In this briefing:
- Xenith Caves And Recommends IPH’s Superior Offer
- Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL
- RBA’s Debelle Strikes Optimistic Tone; Remains Lazor Focused on the State of the Labour Market
- Wynn’s Whale Of A Deal For Crown Off the Hook
- Watch Out for Dovish Noises from the Fed and RBA
1. Xenith Caves And Recommends IPH’s Superior Offer
On the 27th November 2018, Xenith Ip (XIP AU) and Qantm Intellectual Property (QIP AU), both leading providers of IP origination services in Australia – and two of the three listed IP plays – announced a merger via an all-scrip scheme, such that Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group, respectively. Xenith’s board unanimously recommended the merger to its shareholders.
The same day IPH proposed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a A$0.05 dividend) by way of a scheme. QANTM’s board rejected the proposal due to its highly conditional nature.
IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) on the 13 February 2019 and said that is does not support the QANTM scheme. IPH followed up with a scheme proposal for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, which was summarily rejected by Xenith.
Execution risk, especially ACCC approval was an express concern for Xenith. At the time, this appeared spurious given privately owned companies collectively hold a larger market share – and growing – compared to the three listcos currently in play.
The ACCC agreed and signed off on the IPH/XIP tie-up on the 21 March, and a IPH/Xenith merger on the 28 March. Xenith continued to stonewall and backed QANTM’s proposal.
On the 8 April, IPH bumped the scrip portion of its proposal for Xenith. The revised terms were cash (A$1.28) and 0.1261 IPH shares – or $2.15/share – at the time of the announcement. There is a mix & match facility wherein shareholders can choose 100% cash or 100% scrip, subject to scale back.
Xenith approached QANTM to provide a counter proposal to match IPH’s updated offer, however QANTM opted out. Xenith had run out of excuses not to back IPH’s proposal.
The New News
And right on cue, this morning Xenith unanimously recommended IPH’s updated offer.
This is a done deal and will trade tight to terms. Conditions include the termination of the QANTM scheme implementation deed (which will take place shortly with Xenith incurring a A$1.6mn break fee) and Xenith shareholder approval.
The Scheme meeting is tentatively scheduled for the week commencing the 15 July with an expected implementation date early August.
2. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL
- Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
- Firstly, we analyse what a NPL is.
- We then evaluate provisioning changes across Asia. We rank countries.
- We further analyse specific underlying NPL recognition issues in China.
- We then rank a sample of regional banks and countries by NPL recognition.
- Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
- Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.
3. RBA’s Debelle Strikes Optimistic Tone; Remains Lazor Focused on the State of the Labour Market
We had warned to watch out for dovish noises from the RBA this week after it changed its monetary policy meeting statement earlier in the month to say they are monitoring developments, suggesting they may be willing to consider a rate cut in coming months if downside risks to growth materialize.
Watch out for dovish noises from the Fed and RBA; 10 April – AmpGFXcapital.com
However, the speech on the “State of the Economy” on Wednesday by Deputy Governor Guy Debelle sounded relatively optimistic that the deterioration in the outlook since mid-2018 both in Australia and globally may be temporary. The RBA is more watchful, but not yet ready to cut rates.
Debelle highlighted risks to the Australian growth outlook including the clampdown on shadow financing in China and trade tensions, slower household consumption in Australia and a weaker housing market.
However, he sounded more optimistic on the state of the global economy than many market commentators, noting ongoing strength in service sectors and employment and wage growth (globally and in Australia).
He tended to downplay the negative influence the housing market decline may have on the Australian economy.
He suggested that the RBA is lazor focused on the labour market. Provided employment growth continues, unemployment declines and wages growth accelerates, the RBA is unlikely to cut rates. At this time, the RBA still sees strength in leading indicators of the labour market, even though job ads have fallen in recent months. It appears to prefer the vacancy data that rose to a new high in February from three months earlier.
Understandably, in response to Debelle’s glass half full speech, Australian rates and the AUD have firmed.
It is fair to predict that the RBA will cut rates later this year, as most market economists have done. However, Debelle and the RBA are not yet convinced this will be necessary. In particular, it appears to need evidence that the labour market is losing momentum, and this may take several months.
4. Wynn’s Whale Of A Deal For Crown Off the Hook
After a brief pause in trading yesterday morning, Crown Resorts (CWN AU) announced it is in confidential discussions with Wynn Resorts (WYNN US) concerning an acquisition of Crown by way of a Scheme. The announcement states that Wynn has approached Crown on more than one occasion.
That was in the morning.
WYNN confirmed it and released an 8K in the early hours of the 9th saying they would not comment further.
Several hours later, WYNN apparently said it was terminating deal talks with Crown because of the “premature disclosure of preliminary discussions”.
Oops.
This will surely knock Crown shares back down after their 19.7% gain on Tuesday.
But it does not remove the reason for a deal. The Crown commentary clearly indicated that they were not averse to doing a deal. That would suggest James Packer is not either.
The proposal arrived at a unique time for both companies after the CEOs and major shareholders of both companies relinquished their roles in 2018: Packer for health reasons, and Steve Wynn after allegations of sexual harassment.
If Wynn wants to expand its footprint into the hemisphere and James Packer wants to arrange his affairs, a deal somewhere should be in the offing. This deal may just get pushed to the back burner before coming back to the fore. Several years ago, ADM launched a proposal at Graincorp. Months later there had been no apparent communication and the shares drifted off and then, all of a sudden, there was an agreed deal.
Or perhaps this opens up Crown to other suitors.
5. Watch Out for Dovish Noises from the Fed and RBA
We see scope for dovish noises from the FOMC minutes and Fed speakers. The Fed appears to be in the process of shifting towards adopting an average inflation target, which should make them more sanguine if inflation rises above the 2% target and more responsive to signs that economic growth may be slowing. We expect no substantive changes in policy guidance from the ECB this week. The RBA has opportunities in a speech and the financial stability review this week, and its minutes next week to flesh out what appears to have been a shift to an easing bias earlier this month.
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