It was reported over the weekend that the troubled display supplier to iPhone maker Apple, Japan Display (JDI) has almost finalized a deal to raise more than JPY110bn (US$990m) from a China-Taiwan consortium and Japanese public-private fund INCJ Ltd.
The China-Taiwan consortium is expected to secure some 50% stake in Japan Display while the top shareholder INCJ’s current stake of 25.3% is expected to be halved.
The consortium is aiming to restructure JDI’s remaining debt payments of about JPY100bn from Apple for the construction of its plant while it also aims to procure parts for the latest iPhone. In addition, the consortium is also trying to modify a contract stipulating that Apple can seize plants if JDI’s cash and deposits fall below a certain amount.
The consortium along with JDI is planning to build an OLED panel plant in China with JDI providing the technological know-how while the consortium partners invest in capital expenditures and equity.
Japan Display has been struggling to navigate its display business due to the slowdown in iPhone sales, falling behind competition on OLED technology and facing stiff price competition from Chinese panel makers.
We expect the proposed OLED plant in China could help the company stabilize its panel business with Chinese smartphone makers Huawei and Xiaomi who prefer to source panels locally from domestic panel makers such as BOE Technology and Tianma.
Late last December after a Nikkei article on 21 December titled Tokyo Stock Exchange’s big board about to get a lot smaller suggested the TSE would boot up to 1500 stocks from TOPIX, which now boasts 2130+ members – far more than major indices in other developed markets.
My conclusion (in Big Trouble in Little Stocks? TSE Mulls Changing TOPIX almost three months ago) was that there was no good news to be had in bulk on small cap stocks relative to large cap stocks unless they made it clear they’d use the opportunity to buy back stock, etc.
In the interim, there has been considerable speculation about the eventual disposition of smallcap stocks. There was an extensive Toyo Keizai article in early March which pointed to stocks below a market cap of ¥100 billion being possibly excluded from the “step-up” market. There was a Nikkei article on March 15 which suggested that the “limit” might be considerably lower – perhaps ¥25 billion – and that the limit might have other softer elements such as a requirement to deliver or release company reports in English. There have been other ‘non-financial elements’ suggested as well, such as independent director count, cross-holding policies, etc.
It is not clear whether the substantially different reports are the rival speculations of different media enterprises, or the rival agendas of different factions within the power structures who may care (the TSE, FSA, Keidanren, JPFA, JSDA, brokers themselves, a whole raft of small companies, the Securities documentation printing houses, etc).
There are theoretically a lot of vested interests in keeping a very large number of companies listed, and a very large number of companies in widely-followed/tracked indices. Brokers get money from being underwriters on deals. The more companies there are the more deals there are. Brokers also make money by providing the stock loan access for investors who want to go short stocks. If 1500 small stocks are removed from a broad index, it will become incrementally more difficult to borrow them – to make markets or go short. The documentation printing houses charge each company for adapting their financial statements and reports into the regulator-mandated formats and uploading them, running the IR sections of their websites, etc. On the other hand, if half the listed companies in Japan were simply to decide that they’d be better off if they merged into other large companies, then those providers would lose big. Some of the more aggressive local stewards and governance hounds are all for much more rigorous standards.
The two-page Summary is actually not a bad recap of the issues, BUT… there’s more.
There is a fair bit of pent-up expectation that there will be selling of small caps. There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan, and small companies outside MOTHERS are often viewed as lacking in effort to improve governance so the reason why there could be selling.
However, it is not clear there needs to be any selling, which is somewhat counterintuitive.
China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities. This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.
In the first part of this series we will see what motivated China to enter the market and how it plans to do so.
While we have been sceptical about Mercari Inc (4385 JP)‘s efforts in the US, we have always appreciated the domestic business and have only been put off by the rather demanding multiples. After speaking to the company, we continue to like the domestic business and feel that recent initiatives to broaden the user base are likely to be successful. In addition, while we still feel that there are numerous question marks about whether the business model can work in the US, we have come around to a more positive view on the company’s execution there. Lastly, we believe Merpay’s edge in the cashless wars is underappreciated and the fall in the share price is starting to make the stock attractive.
We discuss the details below.
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7-Eleven partners up with Future Retail in an effort to enter the growing Indian Market
Indian E-Commerce giants pose a significant threat to 7-Eleven’s plans
7-Eleven’s recent shift focuses more on developing markets.
Lack of profitability in India could require changes to the standard franchise agreement in order to attract franchisees
On 28th February 2019, Seven & I Holdings (3382 JP), the operator of the world’s largest convenience store chain 7-Eleven, announced that the company has signed a master franchise agreement with Kishore Biyani’s Future Retail, the operator of the Indian large format store chain Big Bazaar, to expand the 7-Eleven convenience stores into India. Future Retail and Seven & I Holdings expect the first 7-Eleven convenience store in India to be opened in Mumbai in 2019.
Korea’s local news house Hankyung reported the names that should be included in the short list. They are Kakao, MBK Partners (with NetMarble), Tencent, Bain Capital and another foreign PE whose name isn’t disclosed. Apparently, Amazon, Comcast and EA, didn’t make the short list. Those in the short list now get a chance to do due diligence. They will then participate in the main bidding round that is scheduled for early April.
It is being reported that only Kakao and NetMarble (with MBK Partners) are truly interested in taking over Nexon’s management right. Tencent is expected to join either Kakao or NetMarble-led consortium in the end. Bain is looking into possible investment opportunities that may be created if this sale leads to a mandatory tender offer to Nexon minority shareholders. It seems safe to say that this comes down to a two-horse race: either Kakao or NetMarble.
Lyft Inc (0812823D US) has kicked off its IPO by posting its S-1 filing last Friday. Rakuten Inc (4755 JP) is Lyft’s single largest shareholder with a 13.05% stake. Rakuten has invested around $700 million to acquire its current Lyft stake and stands to make 3-4 times its investment if Lyft achieves its rumoured IPO valuation range of $20-25 billion.
Lyft’s IPO valuation range was first reported by Reuters on 20 February 2019. On the back of the news, Rakuten’s shares have so far risen around 10%. Notably, at the IPO valuation range, the Lyft stake would account for 20-25% of Rakuten’s current market cap. While the Lyft IPO will prove to be a big winner for Rakuten from an ROI perspective, we believe that from a valuation perspective, the upside is modest.
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Late last December after a Nikkei article on 21 December titled Tokyo Stock Exchange’s big board about to get a lot smaller suggested the TSE would boot up to 1500 stocks from TOPIX, which now boasts 2130+ members – far more than major indices in other developed markets.
My conclusion (in Big Trouble in Little Stocks? TSE Mulls Changing TOPIX almost three months ago) was that there was no good news to be had in bulk on small cap stocks relative to large cap stocks unless they made it clear they’d use the opportunity to buy back stock, etc.
In the interim, there has been considerable speculation about the eventual disposition of smallcap stocks. There was an extensive Toyo Keizai article in early March which pointed to stocks below a market cap of ¥100 billion being possibly excluded from the “step-up” market. There was a Nikkei article on March 15 which suggested that the “limit” might be considerably lower – perhaps ¥25 billion – and that the limit might have other softer elements such as a requirement to deliver or release company reports in English. There have been other ‘non-financial elements’ suggested as well, such as independent director count, cross-holding policies, etc.
It is not clear whether the substantially different reports are the rival speculations of different media enterprises, or the rival agendas of different factions within the power structures who may care (the TSE, FSA, Keidanren, JPFA, JSDA, brokers themselves, a whole raft of small companies, the Securities documentation printing houses, etc).
There are theoretically a lot of vested interests in keeping a very large number of companies listed, and a very large number of companies in widely-followed/tracked indices. Brokers get money from being underwriters on deals. The more companies there are the more deals there are. Brokers also make money by providing the stock loan access for investors who want to go short stocks. If 1500 small stocks are removed from a broad index, it will become incrementally more difficult to borrow them – to make markets or go short. The documentation printing houses charge each company for adapting their financial statements and reports into the regulator-mandated formats and uploading them, running the IR sections of their websites, etc. On the other hand, if half the listed companies in Japan were simply to decide that they’d be better off if they merged into other large companies, then those providers would lose big. Some of the more aggressive local stewards and governance hounds are all for much more rigorous standards.
The two-page Summary is actually not a bad recap of the issues, BUT… there’s more.
There is a fair bit of pent-up expectation that there will be selling of small caps. There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan, and small companies outside MOTHERS are often viewed as lacking in effort to improve governance so the reason why there could be selling.
However, it is not clear there needs to be any selling, which is somewhat counterintuitive.
China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities. This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.
In the first part of this series we will see what motivated China to enter the market and how it plans to do so.
While we have been sceptical about Mercari Inc (4385 JP)‘s efforts in the US, we have always appreciated the domestic business and have only been put off by the rather demanding multiples. After speaking to the company, we continue to like the domestic business and feel that recent initiatives to broaden the user base are likely to be successful. In addition, while we still feel that there are numerous question marks about whether the business model can work in the US, we have come around to a more positive view on the company’s execution there. Lastly, we believe Merpay’s edge in the cashless wars is underappreciated and the fall in the share price is starting to make the stock attractive.
In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below.
Best of luck for the new week – Arun, Venkat and Rickin
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Korea’s local news house Hankyung reported the names that should be included in the short list. They are Kakao, MBK Partners (with NetMarble), Tencent, Bain Capital and another foreign PE whose name isn’t disclosed. Apparently, Amazon, Comcast and EA, didn’t make the short list. Those in the short list now get a chance to do due diligence. They will then participate in the main bidding round that is scheduled for early April.
It is being reported that only Kakao and NetMarble (with MBK Partners) are truly interested in taking over Nexon’s management right. Tencent is expected to join either Kakao or NetMarble-led consortium in the end. Bain is looking into possible investment opportunities that may be created if this sale leads to a mandatory tender offer to Nexon minority shareholders. It seems safe to say that this comes down to a two-horse race: either Kakao or NetMarble.
Lyft Inc (0812823D US) has kicked off its IPO by posting its S-1 filing last Friday. Rakuten Inc (4755 JP) is Lyft’s single largest shareholder with a 13.05% stake. Rakuten has invested around $700 million to acquire its current Lyft stake and stands to make 3-4 times its investment if Lyft achieves its rumoured IPO valuation range of $20-25 billion.
Lyft’s IPO valuation range was first reported by Reuters on 20 February 2019. On the back of the news, Rakuten’s shares have so far risen around 10%. Notably, at the IPO valuation range, the Lyft stake would account for 20-25% of Rakuten’s current market cap. While the Lyft IPO will prove to be a big winner for Rakuten from an ROI perspective, we believe that from a valuation perspective, the upside is modest.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Korea’s local news house Hankyung reported the names that should be included in the short list. They are Kakao, MBK Partners (with NetMarble), Tencent, Bain Capital and another foreign PE whose name isn’t disclosed. Apparently, Amazon, Comcast and EA, didn’t make the short list. Those in the short list now get a chance to do due diligence. They will then participate in the main bidding round that is scheduled for early April.
It is being reported that only Kakao and NetMarble (with MBK Partners) are truly interested in taking over Nexon’s management right. Tencent is expected to join either Kakao or NetMarble-led consortium in the end. Bain is looking into possible investment opportunities that may be created if this sale leads to a mandatory tender offer to Nexon minority shareholders. It seems safe to say that this comes down to a two-horse race: either Kakao or NetMarble.
Lyft Inc (0812823D US) has kicked off its IPO by posting its S-1 filing last Friday. Rakuten Inc (4755 JP) is Lyft’s single largest shareholder with a 13.05% stake. Rakuten has invested around $700 million to acquire its current Lyft stake and stands to make 3-4 times its investment if Lyft achieves its rumoured IPO valuation range of $20-25 billion.
Lyft’s IPO valuation range was first reported by Reuters on 20 February 2019. On the back of the news, Rakuten’s shares have so far risen around 10%. Notably, at the IPO valuation range, the Lyft stake would account for 20-25% of Rakuten’s current market cap. While the Lyft IPO will prove to be a big winner for Rakuten from an ROI perspective, we believe that from a valuation perspective, the upside is modest.
LIQUIDITY RULES – Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this ‘boom’ is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.
WEAK MACRO – Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates. Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year. Equity markets are living on ‘borrowed time’.
Source: Japan Analytics
HOLD FOR NOW – This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.
MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities. This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.
In the first part of this series we will see what motivated China to enter the market and how it plans to do so.
While we have been sceptical about Mercari Inc (4385 JP)‘s efforts in the US, we have always appreciated the domestic business and have only been put off by the rather demanding multiples. After speaking to the company, we continue to like the domestic business and feel that recent initiatives to broaden the user base are likely to be successful. In addition, while we still feel that there are numerous question marks about whether the business model can work in the US, we have come around to a more positive view on the company’s execution there. Lastly, we believe Merpay’s edge in the cashless wars is underappreciated and the fall in the share price is starting to make the stock attractive.
There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33 Information & Communication sub-Sector but is broader in that it encompasses all companies listed on all sections and exchanges but is also narrower in that we have excluded Telecommunications (including Softbank Group (9984 JP)) and Information Technology companies. We have adopted a ‘quantamental’ approach which covers the long-term and current trends for Japan’s Internet Sector as a whole, as well as eight sub-Sectors or Peer Groups and the Sectors’ leading companies by market capitalisation. Our focus is exclusively on the locally-listed universe and is based on disclosed financial and market data. We do not provide any forecasts, other than the companies’ own forecasts and we do not attempt to make any business model or strategic judgments. Our focus is purely on financial and market performance. We do not cover unlisted and defunct companies such as Livedoor and, therefore, there is implicit survivor bias in the data.
The broad themes that are developed in DETAIL below are grouped into six topics as follows: –
OVERVIEW – As will be covered in greater DETAIL below, Japan has failed to evolve a substantial Internet Sector and, in many business models, has been passed by global competitors including in the home market. Although Internet Sector revenues have grown steadily and now account for close to 1% of the total for all listed companies, operating margins have declined by half in the last seven years and are now only four percentage points higher than the market average. Accordingly, as measured by our Results & Revision Score, the Sector is close to a twelve-year low. The market’s response is an unchanged Sector weight in the market composite despite the addition of 111 new companies in the last six years, and a Relative Price Score that has moved in a narrow range over that period. The Sector averages disguise the weak business and market performance of a handful of Sector leaders as well as the overvaluation of the Sector’s more successful business models, which is partly a result of a lack of alternatives. Despite the world’s most significant Internet investor – Softbank Group (9984 JP)‘s Vision Fund – being based in Japan, this fund and other global investors in Internet business have been right to give Japan a ‘pass’.
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LIQUIDITY RULES – Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this ‘boom’ is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.
WEAK MACRO – Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates. Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year. Equity markets are living on ‘borrowed time’.
Source: Japan Analytics
HOLD FOR NOW – This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.
MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan.
Nintendo Co Ltd (7974 JP)‘s offering and the buyback are strong symbols and practical examples of what the Corporate Governance Code wants to accomplish.
With the combination of increased hostility leading to a greater likelihood of eventual private takeout, shorts will cover and foreigners may buy, squeezing existing Descente Ltd (8114 JP) minorities up and out.
Nintendo announced (J) a Secondary Share Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the then-last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33bn worth (whichever is reached first) to be commenced the day after settlement of the Offering.
These banks (such as Bank of Kyoto) which have long-held policy cross-holdings in a Kyoto company with a diehard Kyoto cultural heritage (which can often include a diehard cross-holding culture) may have all succumbed to the new Corporate Governance Code. This is really important.
This deal is going to retail investors, quite specifically because Nintendo management and board view retail investors as both “sticky” investors and likely to largely follow management’s agenda in AGMs. Management might have misjudged how much this will get flipped.
The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains. Given the size, it looks like the former though it will be difficult to get confirmation. Travis Lundy would want to be long Bank of Kyoto both outright and against the cross-holding portfolio.
NTT Docomo announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February. The buyback has already occurred. However, by the vagaries of TSE-calculated indices, they lead to index down-weightings (unless otherwise offset).
This is a very large cancellation for a very large company, so it means a selldown of – by Travis’ estimate – 21.5-22.8mm shares at the close of trading March 28th. Traders looking to tilt short NTT Docomo or tilt long NTT short NTT Docomo will have that as a tailwind.
Panalpina’s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation (EGF), made a formal request to hold an EGM prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights be abolished and a “One Share One Vote” structure be adopted. The situation has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the EGF which were deemed “grandfathered” prior to the change.
EGF wants to pass this giving everyone their capital share percentage vote because the alternative is worse. Getting this passed would slightly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance but it would mean that the EGF could continue to block any deal it did not like. The thing is, there is nothing in the Articles of Association which grants EGF that “grandfathered” exemption.
Cevian wants to block such this from going through, and to have the EGF capped at 5% like the Articles of Association suggest all should be. Cevian says that Panalpina has unlawfully maintained a grandfathering exemption from the 5% cap for the EGF. IF the EGF is capped, it means that effectively the EGF loses the ability to block deals they don’t like.
The situation is weird. It is possible that Panalpina is asking a convoluted and possibly unlawful voting structure with non-best-practice registration deadlines to vote on changing the vote structure. To Travis, this actually probably deserves a court challenge.
Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum with the announcement of a $48/share (51.7% premium to the undisturbed) acquisition proposal. Late last month Versum and Entegris announced a $9bn (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the remaining 52.5%.
It’s now in VSM’s court. Should it opt to ditch Entegris’ merger-of-equals proposal and side with Merck, it would incur a US$140mn termination fee or $1.28/share.
John DeMasi reckons Merck’s proposal is superior, however a pure cash offer vs. stock swap are not directly comparable. The prospect of Entegris substantially increasing the exchange ratio or adding a chunk of cash to the merger consideration seems remote. John expects we will see a bump in Merck’s offer to make it friendly, and a recommended deal, in short order.
Brake supplier, Wabco confirmed that it is in takeover talks with ZF Friedrichshafen, one of the leading auto parts suppliers in Germany. ZF and Wabco jointly develop the Evasive Manoeuvre Assist system for trucks, combining Wabco’s braking and vehicle dynamics control systems alongside ZF’s active steering technology.
The pushback is the Zeppelin Foundation, ZF’s controlling shareholder, and its aversion to taking on excess debt. Management and the foundation previously clashed over the €13.5bn TRW transaction in 2015.
Back in October last year, Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China. The key issue, putting aside the fact Hanergy has been suspended for near-on four years, is that the scrip consideration has no assigned value.
Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares (with an as yet undermined jurisdiction), which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, they will hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as would be the case per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to potentially squeeze out minorities at a bargain price.
It is not clear why the SFC is okay with this takeover proposal, apart from simply being open to any idea to remove Hanergy from the Exchange. At a guess, the SPV consideration structure (as opposed to a straightforward cash offer) is possibly geared to reduce shareholder rights compared to those available under Bermuda Companies Act, Bermuda being where Hanergy is incorporated.
The Scheme doc, due out later this month, or early next, requires sign-off from the SFC. Presumably the SPV jurisdiction should at least be known by then. It is hard to believe an official takeover document would be dispatched boasting no determinate offer value in addition to unknown shareholder protection rights attached to the unlisted scrip.
Descente said will release its Mid-Term Plan early in an effort to encourage shareholders to not tender. For its part, Itochu has released an amendment to its original doc, saying Descente has been naughty (bad-mouthing Itochu to the press while in negotiations), and that it will wait until after the Tender Offer is completed to re-engage. Itochu effectively reserves the right to go full hostile.
ANTA’s CEO was quoted in an interview saying ANTA supports Itochu’s tender offer and management restructuring and governance initiatives because they say they believe it will lift corporate value. That means Itochu+ANTA have a functional majority if not absolute.
This should raise back end values. Descente management is quite stuck here. To Travis, there is likely some upside optionality. Some may decide to stick with the company, raising pro-ration rates.
The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.
The Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years – the Glorious Property (845 HK) offer, which incidentally was voted down. The widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK)in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.
Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. Therefore, the IFA concluded the Offer is reasonable by referencing the premium to last close and historical pricing. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.
A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK)privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ). Trading at a wide gross/annualised return of 7.8%/45.4%, reflecting the risk to completion, and the significant downside should the scheme be voted down.
Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer at VND 120,000 (3.5% premium to the previous close when the doc was prepared), this time to purchase up to 21.7% of the Vietnam-listed DHG, lifting its stake to 56.69%.
The State Capital Investment Corporation (SCIC) owns 43.31%. IF the SCIC tenders, the minimum proration is 33.38%. IF the SCIC does NOT tender their shares, this is effectively a full tender. All of your shares would be purchased.
The very recent performance has been most curious. The last 11 days – before the announcement – have seen the stock move 37.6% on 9x average volume, with little to no news to drive it as far as Travis can tell. Looks some leakage ahead of the partial offer announcement.
Travis thinks there is a non-negligible possibility that Taisho will have to bump their Tender Offer Price. And a non-negligible chance that SCIC tenders.
OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”.
Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model.
Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture en masse.
Ruralco has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.
Nutrien has first mover advantage, however a counter from Elders Ltd (ELD AU) is possible. The two companies have a history after Ruralco attempted to buy out Elders in 2012, but failed over a disagreement in pricing.
ACCC should not be issue to this transaction. A 2013 ruling did not oppose a Ruralco/Elders tie-up, and a similar conclusion is expected for Nutrien.
The gross/annualised spread of 0.2%/0.7% is unattractive. But at this deal price, Elders could still come over the top. Trading itself at 11.4x EV/EBITDA (according to CapIQ), upping the price by 10% would still be accretive to Elders.
Revealed in the release of notes about the Board approval of the Independent Review Committee’s review in late January was the news that Otis offered to buy the company for NT$63/share but it didn’t go anywhere. In addition, some directors – most likely the partisan ones installed in the failed board proxy fight last summer – objected to the lower minimum threshold, which is a sign they don’t want the deal to go through (because the lowering of that threshold is otherwise an unmitigated positive for minority investors).
Despite stories of a suit of breach of trust against six directors for not entertaining or pursuing offers at NT$63 by Otis and/or Schindler, the company had not received any notification from judicial authorities and has not updated the market about Tender-related matters in the last two weeks.
Travis thinks there is the small possibility of a bump to NT$63; but it is not a difficult deal to get done at the minimum threshold at NT$60.
Frasers Property (Thailand) Pcl (FPT TB)has announced a conditional voluntary tender offer for GOLD at Bt8.50/share, ~2.4% premium to last close. Frasers Property Ltd (FPL SP)owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicleUniventures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.
This tender offer therefore has been initiated to consolidate the Sirivadhanabhakdi family’s holding into GOLD. Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. The tender offer will be unconditional.
The intention to delist GOLD is evident although it will be challenging for FPT to secure 90%+ in the tender offer process, given the single-digit premium to last close, and the fact GOLD traded above the current terms as recently as early December. Getting to 90% requires almost 50% of the minority to submit their shares.
Currently trading at a gross/annualized spread of 2.4%/5.9% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.
Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00/share. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.
On a trading basis, this is somewhat interesting. If you are quite bullish the stock, you have a partial put (and you own it already). If you are tentatively bullish A-shares, this offers you a partial put, but there is a possibility that the RMB 45.00 price creates a kind of short-term cap just because it is a sticky price in peoples’ minds.
Travis is not particularly bearish the stock despite the fact that the earnings forecasts have dropped a fair bit since he looked at this six months ago. The consensus EPS forecasts for Dec 2020 today are roughly the same as they were for Dec 2019 six months ago.
The new news on Kosaido Co Ltd (7868 JP) is that the independent statutory auditor Nakatsuji-san has officially expressed his opposition to the Tender Offer. With the shares 19% through terms despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share looks low, and this seems a situation where the deal may fail unless there is a bump. (link to Travis’ insight: Kosaido (7868 JP) TOB Extended)
On the 28 Feb, Bank Danamon Indonesia (BDMN IJ)‘s shares went ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected, but Travis thinks they could fall further: there is no compelling reason to own the bank after it goes ex-rights to receive cash. (link to Travis’ insight: Bank Danamon Goes Ex-Rights)
FY18 results for PCCW, HKT, and PCPD are out. Plugging in the de-consolidated numbers, I estimate PCCW’s discount to NAV at ~37%, right on the 2 STD line. On a simple ratio (PCCW/HKT), it is again approaching an all-time low.
Still select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW’s stub ops, recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16’s stub EBITDA was also negative.
One positive takeaway is that the dividend pass through is holding at around 90%.
Douglas provided the one-year share price comparisons of 30 Korean holdcos and the opcos as well as changes to the foreign ownership stakes of these companies YTD. Significant changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades.
Sanghyun Park points out that Hyundai Motor Co (005380 KS)‘s Common vs. pref ratio is getting out of whack, possibly because of Elliott’s ₩4.5tn dividend demand. Both 1P and 2PB are sufficiently undervalued relative to the Common. The div yield difference to Common is also at the highest levels for both pref types. Sanghyun suggests shorting the Common and being long 1P or 2PB now. 1P is probably a safer bet, but 2PB is more liquid. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time to Short Common & Long Pref)
For the month of February, thirteen new deals were discussed on Smartkarma with a cumulative deal size of US$12.3bn. This overall number includes the “offer” for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component. A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal. The average premium to last close for the new deals was 27.5%.
Pioneer Corp (6773 JP)announced that the deal had received all relevant anti-trust approvals, and payment for shares by the Acquirer (BPAE) of the Third Party Placement was now expected to take place on March 8th.
Glow Energy Pcl (GLOW TB)announced it has entered an S&P to sell Glow SPP1 to B. Grimm Power Service for Bt3.3bn. The P/B was not provided. This is equivalent to ~2.5% of Glow’s market cap.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Source: Company announcements. E = our estimates; C =confirmed
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While we have been sceptical about Mercari Inc (4385 JP)‘s efforts in the US, we have always appreciated the domestic business and have only been put off by the rather demanding multiples. After speaking to the company, we continue to like the domestic business and feel that recent initiatives to broaden the user base are likely to be successful. In addition, while we still feel that there are numerous question marks about whether the business model can work in the US, we have come around to a more positive view on the company’s execution there. Lastly, we believe Merpay’s edge in the cashless wars is underappreciated and the fall in the share price is starting to make the stock attractive.
There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33 Information & Communication sub-Sector but is broader in that it encompasses all companies listed on all sections and exchanges but is also narrower in that we have excluded Telecommunications (including Softbank Group (9984 JP)) and Information Technology companies. We have adopted a ‘quantamental’ approach which covers the long-term and current trends for Japan’s Internet Sector as a whole, as well as eight sub-Sectors or Peer Groups and the Sectors’ leading companies by market capitalisation. Our focus is exclusively on the locally-listed universe and is based on disclosed financial and market data. We do not provide any forecasts, other than the companies’ own forecasts and we do not attempt to make any business model or strategic judgments. Our focus is purely on financial and market performance. We do not cover unlisted and defunct companies such as Livedoor and, therefore, there is implicit survivor bias in the data.
The broad themes that are developed in DETAIL below are grouped into six topics as follows: –
OVERVIEW – As will be covered in greater DETAIL below, Japan has failed to evolve a substantial Internet Sector and, in many business models, has been passed by global competitors including in the home market. Although Internet Sector revenues have grown steadily and now account for close to 1% of the total for all listed companies, operating margins have declined by half in the last seven years and are now only four percentage points higher than the market average. Accordingly, as measured by our Results & Revision Score, the Sector is close to a twelve-year low. The market’s response is an unchanged Sector weight in the market composite despite the addition of 111 new companies in the last six years, and a Relative Price Score that has moved in a narrow range over that period. The Sector averages disguise the weak business and market performance of a handful of Sector leaders as well as the overvaluation of the Sector’s more successful business models, which is partly a result of a lack of alternatives. Despite the world’s most significant Internet investor – Softbank Group (9984 JP)‘s Vision Fund – being based in Japan, this fund and other global investors in Internet business have been right to give Japan a ‘pass’.
Sony Corp (6758 JP) is forming a bullish descending wedge/channel that once mature will chisel out an intermediate low with scope to clear medium term breakout resistance. The tactical low near 4,400 lies just above more strategic support.
Clear pivot points will help manage positioning within the bull wedge that is in the final innings.
The tactical buy level is not that far from strategic support with a more bullish macro lean.
MACD bull divergence is not only supportive into near term weakness but also points to a breakout above medium resistance. Risk lies with Sony not looking back after hitting our tactical low target.
According to management, weak demand for factory automation sensors had a significant negative impact on sales and profits in 1Q of FY Dec-19. Also, in our estimation, it is likely to cause 1H results to fall short of guidance. But this should be in the share price, which has dropped by nearly 50% from its 52-week high.
In the year to December 2018, operating profit was up only 2.1% on a 7.0% increase in sales, largely due to an increase in machine vision marketing expenses. In January and February 2019, factory automation orders and sales dropped abruptly as customers sought to reduce excess inventories. In March, some new orders were received for delivery in May, indicating that the situation may stabilize in 2H. Demand for security and automatic door sensors continues to grow at low single-digit rates.
For FY Dec-19 as a whole, management is guiding for a 6.2% increase in operating profit on a 7.2% increase in sales. Our forecast is for flat operating profit on a 2% increase in sales. Sales and profit growth should pick up over the following two years, in our estimation, but remain in single digits.
At ¥1,765 (Friday, March 29, closing price), Optex is selling at 18x our EPS estimate for FY Dec-19 and 17x our estimate for FY Dec-20. Over the past 5 years, the P/E has ranged from 13x to 36x. On a trailing 12-month basis, Japan Analytics calculates 5% upside to a no-growth valuation, which is in line with our forecast for this fiscal year. This suggests: buy either for the bounce or for the long term.
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There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33 Information & Communication sub-Sector but is broader in that it encompasses all companies listed on all sections and exchanges but is also narrower in that we have excluded Telecommunications (including Softbank Group (9984 JP)) and Information Technology companies. We have adopted a ‘quantamental’ approach which covers the long-term and current trends for Japan’s Internet Sector as a whole, as well as eight sub-Sectors or Peer Groups and the Sectors’ leading companies by market capitalisation. Our focus is exclusively on the locally-listed universe and is based on disclosed financial and market data. We do not provide any forecasts, other than the companies’ own forecasts and we do not attempt to make any business model or strategic judgments. Our focus is purely on financial and market performance. We do not cover unlisted and defunct companies such as Livedoor and, therefore, there is implicit survivor bias in the data.
The broad themes that are developed in DETAIL below are grouped into six topics as follows: –
OVERVIEW – As will be covered in greater DETAIL below, Japan has failed to evolve a substantial Internet Sector and, in many business models, has been passed by global competitors including in the home market. Although Internet Sector revenues have grown steadily and now account for close to 1% of the total for all listed companies, operating margins have declined by half in the last seven years and are now only four percentage points higher than the market average. Accordingly, as measured by our Results & Revision Score, the Sector is close to a twelve-year low. The market’s response is an unchanged Sector weight in the market composite despite the addition of 111 new companies in the last six years, and a Relative Price Score that has moved in a narrow range over that period. The Sector averages disguise the weak business and market performance of a handful of Sector leaders as well as the overvaluation of the Sector’s more successful business models, which is partly a result of a lack of alternatives. Despite the world’s most significant Internet investor – Softbank Group (9984 JP)‘s Vision Fund – being based in Japan, this fund and other global investors in Internet business have been right to give Japan a ‘pass’.
Sony Corp (6758 JP) is forming a bullish descending wedge/channel that once mature will chisel out an intermediate low with scope to clear medium term breakout resistance. The tactical low near 4,400 lies just above more strategic support.
Clear pivot points will help manage positioning within the bull wedge that is in the final innings.
The tactical buy level is not that far from strategic support with a more bullish macro lean.
MACD bull divergence is not only supportive into near term weakness but also points to a breakout above medium resistance. Risk lies with Sony not looking back after hitting our tactical low target.
According to management, weak demand for factory automation sensors had a significant negative impact on sales and profits in 1Q of FY Dec-19. Also, in our estimation, it is likely to cause 1H results to fall short of guidance. But this should be in the share price, which has dropped by nearly 50% from its 52-week high.
In the year to December 2018, operating profit was up only 2.1% on a 7.0% increase in sales, largely due to an increase in machine vision marketing expenses. In January and February 2019, factory automation orders and sales dropped abruptly as customers sought to reduce excess inventories. In March, some new orders were received for delivery in May, indicating that the situation may stabilize in 2H. Demand for security and automatic door sensors continues to grow at low single-digit rates.
For FY Dec-19 as a whole, management is guiding for a 6.2% increase in operating profit on a 7.2% increase in sales. Our forecast is for flat operating profit on a 2% increase in sales. Sales and profit growth should pick up over the following two years, in our estimation, but remain in single digits.
At ¥1,765 (Friday, March 29, closing price), Optex is selling at 18x our EPS estimate for FY Dec-19 and 17x our estimate for FY Dec-20. Over the past 5 years, the P/E has ranged from 13x to 36x. On a trailing 12-month basis, Japan Analytics calculates 5% upside to a no-growth valuation, which is in line with our forecast for this fiscal year. This suggests: buy either for the bounce or for the long term.
Japanese cosmetic companies showed a bit of concern in January when the inbound sales, which had been growing steadily over the past few years turned red all of a sudden.
Tourist arrivals kept their growth momentum going into January, However per capita spend by tourists has been on the decline for a couple of years
Chinese e-commerce legislation did have an impact on Japanese cosmetic companies, however, the impact wasn’t as significant for cosmetic companies as it was for some of the other retailers
Inbound and travel retail sales: back on track from February onwards
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Nintendo Co Ltd (7974 JP)‘s offering and the buyback are strong symbols and practical examples of what the Corporate Governance Code wants to accomplish.
With the combination of increased hostility leading to a greater likelihood of eventual private takeout, shorts will cover and foreigners may buy, squeezing existing Descente Ltd (8114 JP) minorities up and out.
Nintendo announced (J) a Secondary Share Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the then-last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33bn worth (whichever is reached first) to be commenced the day after settlement of the Offering.
These banks (such as Bank of Kyoto) which have long-held policy cross-holdings in a Kyoto company with a diehard Kyoto cultural heritage (which can often include a diehard cross-holding culture) may have all succumbed to the new Corporate Governance Code. This is really important.
This deal is going to retail investors, quite specifically because Nintendo management and board view retail investors as both “sticky” investors and likely to largely follow management’s agenda in AGMs. Management might have misjudged how much this will get flipped.
The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains. Given the size, it looks like the former though it will be difficult to get confirmation. Travis Lundy would want to be long Bank of Kyoto both outright and against the cross-holding portfolio.
NTT Docomo announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February. The buyback has already occurred. However, by the vagaries of TSE-calculated indices, they lead to index down-weightings (unless otherwise offset).
This is a very large cancellation for a very large company, so it means a selldown of – by Travis’ estimate – 21.5-22.8mm shares at the close of trading March 28th. Traders looking to tilt short NTT Docomo or tilt long NTT short NTT Docomo will have that as a tailwind.
Panalpina’s largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation (EGF), made a formal request to hold an EGM prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed – specifically Article 5 – such that the limit on transfer rights and voting rights be abolished and a “One Share One Vote” structure be adopted. The situation has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the EGF which were deemed “grandfathered” prior to the change.
EGF wants to pass this giving everyone their capital share percentage vote because the alternative is worse. Getting this passed would slightly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance but it would mean that the EGF could continue to block any deal it did not like. The thing is, there is nothing in the Articles of Association which grants EGF that “grandfathered” exemption.
Cevian wants to block such this from going through, and to have the EGF capped at 5% like the Articles of Association suggest all should be. Cevian says that Panalpina has unlawfully maintained a grandfathering exemption from the 5% cap for the EGF. IF the EGF is capped, it means that effectively the EGF loses the ability to block deals they don’t like.
The situation is weird. It is possible that Panalpina is asking a convoluted and possibly unlawful voting structure with non-best-practice registration deadlines to vote on changing the vote structure. To Travis, this actually probably deserves a court challenge.
Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum with the announcement of a $48/share (51.7% premium to the undisturbed) acquisition proposal. Late last month Versum and Entegris announced a $9bn (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the remaining 52.5%.
It’s now in VSM’s court. Should it opt to ditch Entegris’ merger-of-equals proposal and side with Merck, it would incur a US$140mn termination fee or $1.28/share.
John DeMasi reckons Merck’s proposal is superior, however a pure cash offer vs. stock swap are not directly comparable. The prospect of Entegris substantially increasing the exchange ratio or adding a chunk of cash to the merger consideration seems remote. John expects we will see a bump in Merck’s offer to make it friendly, and a recommended deal, in short order.
Brake supplier, Wabco confirmed that it is in takeover talks with ZF Friedrichshafen, one of the leading auto parts suppliers in Germany. ZF and Wabco jointly develop the Evasive Manoeuvre Assist system for trucks, combining Wabco’s braking and vehicle dynamics control systems alongside ZF’s active steering technology.
The pushback is the Zeppelin Foundation, ZF’s controlling shareholder, and its aversion to taking on excess debt. Management and the foundation previously clashed over the €13.5bn TRW transaction in 2015.
Back in October last year, Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China. The key issue, putting aside the fact Hanergy has been suspended for near-on four years, is that the scrip consideration has no assigned value.
Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares (with an as yet undermined jurisdiction), which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, they will hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as would be the case per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to potentially squeeze out minorities at a bargain price.
It is not clear why the SFC is okay with this takeover proposal, apart from simply being open to any idea to remove Hanergy from the Exchange. At a guess, the SPV consideration structure (as opposed to a straightforward cash offer) is possibly geared to reduce shareholder rights compared to those available under Bermuda Companies Act, Bermuda being where Hanergy is incorporated.
The Scheme doc, due out later this month, or early next, requires sign-off from the SFC. Presumably the SPV jurisdiction should at least be known by then. It is hard to believe an official takeover document would be dispatched boasting no determinate offer value in addition to unknown shareholder protection rights attached to the unlisted scrip.
Descente said will release its Mid-Term Plan early in an effort to encourage shareholders to not tender. For its part, Itochu has released an amendment to its original doc, saying Descente has been naughty (bad-mouthing Itochu to the press while in negotiations), and that it will wait until after the Tender Offer is completed to re-engage. Itochu effectively reserves the right to go full hostile.
ANTA’s CEO was quoted in an interview saying ANTA supports Itochu’s tender offer and management restructuring and governance initiatives because they say they believe it will lift corporate value. That means Itochu+ANTA have a functional majority if not absolute.
This should raise back end values. Descente management is quite stuck here. To Travis, there is likely some upside optionality. Some may decide to stick with the company, raising pro-ration rates.
The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.
The Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years – the Glorious Property (845 HK) offer, which incidentally was voted down. The widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK)in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.
Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. Therefore, the IFA concluded the Offer is reasonable by referencing the premium to last close and historical pricing. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.
A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK)privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ). Trading at a wide gross/annualised return of 7.8%/45.4%, reflecting the risk to completion, and the significant downside should the scheme be voted down.
Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer at VND 120,000 (3.5% premium to the previous close when the doc was prepared), this time to purchase up to 21.7% of the Vietnam-listed DHG, lifting its stake to 56.69%.
The State Capital Investment Corporation (SCIC) owns 43.31%. IF the SCIC tenders, the minimum proration is 33.38%. IF the SCIC does NOT tender their shares, this is effectively a full tender. All of your shares would be purchased.
The very recent performance has been most curious. The last 11 days – before the announcement – have seen the stock move 37.6% on 9x average volume, with little to no news to drive it as far as Travis can tell. Looks some leakage ahead of the partial offer announcement.
Travis thinks there is a non-negligible possibility that Taisho will have to bump their Tender Offer Price. And a non-negligible chance that SCIC tenders.
OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”.
Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model.
Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture en masse.
Ruralco has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.
Nutrien has first mover advantage, however a counter from Elders Ltd (ELD AU) is possible. The two companies have a history after Ruralco attempted to buy out Elders in 2012, but failed over a disagreement in pricing.
ACCC should not be issue to this transaction. A 2013 ruling did not oppose a Ruralco/Elders tie-up, and a similar conclusion is expected for Nutrien.
The gross/annualised spread of 0.2%/0.7% is unattractive. But at this deal price, Elders could still come over the top. Trading itself at 11.4x EV/EBITDA (according to CapIQ), upping the price by 10% would still be accretive to Elders.
Revealed in the release of notes about the Board approval of the Independent Review Committee’s review in late January was the news that Otis offered to buy the company for NT$63/share but it didn’t go anywhere. In addition, some directors – most likely the partisan ones installed in the failed board proxy fight last summer – objected to the lower minimum threshold, which is a sign they don’t want the deal to go through (because the lowering of that threshold is otherwise an unmitigated positive for minority investors).
Despite stories of a suit of breach of trust against six directors for not entertaining or pursuing offers at NT$63 by Otis and/or Schindler, the company had not received any notification from judicial authorities and has not updated the market about Tender-related matters in the last two weeks.
Travis thinks there is the small possibility of a bump to NT$63; but it is not a difficult deal to get done at the minimum threshold at NT$60.
Frasers Property (Thailand) Pcl (FPT TB)has announced a conditional voluntary tender offer for GOLD at Bt8.50/share, ~2.4% premium to last close. Frasers Property Ltd (FPL SP)owns 40.95% in FPT and also 39.92% in GOLD. FPT’s director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicleUniventures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.
This tender offer therefore has been initiated to consolidate the Sirivadhanabhakdi family’s holding into GOLD. Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. The tender offer will be unconditional.
The intention to delist GOLD is evident although it will be challenging for FPT to secure 90%+ in the tender offer process, given the single-digit premium to last close, and the fact GOLD traded above the current terms as recently as early December. Getting to 90% requires almost 50% of the minority to submit their shares.
Currently trading at a gross/annualized spread of 2.4%/5.9% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.
Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00/share. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.
On a trading basis, this is somewhat interesting. If you are quite bullish the stock, you have a partial put (and you own it already). If you are tentatively bullish A-shares, this offers you a partial put, but there is a possibility that the RMB 45.00 price creates a kind of short-term cap just because it is a sticky price in peoples’ minds.
Travis is not particularly bearish the stock despite the fact that the earnings forecasts have dropped a fair bit since he looked at this six months ago. The consensus EPS forecasts for Dec 2020 today are roughly the same as they were for Dec 2019 six months ago.
The new news on Kosaido Co Ltd (7868 JP) is that the independent statutory auditor Nakatsuji-san has officially expressed his opposition to the Tender Offer. With the shares 19% through terms despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share looks low, and this seems a situation where the deal may fail unless there is a bump. (link to Travis’ insight: Kosaido (7868 JP) TOB Extended)
On the 28 Feb, Bank Danamon Indonesia (BDMN IJ)‘s shares went ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected, but Travis thinks they could fall further: there is no compelling reason to own the bank after it goes ex-rights to receive cash. (link to Travis’ insight: Bank Danamon Goes Ex-Rights)
FY18 results for PCCW, HKT, and PCPD are out. Plugging in the de-consolidated numbers, I estimate PCCW’s discount to NAV at ~37%, right on the 2 STD line. On a simple ratio (PCCW/HKT), it is again approaching an all-time low.
Still select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW’s stub ops, recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16’s stub EBITDA was also negative.
One positive takeaway is that the dividend pass through is holding at around 90%.
Douglas provided the one-year share price comparisons of 30 Korean holdcos and the opcos as well as changes to the foreign ownership stakes of these companies YTD. Significant changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades.
Sanghyun Park points out that Hyundai Motor Co (005380 KS)‘s Common vs. pref ratio is getting out of whack, possibly because of Elliott’s ₩4.5tn dividend demand. Both 1P and 2PB are sufficiently undervalued relative to the Common. The div yield difference to Common is also at the highest levels for both pref types. Sanghyun suggests shorting the Common and being long 1P or 2PB now. 1P is probably a safer bet, but 2PB is more liquid. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time to Short Common & Long Pref)
For the month of February, thirteen new deals were discussed on Smartkarma with a cumulative deal size of US$12.3bn. This overall number includes the “offer” for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component. A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal. The average premium to last close for the new deals was 27.5%.
Pioneer Corp (6773 JP)announced that the deal had received all relevant anti-trust approvals, and payment for shares by the Acquirer (BPAE) of the Third Party Placement was now expected to take place on March 8th.
Glow Energy Pcl (GLOW TB)announced it has entered an S&P to sell Glow SPP1 to B. Grimm Power Service for Bt3.3bn. The P/B was not provided. This is equivalent to ~2.5% of Glow’s market cap.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Source: Company announcements. E = our estimates; C =confirmed
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