We believe that Jangho’s bid is opportunistic and unattractive. Also, if Jangho puts in an improved bid, getting regulatory blessing will be an uphill task.
One of the reasons why the Nexon’s founder Kim Jung-Joo, who is only 50 years old, is trying to sell his entire stake in Nexon may have been due to the recent allegations about him giving about $380,000 worth of Nexon stock (prior to its listing) to his old high school classmate (who is now a senior public prosecutor) for free. Kim Jung-Joo has repeatedly faced allegations and attended numerous court hearings on this matter in the past two years. He may have gotten a bit tired from all these allegations.
Given the enormous size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not likely to purchase Nexon. Rather, the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK). The sheer huge size of this deal will represent one of the largest M&A deals in Asia in 2019.
The average NAV discount of a basket of 40 Holdcos steadily, and not altogether unsurprisingly, widened throughout the year.
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.
Below the various NAV discount chart summaries of various baskets are my weekly setup/unwind tables.
This, and other relationships discussed below, trade with: 1) a minimum liquidity threshold of US$1mn on a 90-day moving average; and 2) a minimum 20% ‘market capitalisation’ threshold, whereby the value of the holding/Opco held must be at least 20% of the parent’s market cap.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainlanders in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.
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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.
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.
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):
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.
The rest of our event-driven research can be found below
Best of luck for the new week – Rickin, Venkat and Arun
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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.
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.
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.
The popular narrative is that should a binding proposal materialise; shareholders can expect a bidding war among the existing bidders, and potential new bidders as Healthscope is “in play”. While there is there is a possibility for some ‘‘sweetening’’ to the bid price, we think that that the formal “winning” bid is unlikely to be materially above the current Brookfield bid.
As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, we try to answer a few questions in this review:
Takeover premium. Based on our estimates, the potential improvements in ROE from the merger and potential divestment of MBK, we think it justifies an Bt11.1/sh premium for Thanachart. The new best case price target for Thanachart stands at Bt64.25/sh, implying a 29% premium over current share price.
Negotiations will play a key role in the actual takeover price. We provide a table of how much money is left on the table for TMB if they acquire TCAP at lower than what we expect.
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 deposit base for both banks…more so on the Thanachart side.
Size. Even after the merger, the combined bank would still have a much smaller headcount than BAY, smallest of the five largest Thai banks. However, it would have more branches than BAY and just 11% less branches than KBANK.
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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%.
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.
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.
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.
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):
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.
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Hyosung Corporation (004800 KS) had fallen 16% just in two days. Holdco is now at a 50% discount to NAV. This is a 10%p drop from 10 days ago (Dec 19). Holdco price must have been overly corrected. The ongoing police investigation on Cho Hyun-joon’s alleged crime won’t lead to a delisting. 10%p drop in discount to NAV must be a price divergence, not a sensible price correction.
Trade volume remained steady. Local hedge funds led the selling on Dec 27. Even they changed their position the following day. No short selling spike has been seen either. Hyosung is one of the highest yielding div holdco stocks. Hyosung Capital liquidation and Anyang Plant revaluation would be another short-term plus.
I’d exploit this price divergence. It would soon revert to the Dec 19 discount level. It should at least stay at the peer average.
Just how will Harbin Electric Co Ltd H (1133 HK)‘s independent directors justify recommending an Offer to shareholders at a price which gave cash less cavalier than cash?
MYOB Group Ltd (MYO AU)‘s directors grudgingly yet understandably enter an agreed deal with KKR.
As previously discussed in Harbin Electric Expected To Be Privatised, Harbin Electric (HE) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption. The Offer price of $4.56/share, an 82.4% premium to last close, is bang in line with that paid by HEC in January this year for new domestic shares. The Offer price has been declared final.
Of note, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors (and the IFA) can justify recommending an Offer to shareholders at any price below the net cash/share, especially when the underlying business is profit-generating.
Dissension rights are available, however, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC and HK Law.
Trading at a gross/annualised spread of 15%/28% assuming end-July completion, based on the average timeline for merger by absorption precedents. As HEC is only waiting for approval from independent H-shareholders suggests this transaction may complete earlier than precedents.
KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal. The Offer price assumes no full-year dividend is paid.
On balance, MYOB’s board has made the right decision to accept KKR’s reduced Offer. The argument that MYOB is a “known turnaround story” is challenged as cloud-based accounting software providers Xero Ltd (XRO AU)and Intuit Inc (INTU US) grab market share. This is also reflected in MYOB’s forecast 7% revenue growth in FY18 and follows a 10% decline in first-half profit, despite a 61% jump in online subscribers.
And there is justification for KKR’s lowering the Offer price: the ASX is down 10% since KKR’s initial tilt, the ASX technology index is off by ~14%, a basket of listed Aussie peers are down 17%, while Xero, the most comparable peer, is down ~20%. The Scheme Offer is at a ~27% premium to the estimated adjusted (for the ASX index) downside price of $2.68/share.
Bain was okay selling at $3.15/share to KKR and will be fine selling its remaining ~6.5% stake at $3.40. Presumably, MYOB sounded out the other major shareholders such as Fidelity, Yarra Funds Management, Vanguard etc as to their read on the revised $3.40 offer, before agreeing to the SIA with KKR.
If the markets avoid further declines, this deal will probably get up. If the markets rebound, the outcome is less assured. This Tuesday marks the beginning of a new year and a renewed mandate for investors to take risk, especially an agreed deal; but the current 5.3% annualised spread is tight.
The Ministry of Finance, the major shareholder of TMB, confirmed that both Krung Thai Bank Pub (KTB TB)and Thanachart Capital (TCAP TB)had engaged in merger talks with TMB. Considering an earlier KTB/TMB courtship failed, it is more likely, but by no means guaranteed, that the deal with Thanachart will happen. Bloomberg is also reporting that Thanachart and TMB want to do a deal before the next elections, which is less than two months away.
TMB is much bigger than Thanachart and therefore it may boil down to whether TMB wants to be the target or acquirer. In Athaporn Arayasantiparb, CFA‘s view, a deal with Thanachart would leave TMB as the acquirer rather than the target. But Thanachart’s management has a better track record than TMB.
Both banks have undergone extensive deals before this one: 1) TMB acquired DBS Thai Danu and IFCT; and 2) Thanachart engineered an acquisition of the much bigger, but struggling, SCIB.
A merger between the two would still leave them smaller than Bank Of Ayudhya (BAY TB) and would not change the bank rankings; but it would give TMB a bigger presence in asset management, hire-purchase finance and a re-entry into the securities business.
Mando accounts for 45% of Halla’s NAV, which is currently trading at a 50% discount. Sanghyun Park believes the recent narrowing in the discount may be due to the hype attached to Mando-Hella Elec, which he believes is overdone; and recommends a short Holdco and long Mando. Using Sanghyun’s figures, I see the discount to NAV at 51%, 2STD above the 12-month average of ~47%.
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.
The accounting fraud issue had hammered the Celltrion duo nearly equally up until Dec 26. But last two days were different. Healthcare got hurt much more deeply. Celltrion fell only 2.41%, but Healthcare fell 11.52%.
The accounting issue is supposed to be equal to both. KOSPI move and merger are still alive to push up Healthcare. Local institutions and foreigners have bashed both pretty much equally in the last two days. This is another sign that it was more of a price divergence than a mean reversion.
The duo is now at 20D MA and also the yearly mean. I expect it to go substantially below the yearly mean on KOSPI move and merger expectations. A powerful downwardly mean adjusting force still seems to be in action. I’d long Healthcare and short Celltrion to exploit the latest price divergence.
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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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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.
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.
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As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, we try to answer a few questions in this review:
Takeover premium. Based on our estimates, the potential improvements in ROE from the merger and potential divestment of MBK, we think it justifies an Bt11.1/sh premium for Thanachart. The new best case price target for Thanachart stands at Bt64.25/sh, implying a 29% premium over current share price.
Negotiations will play a key role in the actual takeover price. We provide a table of how much money is left on the table for TMB if they acquire TCAP at lower than what we expect.
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 deposit base for both banks…more so on the Thanachart side.
Size. Even after the merger, the combined bank would still have a much smaller headcount than BAY, smallest of the five largest Thai banks. However, it would have more branches than BAY and just 11% less branches than KBANK.
Hyosung Corporation (004800 KS) had fallen 16% just in two days. Holdco is now at a 50% discount to NAV. This is a 10%p drop from 10 days ago (Dec 19). Holdco price must have been overly corrected. The ongoing police investigation on Cho Hyun-joon’s alleged crime won’t lead to a delisting. 10%p drop in discount to NAV must be a price divergence, not a sensible price correction.
Trade volume remained steady. Local hedge funds led the selling on Dec 27. Even they changed their position the following day. No short selling spike has been seen either. Hyosung is one of the highest yielding div holdco stocks. Hyosung Capital liquidation and Anyang Plant revaluation would be another short-term plus.
I’d exploit this price divergence. It would soon revert to the Dec 19 discount level. It should at least stay at the peer average.
Just how will Harbin Electric Co Ltd H (1133 HK)‘s independent directors justify recommending an Offer to shareholders at a price which gave cash less cavalier than cash?
MYOB Group Ltd (MYO AU)‘s directors grudgingly yet understandably enter an agreed deal with KKR.
As previously discussed in Harbin Electric Expected To Be Privatised, Harbin Electric (HE) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption. The Offer price of $4.56/share, an 82.4% premium to last close, is bang in line with that paid by HEC in January this year for new domestic shares. The Offer price has been declared final.
Of note, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors (and the IFA) can justify recommending an Offer to shareholders at any price below the net cash/share, especially when the underlying business is profit-generating.
Dissension rights are available, however, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC and HK Law.
Trading at a gross/annualised spread of 15%/28% assuming end-July completion, based on the average timeline for merger by absorption precedents. As HEC is only waiting for approval from independent H-shareholders suggests this transaction may complete earlier than precedents.
KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal. The Offer price assumes no full-year dividend is paid.
On balance, MYOB’s board has made the right decision to accept KKR’s reduced Offer. The argument that MYOB is a “known turnaround story” is challenged as cloud-based accounting software providers Xero Ltd (XRO AU)and Intuit Inc (INTU US) grab market share. This is also reflected in MYOB’s forecast 7% revenue growth in FY18 and follows a 10% decline in first-half profit, despite a 61% jump in online subscribers.
And there is justification for KKR’s lowering the Offer price: the ASX is down 10% since KKR’s initial tilt, the ASX technology index is off by ~14%, a basket of listed Aussie peers are down 17%, while Xero, the most comparable peer, is down ~20%. The Scheme Offer is at a ~27% premium to the estimated adjusted (for the ASX index) downside price of $2.68/share.
Bain was okay selling at $3.15/share to KKR and will be fine selling its remaining ~6.5% stake at $3.40. Presumably, MYOB sounded out the other major shareholders such as Fidelity, Yarra Funds Management, Vanguard etc as to their read on the revised $3.40 offer, before agreeing to the SIA with KKR.
If the markets avoid further declines, this deal will probably get up. If the markets rebound, the outcome is less assured. This Tuesday marks the beginning of a new year and a renewed mandate for investors to take risk, especially an agreed deal; but the current 5.3% annualised spread is tight.
The Ministry of Finance, the major shareholder of TMB, confirmed that both Krung Thai Bank Pub (KTB TB)and Thanachart Capital (TCAP TB)had engaged in merger talks with TMB. Considering an earlier KTB/TMB courtship failed, it is more likely, but by no means guaranteed, that the deal with Thanachart will happen. Bloomberg is also reporting that Thanachart and TMB want to do a deal before the next elections, which is less than two months away.
TMB is much bigger than Thanachart and therefore it may boil down to whether TMB wants to be the target or acquirer. In Athaporn Arayasantiparb, CFA‘s view, a deal with Thanachart would leave TMB as the acquirer rather than the target. But Thanachart’s management has a better track record than TMB.
Both banks have undergone extensive deals before this one: 1) TMB acquired DBS Thai Danu and IFCT; and 2) Thanachart engineered an acquisition of the much bigger, but struggling, SCIB.
A merger between the two would still leave them smaller than Bank Of Ayudhya (BAY TB) and would not change the bank rankings; but it would give TMB a bigger presence in asset management, hire-purchase finance and a re-entry into the securities business.
Mando accounts for 45% of Halla’s NAV, which is currently trading at a 50% discount. Sanghyun Park believes the recent narrowing in the discount may be due to the hype attached to Mando-Hella Elec, which he believes is overdone; and recommends a short Holdco and long Mando. Using Sanghyun’s figures, I see the discount to NAV at 51%, 2STD above the 12-month average of ~47%.
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.
The accounting fraud issue had hammered the Celltrion duo nearly equally up until Dec 26. But last two days were different. Healthcare got hurt much more deeply. Celltrion fell only 2.41%, but Healthcare fell 11.52%.
The accounting issue is supposed to be equal to both. KOSPI move and merger are still alive to push up Healthcare. Local institutions and foreigners have bashed both pretty much equally in the last two days. This is another sign that it was more of a price divergence than a mean reversion.
The duo is now at 20D MA and also the yearly mean. I expect it to go substantially below the yearly mean on KOSPI move and merger expectations. A powerful downwardly mean adjusting force still seems to be in action. I’d long Healthcare and short Celltrion to exploit the latest price divergence.
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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.
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.
We believe that Jangho’s bid is opportunistic and unattractive. Also, if Jangho puts in an improved bid, getting regulatory blessing will be an uphill task.
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The accounting fraud issue had hammered the Celltrion duo nearly equally up until Dec 26. But last two days were different. Healthcare got hurt much more deeply. Celltrion fell only 2.41%, but Healthcare fell 11.52%.
The accounting issue is supposed to be equal to both. KOSPI move and merger are still alive to push up Healthcare. Local institutions and foreigners have bashed both pretty much equally in the last two days. This is another sign that it was more of a price divergence than a mean reversion.
The duo is now at 20D MA and also the yearly mean. I expect it to go substantially below the yearly mean on KOSPI move and merger expectations. A powerful downwardly mean adjusting force still seems to be in action. I’d long Healthcare and short Celltrion to exploit the latest price divergence.
Halla Holdings is falling nearly 5% today. Holdco said it’d give a ₩2,000 div per share. This is about 4.5% div yield at yesterday’s closing price. 5% drop today shouldn’t be much as an ex-dividend date price drop. Mando fell 5%. Mando was oversold relative to the other local auto stocks, particularly to Halla Holdings. They are still close to +1 σ on a 20D MA.
Mando-Hella Elec has been another reason behind Holdco’s valuation divergence against Mando lately. I believe Mando-Hella is being overhyped. Mando-Hella-caused divergence should no longer be effective. I expect ‘downwardly’ mean reversion from now on. I’d go short Holdco and long Mando at this point.
The Offer price of $4.56/share, an 82.4% premium to last close, has been declared final. The price corresponds to the subscription of 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) @$4.56/share by HEC in January this year.
Of greater significance, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors can justify recommending an Offer to shareholders at any price which gave cash less cavalier than cash.
Dissension rights are available, however, what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident.
As all PRC approvals have been obtained, this transaction may complete earlier than prior mergers by absorption, which have taken 6-8 months from the initial announcement.
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