As share class trades go, Discovery has presented several opportunities over the years to take advantage of index changes, corporate events, and a management that has aggressively repurchased nonvoting DISCK shares versus voting DISCA shares.
Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.
New Pride Corp (900100 KS) announced a ₩36.2bil rights offer. This is a public offering, so there won’t be subscription rights to trade. Pricing will be done as 3-day VWAP on Jan 9~11 at a 30% discount.
Supposedly, we can have ample opportunity to arb trade. This may be what the company is hoping. Simply, we wait until Jan 16~17 (subscription period) and see the spread. At this much discount, there must be a huge spread opening.
Proration risk can be much more annoying than a usual stockholder offering. In the previous public offering event by New Pride, subscription rate went as high as 370 to 1. It should be way much lower this time. But still this is risky enough.
LG Chem Ltd (051910 KS) 1P is now at a 44.20% discount to Common. Div would be the same as last year of ₩6,000 despite lower earnings. Payout would be 28%. Div yield for Common will be 1.68%, and 3.03% for 1P. Div yield difference stands at 1.35%p. This is a record high at least since 2014.
1P’s discount to Common is hovering at the highest level in 2 years. On a 20D MA, it is close to +1 σ. It may not be tempting enough for those seeking high yields. Otherwise, this’d be worth giving it a shot. Liquidity shouldn’t be an issue. Short recovering risk on Common also appears to be limited.
Daelim Industrial (000210 KS) is one of the main targets of local activist movement. This makes a setting for higher dividends. Common div yield to 1.58% and Pref to 4.18%. Difference is 2.59%p. This is the widest gap in many years.
Pref is currently at a 60.89% discount to Common. Among those > ₩100bil MC prefs, it is the second highest discounted pref, only behind CJ Cheiljedang 1P (097955 KS). Local street expects at least ₩1,600 div per share. This should be a conservative estimate. On a 20D MA, Pref is above +1 σ.
Dec 26 is record date of dividend payout. I expect a price catchup movement tomorrow in favor of Pref. I’d go long Pref and short Common as early in the morning as possible.
After securing a 19.9% stake from Bain in early October and initially pitching A$3.70/share, in a textbook bear hug, KKR (marginally) bumped its indicative offer to A$3.77/share to a get a look under the hood, then following seven weeks of due diligence, backtracked with a lower price of A$3.40/share, citing adverse market conditions.
MYOB Board’s response last week to the reduced offer was to inform KKR that it is not in a position to recommend the revised proposal, however, “it remains in discussions with KKR regarding its proposal”, leaving the door open for ongoing negotiations. KKR for its part, said there were no landmines following the DD process. The price action last Friday suggested the outcome was a coin toss.
Today, 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 and subject to an independent expert concluding the Offer is in the best interest of shareholders. The Offer price assumes no full-year dividend is paid.
The agreement provides a “go shop” provision until the 22 February 2019 – when MYOB is expected to release its FY18 results – to solicit competing proposals.
The Offer appears reasonable when compared to peers and with regards to the 14% decline in the ASX technology index; but conversely, could be construed as being opportunistic.
A Scheme Booklet is expected to be dispatched mid-March with an estimated implementation date of 3 May. Currently trading at a 3.8%/11% gross/annualised spread. 1 January makes a new year and there will be investors who would want to take an agreed deal at 11%.
Recapping the original plan: when Familymart Uny Holdings (8028 JP)(“FM”) sold the remaining 60% of UNY to Don Quijote Holdings (7532 JP) (DQ), it entered into an agreement to buy 20+% in DQ, for one of two reasons; 1) a company wants to prove to the employees of a division being sold that they are maintaining a watchful eye over them, or (as is now evident) 2) the buyer wants to gain an equity method affiliate and the income from it (including the placeholder for frontrunner status to future capital events).
FM launched a Partial Tender Offer at a 20% premium to last in order to buy these shares, and in the MOU to launch the tender offer there was a clause which said that if FM did not reach the full 20%, it had made arrangements to borrow shares in order to get to 20% of the voting rights. And if FM did not manage to get to the full 20%, there was an agreement between DQ which allowed FM to buy shares in the market to get to a 20% (but not larger) position.
If FM managed to get the shares, it was going to buy from the weak hands. Growth stock managers don’t like selling growth stocks until the growth stops growing. DQ is still growing, and with UNY, DQ may grow faster than previously expected. The upshot is that everyone decided they’d stand pat – FM got nothing in the tender (0.08% of the total desired).
Shares in DQ could fall because of a lack of hard strategy announced by FM to buy all the shares at a higher price immediately. That shouldn’t be a big worry – it wasn’t going to happen.
Travis Lundy sees DQ having a performance skew which includes a “cushion of sorts” in the ¥5500-6600/share zone where he would expect FM to acquire shares. He does not see a cushion for the shares of FM, and expects them to be volatile.
It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK)& Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual. Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
“Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.
Reportedly Motherson has entered merger/acquisition talks withLeoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.
Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi.
Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN)(9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players.
Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
The Nikkei carried an article noting that the Japanese government’s FY2019 budget currently being formed proposes a sale of ¥160bn of shares in NTT to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares. One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Travis estimates NTT has ~1.95bn shares outstanding, or ~1.917bn shares outstanding ex-Treasury shares, after recent buybacks. If NTT cancelled the shares it has bought back prior to buying back shares from the government, this would allow NTT to buy back 59mm shares from the government (assuming those shares are also cancelled). If it did not, it would mean NTT could only buy back about 42-43mm shares. 59mm shares backs out ¥250bn; 43mm shares at a 10% discount would be ¥180bn. That means there is about 10% leeway in stock price to buy ¥160bn from the government IF shares repurchased under the current buyback are not cancelled.
But that also means that there would be no more buybacks from the government after that until the company buys back more shares from the market. If the company wanted to buy back another ¥200bn from the government, ceteris paribus it would have to buy back something like ¥400-450bn first from the market in order to reduce the denominator. Travis concludes there is still more on-market buying to do.
At an NTT/ NTT Docomo Inc (9437 JP) ratio of 1.80x, buybacks coming, expected ongoing strong dividend policy (and lots of headroom to do so, unlike perhaps Softbank Corp (9434 JP)), and investor suspicion of what comes next for Docomo, NTT is the home of the cashflow.
The IPO of Softbank Corp and the Merger of Takeda and Shire Pharmaceuticals create significant changes in TOPIX, MSCI, and FTSE because of the addition of roughly ¥5tn of “new” market capitalization in major Japan indices. Pure passive investors have something like ¥1.35tn of Softbank Corp and Takeda Pharmaceutical to buy.
However, after Travis’ initial note (Softbank Corp, Takeda, and Newton’s Three Laws of Motion), TSE unhelpfully changed their mind on timing (for Takeda) based on an unhelpful change by the LSE. With the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st. The new schedule is:
Index Deletion
Shire (shs mm)
Index Inclusion
Takeda (shs mm)
Index Effect (US$ bn)
Net Delta (US$bn)
21 Dec
MSCI
-50
MSCI JP
+75
– $0.3bn
+$1.3bn
21 Dec
FTSE UK, All-Share,
-100-130
FTSE JP
+15
-$5.2bn+
– $2.1bn
rest of December – end of a pretty bad year for hedge funds, but illiquid
all of January
30 Jan
TOPIX
-$1.9bn
TOPIX, JPXN400
+60
+$2.1bn
+$2.1bn
30 Jan
TOPIX
-$3.5bn
TOPIX
Softbank
+$3.5bn
+$3.5bn
all of February
27 Feb
TOPIX, JPXN400
+60
+$2.1bn
+$2.1bn
It doesn’t change the amounts but a lot more time allows for more risk and preparation and there will no longer be any potential settlement issues on the TOPIX side. There is still the same amount of Takeda to buy in TOPIX and JPX Nikkei 400.
In principle, Travis would want to be long Takeda at the close of the year of 2018, but given the LSE and TSE changes there is less support to give and the payoff is substantially more distant.
Speciality steel maker Nisshin Steel (5413 JP)is slated to merge with parent company Nippon Steel & Sumitomo Metal (5401 JP)as of January 1, 2019. For that, Nisshin Steel will be delisted on December 26th (i.e. the last day of trading is the 25th) and that means the Nikkei Inc was obliged to choose a replacement for Nisshin Steel in the Nikkei 225 and other indices. On December 11th, the Nikkei Inc announcedItoham Yonekyu Holdings Inc (2296 JP) would take Nisshin’s place in the Nikkei 500 Index; announced that Japan Post Holdings (6178 JP) would join the Nikkei 300 Index; and announced thatDic Corp (4631 JP)would replace Nisshin Steel in the Nikkei Stock Average, better known as the Nikkei 225.
Nisshin Steel’s deletion is a nothing-burger.
The possibility of a DIC addition was well-flagged as early as May when sell-side brokers started compiling Annual and Ad Hoc Review lists for the Nikkei 225 changes to come in September and as a result of the Nisshin Steel merger. Travis would rather be long DIC than short DIC through the close of December 21st or probably December 25th.
YP appeared “cheap” back in April when I last discussed this Holdco, and is now cheaper, with its holding in KZ accounting for near-on 200% of its market cap. I can’t think of any other parent/subsidiary relationship – one which is essentially a single stock structure – with such a deep discount. Especially one where the stub ops operate in a similar space to that of the listed holding.
On the negative front, an investigation into YP’s Seokpo zinc smelter remains ongoing on account of perceived environmental transgressions. The Seokpo smelter is located in a national park on the Nakdong river. Wastewater containing above-legal limits of certain chemicals (fluoride and selenium) allegedly flowed downstream to residents, who are heavily reliant on this water.
YP’s stub and KZ are in the same business, but there are differences. YP does not have a balanced product mix as KZ does, with around 84% of its revenue coming from zinc-related production (for the 9M18 period), compared to 42.5% (on a revenue basis) for KZ, followed by lead (20.4%), silver (20.2%), and gold (7.6%).
However, YP and KZ remain inextricably intertwined and the current discount is unjustifiably steep. Just that YP’s liquidity, uncertainty on Seokpo, and lack of a near-term catalyst make for a difficult stub set-up.
A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp,closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.
At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK)and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?
If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion.
For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.
CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)
LCY Chemical Corp (1704 TT). MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan. The settlement is expected to take place mid-Feb.
Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.
CCASS
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.
LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.
There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc.
One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.
This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs.
Preceding my comments on Young Poong 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%.
On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.
Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise.
LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.
Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK)is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending.
HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn or HK$7.27/share) was 65%.
HE issued 329mn domestic shares (~47.16% of the existing issued domestic shares and ~24.02% of the existing total issued shares) to its parent in January this year, at HK$4.56/share or a 60.9% discount to the June 2017 book value. A similar discount to the June 2018 book value backs out HK$4.15/share, or ~67% upside from the undisturbed price, in line with the premium to ASMC’s Offer.
A privatisation would require a scheme-like vote for the H-shares. HEC holds no H shares. There are 675mn H shares and no single shareholder controls a 10% (or more) blocking stake.
Dissension rights are available according to HE’s articles of association, although what constitutes a “fair price” under those rights, and the timing of the settlement under such rights, are not evident.
There are likely to be the customary PRC regulatory approvals required, however as HEC is already the controlling shareholder and an SOE, these conditions are not in doubt.
Should an offer emerge, expect completion in ~6 months from the initial announcement.
Hyundai Motor Co (005380 KS) and Hyundai Mobis (012330 KS) are way more correlated than what internal sales dependency suggests. Their 2Y correlation coefficient is 0.84. The scatter chart shows they are clearly cointegrated.
The owner family potentially buying Mobis shares may create divergence in favor of Motor. They need to sell their Motor shares to buy Mobis shares. The higher Motor price and the lower Mobis price are, the happier and wealthier they become.
Current price ratio is a little below 2Y stat mean. I expect it to reach a +0.5~1 σ level on 2Y SD. This is a 4.5~9% yield. I’d go long Motor and short Mobis to hunt for this.
Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.
After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.
If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.
So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).
Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot.
The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”
I cheerfully say quantum mechanics completely baffles me.
I less cheerfully say this whole episode with Takeda and index providers has baffled me too.
But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.
If it all works out well, it might just be Spooky Action At a Distance.
*And there, of course, you have the third Hamlet reference this month… I haz all your Shakespeares!
Hitachi Ltd (6501 JP) announced the acquisition of an 80.1% stake in ABB Ltd (ABBN VX)’s power grids business for $6.4 billion. ABB will retain the remaining stake in the divested unit, which is valued at an EV of $11 billion. ABB’s power grids is a global #1 player and makes transformers, long distance electricity-transmission systems and energy storage units.
Setting aside the huge cultural and integration challenges, we believe that Hitachi’s acquisition of ABB’s power grids is a bold but a risky move.
As share class trades go, Discovery has presented several opportunities over the years to take advantage of index changes, corporate events, and a management that has aggressively repurchased nonvoting DISCK shares versus voting DISCA shares.
Right before Christmas, the Ministry of Finance confirms that both Thanachart and KTB were in talks to merge with TMB. We note that:
Considering that KTB’s earlier courtship failed once, it is more likely, but by no means guaranteed, for the deal with Thanachart to happen.
A deal with Thanachart would leave TMB as the acquirer rather than the target. Thanachart’s management has 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 BAY and not really change the bank rankings, but it would give TMB a bigger presence in asset management and hire-purchase finance and an re-entry into the securities business.
In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook.
Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in.
Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.
THEY GOT NOTHING.
I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners.
“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected.
The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.
There was a clearly-available trading strategy based on that.
The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).
CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.
A last-minute lump of coal in the stocking from accounting software and services provider MYOB Group Ltd (MYO AU)?
Kohlberg Kravis Roberts has reduced its indicative offer to $3.40 from $3.77 after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal is scheduled to expire at 5pm Friday, providing a day and change for MYOB to sound out shareholders as to the next move. Either the lower tilt is grudgingly accepted, or MYOB rejects and KKR walks away (for now), or goes hostile.
Either way, with MYOB’s VWAP above the revised proposal on all but 6 days since the initial announcement on the 8 October and $3.47/share on average, there won’t be a lot of Ho Ho Ho’ing.
Shares are down 11% as I type, implying 13% upside and 11% downside (using the ASX performance-adjusted price) or ~18% downside when pegged to peers. That’s not an attractive risk/reward heading into year-end.
Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.
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.
Australian Pharma Indus (API AU), a pharmaceutical wholesaler, has lobbed an indicative cash-scrip proposal for its competitor, Sigma Healthcare (SIG AU). Under the proposal, Sigma shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share, implying $0.686 per Sigma share. If the proposal is successful, API/Sigma shareholders would own 63%/37% of the merged API-Sigma.
Unsurprisingly, API believes its proposal delivers fair value to both API and Sigma shareholders. However, our analysis suggests that Sigma shareholders need a bump for the bid to cross the finish line.
There are seven stocks which were promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December.
A couple are decently largecap. Most are smaller.
A good question to ask when looking at these stocks might be… What Really Happens Around TOPIX Inclusions?
Having traded them for much of the last 20yrs, I had my hypotheses, and had done studies over the years for my own purposes, but I had not done a study recently. To check my personal hypotheses I tested 340+ TOPIX inclusions over the past five years.
There are patterns to the history of trading these events which are worth a look. Some of the patterns are reasonably interesting.
After securing a 19.9% stake from Bain in early October and initially pitching A$3.70/share, in a textbook bear hug, KKR (marginally) bumped its indicative offer to A$3.77/share to a get a look under the hood, then following seven weeks of due diligence, backtracked with a lower price of A$3.40/share, citing adverse market conditions.
MYOB Board’s response last week to the reduced offer was to inform KKR that it is not in a position to recommend the revised proposal, however, “it remains in discussions with KKR regarding its proposal”, leaving the door open for ongoing negotiations. KKR for its part, said there were no landmines following the DD process. The price action last Friday suggested the outcome was a coin toss.
Today, 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 and subject to an independent expert concluding the Offer is in the best interest of shareholders. The Offer price assumes no full-year dividend is paid.
The agreement provides a “go shop” provision until the 22 February 2019 – when MYOB is expected to release its FY18 results – to solicit competing proposals.
The Offer appears reasonable when compared to peers and with regards to the 14% decline in the ASX technology index; but conversely, could be construed as being opportunistic.
A Scheme Booklet is expected to be dispatched mid-March with an estimated implementation date of 3 May. Currently trading at a 3.8%/11% gross/annualised spread. 1 January makes a new year and there will be investors who would want to take an agreed deal at 11%.
Recapping the original plan: when Familymart Uny Holdings (8028 JP)(“FM”) sold the remaining 60% of UNY to Don Quijote Holdings (7532 JP) (DQ), it entered into an agreement to buy 20+% in DQ, for one of two reasons; 1) a company wants to prove to the employees of a division being sold that they are maintaining a watchful eye over them, or (as is now evident) 2) the buyer wants to gain an equity method affiliate and the income from it (including the placeholder for frontrunner status to future capital events).
FM launched a Partial Tender Offer at a 20% premium to last in order to buy these shares, and in the MOU to launch the tender offer there was a clause which said that if FM did not reach the full 20%, it had made arrangements to borrow shares in order to get to 20% of the voting rights. And if FM did not manage to get to the full 20%, there was an agreement between DQ which allowed FM to buy shares in the market to get to a 20% (but not larger) position.
If FM managed to get the shares, it was going to buy from the weak hands. Growth stock managers don’t like selling growth stocks until the growth stops growing. DQ is still growing, and with UNY, DQ may grow faster than previously expected. The upshot is that everyone decided they’d stand pat – FM got nothing in the tender (0.08% of the total desired).
Shares in DQ could fall because of a lack of hard strategy announced by FM to buy all the shares at a higher price immediately. That shouldn’t be a big worry – it wasn’t going to happen.
Travis Lundy sees DQ having a performance skew which includes a “cushion of sorts” in the ¥5500-6600/share zone where he would expect FM to acquire shares. He does not see a cushion for the shares of FM, and expects them to be volatile.
It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK)& Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual. Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
“Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.
Reportedly Motherson has entered merger/acquisition talks withLeoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.
Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi.
Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN)(9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players.
Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
The Nikkei carried an article noting that the Japanese government’s FY2019 budget currently being formed proposes a sale of ¥160bn of shares in NTT to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares. One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Travis estimates NTT has ~1.95bn shares outstanding, or ~1.917bn shares outstanding ex-Treasury shares, after recent buybacks. If NTT cancelled the shares it has bought back prior to buying back shares from the government, this would allow NTT to buy back 59mm shares from the government (assuming those shares are also cancelled). If it did not, it would mean NTT could only buy back about 42-43mm shares. 59mm shares backs out ¥250bn; 43mm shares at a 10% discount would be ¥180bn. That means there is about 10% leeway in stock price to buy ¥160bn from the government IF shares repurchased under the current buyback are not cancelled.
But that also means that there would be no more buybacks from the government after that until the company buys back more shares from the market. If the company wanted to buy back another ¥200bn from the government, ceteris paribus it would have to buy back something like ¥400-450bn first from the market in order to reduce the denominator. Travis concludes there is still more on-market buying to do.
At an NTT/ NTT Docomo Inc (9437 JP) ratio of 1.80x, buybacks coming, expected ongoing strong dividend policy (and lots of headroom to do so, unlike perhaps Softbank Corp (9434 JP)), and investor suspicion of what comes next for Docomo, NTT is the home of the cashflow.
The IPO of Softbank Corp and the Merger of Takeda and Shire Pharmaceuticals create significant changes in TOPIX, MSCI, and FTSE because of the addition of roughly ¥5tn of “new” market capitalization in major Japan indices. Pure passive investors have something like ¥1.35tn of Softbank Corp and Takeda Pharmaceutical to buy.
However, after Travis’ initial note (Softbank Corp, Takeda, and Newton’s Three Laws of Motion), TSE unhelpfully changed their mind on timing (for Takeda) based on an unhelpful change by the LSE. With the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st. The new schedule is:
Index Deletion
Shire (shs mm)
Index Inclusion
Takeda (shs mm)
Index Effect (US$ bn)
Net Delta (US$bn)
21 Dec
MSCI
-50
MSCI JP
+75
– $0.3bn
+$1.3bn
21 Dec
FTSE UK, All-Share,
-100-130
FTSE JP
+15
-$5.2bn+
– $2.1bn
rest of December – end of a pretty bad year for hedge funds, but illiquid
all of January
30 Jan
TOPIX
-$1.9bn
TOPIX, JPXN400
+60
+$2.1bn
+$2.1bn
30 Jan
TOPIX
-$3.5bn
TOPIX
Softbank
+$3.5bn
+$3.5bn
all of February
27 Feb
TOPIX, JPXN400
+60
+$2.1bn
+$2.1bn
It doesn’t change the amounts but a lot more time allows for more risk and preparation and there will no longer be any potential settlement issues on the TOPIX side. There is still the same amount of Takeda to buy in TOPIX and JPX Nikkei 400.
In principle, Travis would want to be long Takeda at the close of the year of 2018, but given the LSE and TSE changes there is less support to give and the payoff is substantially more distant.
Speciality steel maker Nisshin Steel (5413 JP)is slated to merge with parent company Nippon Steel & Sumitomo Metal (5401 JP)as of January 1, 2019. For that, Nisshin Steel will be delisted on December 26th (i.e. the last day of trading is the 25th) and that means the Nikkei Inc was obliged to choose a replacement for Nisshin Steel in the Nikkei 225 and other indices. On December 11th, the Nikkei Inc announcedItoham Yonekyu Holdings Inc (2296 JP) would take Nisshin’s place in the Nikkei 500 Index; announced that Japan Post Holdings (6178 JP) would join the Nikkei 300 Index; and announced thatDic Corp (4631 JP)would replace Nisshin Steel in the Nikkei Stock Average, better known as the Nikkei 225.
Nisshin Steel’s deletion is a nothing-burger.
The possibility of a DIC addition was well-flagged as early as May when sell-side brokers started compiling Annual and Ad Hoc Review lists for the Nikkei 225 changes to come in September and as a result of the Nisshin Steel merger. Travis would rather be long DIC than short DIC through the close of December 21st or probably December 25th.
YP appeared “cheap” back in April when I last discussed this Holdco, and is now cheaper, with its holding in KZ accounting for near-on 200% of its market cap. I can’t think of any other parent/subsidiary relationship – one which is essentially a single stock structure – with such a deep discount. Especially one where the stub ops operate in a similar space to that of the listed holding.
On the negative front, an investigation into YP’s Seokpo zinc smelter remains ongoing on account of perceived environmental transgressions. The Seokpo smelter is located in a national park on the Nakdong river. Wastewater containing above-legal limits of certain chemicals (fluoride and selenium) allegedly flowed downstream to residents, who are heavily reliant on this water.
YP’s stub and KZ are in the same business, but there are differences. YP does not have a balanced product mix as KZ does, with around 84% of its revenue coming from zinc-related production (for the 9M18 period), compared to 42.5% (on a revenue basis) for KZ, followed by lead (20.4%), silver (20.2%), and gold (7.6%).
However, YP and KZ remain inextricably intertwined and the current discount is unjustifiably steep. Just that YP’s liquidity, uncertainty on Seokpo, and lack of a near-term catalyst make for a difficult stub set-up.
A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp,closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.
At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK)and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?
If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion.
For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.
CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)
LCY Chemical Corp (1704 TT). MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan. The settlement is expected to take place mid-Feb.
Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.
CCASS
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.
Right before Christmas, the Ministry of Finance confirms that both Thanachart and KTB were in talks to merge with TMB. We note that:
Considering that KTB’s earlier courtship failed once, it is more likely, but by no means guaranteed, for the deal with Thanachart to happen.
A deal with Thanachart would leave TMB as the acquirer rather than the target. Thanachart’s management has 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 BAY and not really change the bank rankings, but it would give TMB a bigger presence in asset management and hire-purchase finance and an re-entry into the securities business.
In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook.
Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in.
Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.
THEY GOT NOTHING.
I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners.
“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected.
The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.
There was a clearly-available trading strategy based on that.
The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).
CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.
A last-minute lump of coal in the stocking from accounting software and services provider MYOB Group Ltd (MYO AU)?
Kohlberg Kravis Roberts has reduced its indicative offer to $3.40 from $3.77 after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal is scheduled to expire at 5pm Friday, providing a day and change for MYOB to sound out shareholders as to the next move. Either the lower tilt is grudgingly accepted, or MYOB rejects and KKR walks away (for now), or goes hostile.
Either way, with MYOB’s VWAP above the revised proposal on all but 6 days since the initial announcement on the 8 October and $3.47/share on average, there won’t be a lot of Ho Ho Ho’ing.
Shares are down 11% as I type, implying 13% upside and 11% downside (using the ASX performance-adjusted price) or ~18% downside when pegged to peers. That’s not an attractive risk/reward heading into year-end.
LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.
There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc.
One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.
This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs.
Preceding my comments on Young Poong 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%.
Friday morning, wholesale and retail pharmacy health/beauty and lifestyle products operator Australian Pharmaceutical Industries (API AU) announced that it had become a substantial shareholder in wholesale and retail pharmacy health/beauty and lifestyle products operator Sigma Healthcare Ltd (SIG AU) by purchasing 137.26mm shares. Roughly 52.5mm of those shares were purchased between A$0.53 and A$0.63/share between 5 September (the day before the half-year report came out) and 10 October and the other ~84.8mm shares were purchased Thursday 13 December at A$0.64, bringing the total position to 12.95%.
It turns out that on 11 October, API made an indicative non-binding proposal to Sigma through a Scheme of Arrangement whereby Sigma shareholders would receive 0.31 shares of API and A$0.23 in cash for each share of Sigma held.
That offer is now made public.
Worth A$0.686 per Sigma share as of announcement, the Indicative Proposal comes at a 69% premium to the close of trading on 13 December and a 46.8% premium to the one-month average. It is, however, a 10% premium to where API was buying shares on market in September and October. API shares were up a further 8+% on Friday, lifting terms further.
Sigma traded up 43% Friday to A$0.58 against terms which are now ~A$0.723, so there is still 24.7% upside to terms and there might be further upside on further synergy bullishness.
The Scheme Proposal is based on publicly available information, is subject to a number of conditions precedent, ACCC approval, due diligence, and confirmation of what they see as cost synergies.
This deal is somewhat opportunistic after recent troubles at Sigma, and I expect the ongoing strategic review at Sigma (assisted by Accenture) will come out saying that on a standalone basis after fixing itself up it is worth more than where it has been trading. The question is whether a merger would accelerate both the internal efforts at Sigma and improve competitiveness through cost synergies.
Allan Gray was the seller of the 8% stake yesterday it appears. The CIO is quoted in the API announcement as saying they support consolidation in the pharmaceutical wholesaling sector and are “positively disposed to efforts to expedite this consolidation.” They support it to such an extent that they decided to cut in half their participation in the economics of such efforts at expediting this consolidation.
First time indicative opportunistic offers in Australia can be an arbitrageurs’ graveyard.
Recapping the original plan: when Familymart Uny Holdings (8028 JP)(“FM”) sold the remaining 60% of UNY to Don Quijote Holdings (7532 JP) (DQ), it entered into an agreement to buy 20+% in DQ, for one of two reasons; 1) a company wants to prove to the employees of a division being sold that they are maintaining a watchful eye over them, or (as is now evident) 2) the buyer wants to gain an equity method affiliate and the income from it (including the placeholder for frontrunner status to future capital events).
FM launched a Partial Tender Offer at a 20% premium to last in order to buy these shares, and in the MOU to launch the tender offer there was a clause which said that if FM did not reach the full 20%, it had made arrangements to borrow shares in order to get to 20% of the voting rights. And if FM did not manage to get to the full 20%, there was an agreement between DQ which allowed FM to buy shares in the market to get to a 20% (but not larger) position.
If FM managed to get the shares, it was going to buy from the weak hands. Growth stock managers don’t like selling growth stocks until the growth stops growing. DQ is still growing, and with UNY, DQ may grow faster than previously expected. The upshot is that everyone decided they’d stand pat – FM got nothing in the tender (0.08% of the total desired).
Shares in DQ could fall because of a lack of hard strategy announced by FM to buy all the shares at a higher price immediately. That shouldn’t be a big worry – it wasn’t going to happen.
Travis Lundy sees DQ having a performance skew which includes a “cushion of sorts” in the ¥5500-6600/share zone where he would expect FM to acquire shares. He does not see a cushion for the shares of FM, and expects them to be volatile.
It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK)& Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual. Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
“Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.
Reportedly Motherson has entered merger/acquisition talks withLeoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.
Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi.
Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN)(9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players.
Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
The Nikkei carried an article noting that the Japanese government’s FY2019 budget currently being formed proposes a sale of ¥160bn of shares in NTT to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares. One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Travis estimates NTT has ~1.95bn shares outstanding, or ~1.917bn shares outstanding ex-Treasury shares, after recent buybacks. If NTT cancelled the shares it has bought back prior to buying back shares from the government, this would allow NTT to buy back 59mm shares from the government (assuming those shares are also cancelled). If it did not, it would mean NTT could only buy back about 42-43mm shares. 59mm shares backs out ¥250bn; 43mm shares at a 10% discount would be ¥180bn. That means there is about 10% leeway in stock price to buy ¥160bn from the government IF shares repurchased under the current buyback are not cancelled.
But that also means that there would be no more buybacks from the government after that until the company buys back more shares from the market. If the company wanted to buy back another ¥200bn from the government, ceteris paribus it would have to buy back something like ¥400-450bn first from the market in order to reduce the denominator. Travis concludes there is still more on-market buying to do.
At an NTT/ NTT Docomo Inc (9437 JP) ratio of 1.80x, buybacks coming, expected ongoing strong dividend policy (and lots of headroom to do so, unlike perhaps Softbank Corp (9434 JP)), and investor suspicion of what comes next for Docomo, NTT is the home of the cashflow.
The IPO of Softbank Corp and the Merger of Takeda and Shire Pharmaceuticals create significant changes in TOPIX, MSCI, and FTSE because of the addition of roughly ¥5tn of “new” market capitalization in major Japan indices. Pure passive investors have something like ¥1.35tn of Softbank Corp and Takeda Pharmaceutical to buy.
However, after Travis’ initial note (Softbank Corp, Takeda, and Newton’s Three Laws of Motion), TSE unhelpfully changed their mind on timing (for Takeda) based on an unhelpful change by the LSE. With the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st. The new schedule is:
Index Deletion
Shire (shs mm)
Index Inclusion
Takeda (shs mm)
Index Effect (US$ bn)
Net Delta (US$bn)
21 Dec
MSCI
-50
MSCI JP
+75
– $0.3bn
+$1.3bn
21 Dec
FTSE UK, All-Share,
-100-130
FTSE JP
+15
-$5.2bn+
– $2.1bn
rest of December – end of a pretty bad year for hedge funds, but illiquid
all of January
30 Jan
TOPIX
-$1.9bn
TOPIX, JPXN400
+60
+$2.1bn
+$2.1bn
30 Jan
TOPIX
-$3.5bn
TOPIX
Softbank
+$3.5bn
+$3.5bn
all of February
27 Feb
TOPIX, JPXN400
+60
+$2.1bn
+$2.1bn
It doesn’t change the amounts but a lot more time allows for more risk and preparation and there will no longer be any potential settlement issues on the TOPIX side. There is still the same amount of Takeda to buy in TOPIX and JPX Nikkei 400.
In principle, Travis would want to be long Takeda at the close of the year of 2018, but given the LSE and TSE changes there is less support to give and the payoff is substantially more distant.
Speciality steel maker Nisshin Steel (5413 JP)is slated to merge with parent company Nippon Steel & Sumitomo Metal (5401 JP)as of January 1, 2019. For that, Nisshin Steel will be delisted on December 26th (i.e. the last day of trading is the 25th) and that means the Nikkei Inc was obliged to choose a replacement for Nisshin Steel in the Nikkei 225 and other indices. On December 11th, the Nikkei Inc announcedItoham Yonekyu Holdings Inc (2296 JP) would take Nisshin’s place in the Nikkei 500 Index; announced that Japan Post Holdings (6178 JP) would join the Nikkei 300 Index; and announced thatDic Corp (4631 JP)would replace Nisshin Steel in the Nikkei Stock Average, better known as the Nikkei 225.
Nisshin Steel’s deletion is a nothing-burger.
The possibility of a DIC addition was well-flagged as early as May when sell-side brokers started compiling Annual and Ad Hoc Review lists for the Nikkei 225 changes to come in September and as a result of the Nisshin Steel merger. Travis would rather be long DIC than short DIC through the close of December 21st or probably December 25th.
YP appeared “cheap” back in April when I last discussed this Holdco, and is now cheaper, with its holding in KZ accounting for near-on 200% of its market cap. I can’t think of any other parent/subsidiary relationship – one which is essentially a single stock structure – with such a deep discount. Especially one where the stub ops operate in a similar space to that of the listed holding.
On the negative front, an investigation into YP’s Seokpo zinc smelter remains ongoing on account of perceived environmental transgressions. The Seokpo smelter is located in a national park on the Nakdong river. Wastewater containing above-legal limits of certain chemicals (fluoride and selenium) allegedly flowed downstream to residents, who are heavily reliant on this water.
YP’s stub and KZ are in the same business, but there are differences. YP does not have a balanced product mix as KZ does, with around 84% of its revenue coming from zinc-related production (for the 9M18 period), compared to 42.5% (on a revenue basis) for KZ, followed by lead (20.4%), silver (20.2%), and gold (7.6%).
However, YP and KZ remain inextricably intertwined and the current discount is unjustifiably steep. Just that YP’s liquidity, uncertainty on Seokpo, and lack of a near-term catalyst make for a difficult stub set-up.
A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp,closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.
At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK)and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?
If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion.
For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.
CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)
LCY Chemical Corp (1704 TT). MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan. The settlement is expected to take place mid-Feb.
Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.
CCASS
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.
Right before Christmas, the Ministry of Finance confirms that both Thanachart and KTB were in talks to merge with TMB. We note that:
Considering that KTB’s earlier courtship failed once, it is more likely, but by no means guaranteed, for the deal with Thanachart to happen.
A deal with Thanachart would leave TMB as the acquirer rather than the target. Thanachart’s management has 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 BAY and not really change the bank rankings, but it would give TMB a bigger presence in asset management and hire-purchase finance and an re-entry into the securities business.
In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook.
Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in.
Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.
THEY GOT NOTHING.
I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners.
“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected.
The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.
There was a clearly-available trading strategy based on that.
The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).
CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.