investors, followed by  Greentown Service Group (2869 HK), Fullshare Holdings (607 HK) and Beijing Tong Ren Tang Chinese Medicine (3613 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Were Buying Pharma and Property Managers in December)  

• Takeda Pharmaceutical (4502 JP)  announced that the Royal Court of Jersey had sanctioned the Shire Scheme.

• The Barrick Gold (ABX US) / Randgold Resources (RRS LN) Scheme is now effective.

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. Hansae Yes24 Holdings Stub Trade: Macy’s Lowered Guidance Will Revert Back 5Y High Holdco Discount
2. Toshiba Buyback: Proceeding Apace, But That’s Slow
3. GER Upcoming EVENTS Calendar
4. M1 Offer Despatched – Dynamics Still Iffy
5. DNO/Faroe – And That’s A Wrap

1. Hansae Yes24 Holdings Stub Trade: Macy’s Lowered Guidance Will Revert Back 5Y High Holdco Discount

• 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. 

2. Toshiba Buyback: Proceeding Apace, But That’s Slow

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:

    Toshiba: King Street’s Buyback Proposals Lack Required Detail (5 Oct 2018)
    Toshiba’s Buyback – How It Might Work (9 Nov 2018)
    Toshiba’s ToSTNeT-3 Buyback: Unwinding? Another Game of 🐓? (12 Nov 2018)
    Toshiba ToSTNeT-3: Round 2 (¥579bn To Go) (14 Nov 2018)
    Toshiba ToSTNeT-3 Buyback Means 1/3 Done. Off To Buy In The Market Now! (21 Nov 2018)
    Toshiba Buyback Update – Not Banging Down Doors To Get Stock Yet (3 Dec 2018)

3. GER Upcoming EVENTS Calendar

We have received requests to provide a calendar of upcoming catalysts for near-term M&A, stubs and erstwhile event-driven names. Below is a list of catalysts over the near-term for such names as below. 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. M1 Offer Despatched – Dynamics Still Iffy

On January 7th after the close of trading, Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). 

The closing date, as clear there, is 4 February. 

After three-plus months of speculation that Axiata Group (AXIATA MK) was unhappy with the price and might make a counter-offer, no offer has been forthcoming. 

After I wrote on the 2nd in M1 Offer Coming – Market Odds Suggest a Bump But… that the reward/risk did not look that great, shares drifted downward from the S$2.09-2.11 area and into the afternoon of the 7th, traded in the S$2.05-2.07 range, which was the first time in months the shares had traded at or below the prospective offer price. 

Some 20mm+ shares (5.5% of the shares out other than the three major holders) traded between 3pm Singapore time on the 7th and a few minutes after the open the day after the announcement. Then part-way through the day, someone bought a large number of shares lifting the share price two spreads for a while. Since then, the shares have settled back down to the $2.07-2.08 range.

Depending on your opinion of the likelihood of a bump, your execution strategy will differ. It’s still not clear that a bump or counterbid will be forthcoming, but at S$2.07, the risks are better than they were higher. 

5. DNO/Faroe – And That’s A Wrap

In my insight (DNO Closes In On Faroe) last week, I concluded a slight kiss to DNO ASA (DNO NO)‘s Offer for Faroe Petroleum (FPM LN), would get it over the line and this is exactly what transpired.

On January 8th, DNO 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.

Shortly after that statement, on the same day, DNO capitalised on this negative newsflow and announced it had increased its (final) cash Offer to GBP 1.60/share, 5.3% above the initial Offer of GBP 1.52/share. DNO subsequently reported on January 9th that it had gained additional acceptances from shareholders representing ~8.65% of shares out, taking total acceptances to 52.44%. The offer will now become unconditional on January 11th (tomorrow) upon the settlement of these additional acceptances.  

Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender. 

Shares last closed at a price of GBP 1.61 and the final closing date is 1.00 p.m. (London time) on 23 January 2019.

In this briefing:

1. Nongshim Holdings Stub Trade: Time for Holdco To Catch Up
2. M1 Offer Coming – Market Odds Suggest a Bump But…
3. Healthscope (HSO AU): A Material Bump to Brookfield’s Offer Is Doubtful

1. Nongshim Holdings Stub Trade: Time for Holdco To Catch Up

• Nongshim Co Ltd (004370 KS) is responsible for 70% of Nong Shim Holdings Co (072710 KS) NAV. Holdco is currently at a 54% discount to NAV. This is a 2 year low.
• Thanks to improved Korea-China relation, Opco (004320 KS) shares have nicely rebounded lately. Nongshim Holdco hasn’t caught up. This created the highest price ratio gap in 2 years. On a 20D MA, they are close to the mean. But on a 2 year mean, Holdco is currently and still severely undervalued.
• Liquidity has played a major role in the recent price gap widening. At a rebounding cycle like this, liquidity must have been a huge factor. But it shouldn’t be too long until Holdco catches up. Opco has kinda drifted sideways for a while now. This should be time for Holdco to begin a catchup.

2. M1 Offer Coming – Market Odds Suggest a Bump But…

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 fully-diluted shares (current shares out + 26.826mm Options + ~2.1mm Award shares). 

The Offerors will buy all shares tendered if they get to a minimum of 50+%.  

The other terms and conditions of this deal will be set out in the offer document which is expected to be despatched in mid-January 2019 (14-21 days from 28 December).  

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$2.10 which is higher than the proposed Offer Price, indicating the market is expecting a bump or an overbid.

We’ll see.

3. Healthscope (HSO AU): A Material Bump to Brookfield’s Offer Is Doubtful

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, is caught again in a bidding war between Brookfield Asset Management (BAM US) and BGH-AustralianSuper. On 21 December 2018, Healthscope extended exclusive due diligence with Brookfield. Brookfield noted that it has “no reason to believe it would not be willing and able to proceed” with its proposal.

In this briefing:

1. Would a Sale of Founder’s Holdco NXC Corp Trigger a Tender Offer for Nexon (3659 JP)?
2. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard
3. HDC Holdings Stub Trade: Current Status & Trade Approach
4. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War
5. Bandhan Bank To Buy GRUH: A Pricey Bank/NBFC Deal

1. Would a Sale of Founder’s Holdco NXC Corp Trigger a Tender Offer for Nexon (3659 JP)?

It was reported on January 3rd that Korean founder and heretofore effective controller of Nexon Co Ltd (3659 JP) Mr. Kim Jung-Ju and family, who exercise their ownership of Nexon through near 100% (98.64% according to Douglas Kim) control of NXC Corp (Korea) and NXC’s control of NXMH B.V.B.A (Belgium), planned to sell their stakes in NXC for up to 10 trillion won (US$8.9 billion).

Those two companies – NXC Corp (Korea) and NXMH (Belgium) – own 253.6mm shares and 167.2mm shares respectively, or direct and indirect ownership by NXC of just under a 48% stake in Nexon (3659 JP). Yoo Junghyun (Kim Jung-Ju’s wife) directly holds another 5.12mm shares at last look. 

The speculation is that it might be sold to Tencent Holdings (700 HK) or another global buyer because it might be too big a mouthful to swallow for NCsoft Corp (036570 KS) and Netmarble Games (251270 KS), each of which have a market cap in the area of 10 trillion won themselves. 

Nexon was founded in Korea in 1994 and moved its headquarters from Seoul to Tokyo in 2005, listing itself on the TSE in December 2011. The company is a well-known gamemaker (over 80 PC and online/mobile games), with famous games such as MapleStory, Dungeon & Fighter, and Counter Strike.

Douglas Kim has started the discussion of this situation in Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon? and Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?. 

The Korea Economic Daily said in its report on the 3rd of January that Deutsche Bank and Morgan Stanley had been selected as advisors to run a sale process, and a formal non-binding offer to potential bidders was expected next month. A Korea Herald article suggested that “potential buyers, according to industry speculation, include China’s Tencent, Korea’s Netmarble Games, China’s NetEase and Electronic Arts of the US.”

The Big Question

In the second piece, Douglas Kim questions whether Kim Jung-Ju would sell NXC (and NXMH) 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 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 changed a bit over 10 years ago would indicate not, but there are questions (and precedents) here.

Discussion ensues.

2. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard

This week in StubWorld …

• With concerns over its tender offer for BGF Retail (282330 KS) now behind it, now may be the time for a BGF Co Ltd (027410 KS) setup.
• Kingboard Chemical (148 HK) gets a boost after buying properties from its major shareholder, however, the implied yield is uninspiring.

Preceding my comments on BGF and KBC 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%.

3. HDC Holdings Stub Trade: Current Status & Trade Approach

• HDC Holdings (012630 KS) and HDC-OP (294870 KS) price gap is now at a nearly record high. Holdco discount is now 60% to NAV. On a 20D MA, Holdco and Sub are currently below -1 σ.
• I initiated a stub trade on the duo on Dec 11. It paid off on a short term horizon until the duo reached within -0.5~0 σ on a 20D MA. Yield peaked at 4.6% on Dec 14. If you approached with a longer term horizon, things wouldn’t have been as enjoyable.
• The only possibly explainable factor for the recent price divergence is HDC I-Controls’ need to dump a 1.78% Holdco stake. 1.78% overhang risk is not enough to sustain this much divergence and current 60% Holdco discount.
• The duo has again entered < -1 σ territory at yesterday’s closing prices. I’d first make another short-term stub trade. I’d hold onto the position until they reach within -0.5~0 σ on a 20D MA with a loss cut at -5%. But a little longer term approach to hunt for a higher yield wouldn’t be a bad idea at this point.

4. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a bid. On 7 January 2019, Konnectivity launched a voluntary conditional offer (VGO) at S$2.06 cash per share. Konnectivity is jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP).

5. Bandhan Bank To Buy GRUH: A Pricey Bank/NBFC Deal

Bandhan Bank (BANDHAN IN) (“BBL”) and Gruh Finance (GRHF IN) (“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. All media sources suggest it was something of a surprise to GRUH personnel and management.

The exchange ratio has been set at 568 Bandhan Bank shares per 1000 GRUH Finance shares. 

Following the announcement, the shares of Bandhan Bank and GRUH Finance have declined by 4.8% and 16.4% respectively. The deal is trading at a gross/annualised spread of 10%/13+% assuming a deal completion date in late September as of Tuesday’s close (but not assuming any dividends). 

The deal is conditional on receiving approvals from the Reserve Bank of India (RBI), Competition Commission India (CCI), National Company Law Tribunal (NCLT) and other relevant regulatory authorities. 

Indicative Timeline

Note that Indian Schemes of Amalgamation also require 75% shareholder approval from all combining parties. The vote for Bandhan shareholders is a foregone conclusion as the promoter Bandhan Financial Holdings has 82.3%. The GRUH vote is not certain but HDFC has 57.8% of the 75% required. 

This deal is really pricey, and some shareholders of Bandhan Bank who will get diluted have voted with their feet. It is a pretty great exit from GRUH for HDFC. While the prima facie evidence suggests that the deal was done to appease the RBI and get closer to the promoter shareholder limit required in October last year, the shareholder structure and CEO Ghosh’s own personal history suggests that neither the 40% rule nor the salary freeze are real hurdles (though the branch opening freeze may be something BBL wants to lift).

In this briefing:

1. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?
2. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model
3. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments
4. PCI Ltd – All Over Before It Starts
5. Softbank: Reduced Yield Competitiveness, End of Passive Buying and Softbank Group’s Hunger for Cash

1. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?

According to a local media outlet called Chosun Daily, it stated that one of the bankers in the deal (Deutsche Bank), already sent teaser letters of this deal to Tencent Holdings (700 HK) and KKR and in the teaser letter, it mentioned about potentially selling nearly 47% of Nexon Co Ltd (3659 JP) (Japan).

The question about whether or not Kim Jung-Joo decides to sell NXC Corp (Korea) or Nexon Co Ltd (3659 JP) (Japan) has important consequences not just for him and his family but also to the minority shareholders of Nexon Co Ltd (3659 JP). If Kim Jung-Joo decides to sell NXC Corp (Korea), there may not be much upside for the minority shareholders of Nexon Co Ltd (3659 JP) since current regulations do not require the buyers to pay potentially additional control premium to the minority shareholders as well. 

However, if Kim Jung-Joo decides to sell Nexon Co Ltd (3659 JP) (Japan), there may be an opportunity for the minority shareholders to gain from an additional control premium. We think that this is one of the reasons why Nexon Co Ltd (3659 JP) shares are up 13% YTD as some of the investors may think that there could be a higher probability that Kim Jung-Joo ends up selling Nexon Co Ltd (3659 JP) (Japan), instead of NXC Corp (Korea). 

2. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model

Would Wal Mart Stores (WMT US) have paid USD16 bn last year for Flipkart, a leading online Indian retailer, if the recent clarification on India’s policy on FDI in e-commerce were in place back then? Foreign owned online retailers in India ( Amazon.com Inc (AMZN US) , Wal Mart Stores (WMT US) and Alibaba Group Holding (BABA US)  ) will need to rejig their operating models and may face prospects of slower growth and even more distant breakeven targets, if the Indian Government is indeed determined to enforce its policy that e-commerce ‘Marketplaces’ operate only as platforms for third party vendors. Unsurprisingly, Amazon.com Inc (AMZN US) and Wal Mart Stores (WMT US) have reportedly teamed up to lobby the government on these regulations. 

The Indian Government had posted a one-page circular on Dec 26th giving further clarifications to its existing policy on foreign owned e-commerce entities. The detailing of policy specifics seems to be an attempt to enforce the existing policy restrictions on foreign owned online retailers; compliance has so far been sketchy. India do not allow majority foreign ownership in multi brand retail stores and online retailers are allowed to operate only as ‘Marketplaces’ and not as B2C entities. With national elections due in next few months, the Government cannot ignore demands from domestic lobby groups to reign in free play by deep pocketed foreign operators that have been hurting local retailers.

In the detailed note below, we present (1) an overview of the regulatory framework and restrictions under which online retailers operate in India (2) the updated policy and its impact on operating models of Amazon and Walmart in India (3) expectations for India’s e-commerce players. Also, there is a likely gainer from all these – a listed Indian player aspiring to trump global majors in India’s online retail turf.

3. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments

In this report, we discuss some of the major changes in regulation and recent important news related to the Korea National Pension Fund Service (NPS), including changes to the voting rights of outsourced Korean equity investments by NPS as well as how it may deal with the Hanjin Kal Corp (180640 KS) corporate governance issues. 

It was reported yesterday that the NPS will allow 57 trillion won ($51 billion) of Korean equity investments which are currently managed indirectly by numerous outsourced asset management companies to have their own respective voting rights. The Financial Services Commission (FSC) announced yesterday that an amendment to the enforcement ordinance of the Capital Market Act was passed allowing NPS’s indirectly managed Korean equity investments’ voting rights to be exercised by the outsourced asset managers rather than by NPS itself passed the Cabinet meeting. 

What are the major implication? As a result of this move, this will act as a key positive catalyst spurring on greater corporate activism since NPS’s outsourced fund managers will have greater freedom to make more aggressive decisions to improve shareholder value of Korean companies. In addition, it also reduces the overall responsibility of carrying out the Stewardship Code changes to not just on NPS but on the rest of the major asset management companies in Korea. 

4. PCI Ltd – All Over Before It Starts

After gaining 22.5% over seven trading days back in mid-September, Pci Ltd (PCI SP) responded to an SGX query over this price action that “it has been approached by a third party in connection with a potential transaction in relation to the securities of the Company. The discussions are on-going …“.

All was revealed on 4th January 2019, when PCI announced that Pagani Holding  (a 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, and to reject or vote against any competing offers. PCI’s executive chairman, Peh Kwee Chim, is Chuan Hup’s majority owner. 

The price presents a ~18% premium to the last close, but a 49% premium to the “undisturbed” price back in early September and a 60% premium over the 12-month VWAP. The Offer values PCI at US$195mn.

With the 75%-for scheme condition satisfied and a lifetime-high takeover price, this is a done deal, and is duly reflected in the gross/annualised spread of 2.3%/6.8%, assuming mid-May completion.

5. Softbank: Reduced Yield Competitiveness, End of Passive Buying and Softbank Group’s Hunger for Cash

We are once again turning negative on Softbank Corp (9434 JP) as the stock price is now 18% above the ¥1,200 level which we mentioned looked cheap, outperforming Topix by 20% and the Nikkei by 21%. 

Softbank Corp: When Does It Become a Buy?

In our view this IPO was oversold and probably to numerous weak hands who may now be looking at the large price drops that Softbank Group has occasionally suffered. We would hazard a guess that many of the individuals looking to flip the shares may still not have sold, however, if the stock dips below ¥1,200 we believe risk-reward would tilt positive until the passive buying is complete. Our view on this large drop is mostly that Softbank over-reached in terms of the size of the sale and the valuation.

The business, while subject to various headwinds should still be highly cash generative and at the current price is on just under 13x EV/OP. That’s not particularly cheap but nor is it ridiculously expensive if you believe OP will not drop (we believe it will). With a bit more of a discount and once the initial selling pressure from flippers dies down we believe the yield and passive buying should help the stock find a temporary floor. We do not view this as an attractive long-term holding in any way shape or form, but as a short-term trade the potential to make a 5-10% return on the back of a bounce following panic selling by retail supported by the yield and passive buying seems reasonably good.

Prior to that, we had flagged that retail demand for the IPO could be fragile in Softbank IPO: Signs Point to Risk of Early IPO Price Break and while there was a stronger sell-off than we expected immediately post listing, we would hazard a guess that there could still be an overhang close to the IPO price as there could be significant latent sell volume from retailers hoping to break-even and if that opportunity opens up in a weak market we believe many could choose to sell despite the rebound.

We would point to the news today regarding Softbank Group lowering its planned investment in WeWork from $16bn to just $2bn due to investors in the Vision Fund balking. As perhaps the most aggressive tech investor of the last few years, Softbank stepping back is not a good sign overall and raises questions about the viability of the valuations that other companies in its investment portfolio, namely Uber, are targeting for their upcoming IPOs. With news sources suggesting that Softbank Group is also looking to offload its Nvidia Corp (NVDA US) stake, the tide appears to have truly turned for tech in general and the chronically unprofitable platform companies such as Uber and WeWork in particular.

This raises the governance risks we initially highlighted regarding the use of Softbank Corp for funding the overall Softbank Group. As such, despite a final round of passive buying for Topix buying at the end of the month, the stock price looks vulnerable here.

In this briefing:

1. Hankook Tire Worldwide Stub Reverse Trade: Massive Price Divergence Is Created Today
2. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
3. Healius (HLS AU): Bid Rejection Provides Option Value
4. Poongsan Holdings Stub Trade: Current Status & Trade Approach
5. The GER Weekly EVENTS Wrap: Healius, FamilyMart, Healthscope, Myob and Hitachi

1. Hankook Tire Worldwide Stub Reverse Trade: Massive Price Divergence Is Created Today

• Hankook Tire Worldwide (000240 KS) is another local single sub dependent holdco in Korea. Hankook Tire (161390 KS) accounts for nearly 90% of the sub holdings. Holdco is now at a 35% discount to NAV. This is substantially better than the local peer average.
• Sub is taking a harsh hit now mainly on concerns over 4Q results. It is currently down 7% today. In contrast, Holdco is holding steady. It is rather up 1%. This is creating a massive price divergence. As of now, they are close to +3 σ on a 20D MA.
• Holdco’s real world float is much less than 10% of total shares. This often serves to help Holdco stave off market volatility like today’s. But this much divergence is a rare one. Sub’s current PER on FY19e is at 7x. This is 20% less than its usual level. It should be that Sub is being oversold.
• I’d make a very short-term trade at this point. I’d go short Holdco and long Sub for a quick mean reversion.

2. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not

This insight briefly summarises the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in  2018.

Transactions discussed were typically Asia-Pacific-centric or concerned an outbound transaction initiated from an Asia-Pacific-listed company. The majority of these deals involved a market cap/deal size in excess of US$100mn.

The mega deals of Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN), Sprint Corp (S US)/T Mobile Us Inc (TMUS US) and Intl Business Machines (IBM US)/Red Hat Inc (RHT US) were first discussed in May, June and November respectively.

• The most generous country? The average premium for Australian and Hong Kong deals was almost identical at 38%.
• The stingiest? Singapore with 16%.
• The graveyard award? 49 deals were completed with 35 ongoing. Australia had four deals (out of a total of 29, the most for any country) that were abandoned for various reasons – such as CKI getting dinged by FIRB in its tilt for APA Group (APA AU). But in terms of outright fails, Hong Kong takes home that award following the failures in Pou Sheng Intl Holdings (3813 HK), Guoco Group Ltd (53 HK) and Spring Real Estate Investment Trust (1426 HK).

During the year a number of large, high profile transactions were completed that were also extensively analysed and discussed on Smartkarma. However, if the initial discussions between the two parties (acquirer & target) took place pre-2018, they are not included in the charts above. A selection of these include (in no particular order): 

Broadcom Corp Cl A (BRCM US)/Qualcomm Inc (QCOM US)
Alps Electric (6770 JP)/Alpine Electronics (6816 JP)
Westfield Corp (WFD AU)/Unibail-Rodamco SE (UL FP)
Idemitsu Kosan (5019 JP)/Showa Shell Sekiyu Kk (5002 JP)
Orient Overseas International (316 HK)

3. Healius (HLS AU): Bid Rejection Provides Option Value

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.”

4. Poongsan Holdings Stub Trade: Current Status & Trade Approach

• 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.

5. The GER Weekly EVENTS Wrap: Healius, FamilyMart, Healthscope, Myob and Hitachi

Happy New Year! Below is a recap of the key event-driven research produced by the Global Equity Research team. This week we dig into the potential low-ball bid for Healius (HLS AU) , we update our view on the messy deal between Familymart Uny Holdings (8028 JP) and Don Quijote Holdings (7532 JP) as the deal shifts to earnings dislocation. In addition, we question the economics of a material bump for Healthscope Ltd (HSO AU), assess the reduced bid (and great call by Arun) on MYOB Group Ltd (MYO AU) and finally dig into the potentially risky acquisition by Hitachi Ltd (6501 JP) of ABB Ltd (ABBN VX)‘s power grids. 

The rest of our event-driven research can be found below

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