Brief Consumer: APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms and more

In this briefing:

1. APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms
2. Last Week in Event SPACE: Altaba, Nexon, MYOB, Panalpina, Ezion, Naspers, Melco
3. Las Vegas Sands: Singapore Expansion Impacts Our Valuation Now, Long Before Projected 2025 Debut
4. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead
5. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?

1. APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms

On 5 April, Ap Eagers Ltd (APE AU) announced that it had lobbed an unsolicited all-scrip takeover for Automotive Holdings (AHG AU)/AHG. Under the proposal, AHG’s shareholders would receive 1 AP Eagers share for every 3.8 AHG share. In a 100% acquisition scenario, AP Eagers shareholders would own 75.5% of the merged AP Eagers-AHG.

2. Last Week in Event SPACE: Altaba, Nexon, MYOB, Panalpina, Ezion, Naspers, Melco

Last Week in Event SPACE …

• Here it is. The end – the culmination of years of effort and high balance sheet usage by hedge funds. Altaba Inc (AABA US) is going out with a whimper plus a little upside.
• Reportedly plans for the sale of NHC have been abandoned with a focus on selling its Nexon Co Ltd (3659 JP)gaming unit.
• That’s a wrap, as Manikay blinks and concedes to KKR’s Offer for MYOB Group Ltd (MYO AU).
• Ezion Holdings (EZI SP) is tendered a necessary lifeboat from Yinson Holdings (YNS MK).
• We now have an agreed deal for Panalpina Welttransport Holding (PWTN SW) supported by the Ernst Göhner Foundation, the major activist shareholders, and Panalpina management.
• Naspers Ltd (NPN SJ)‘s discount to NAV narrows as it teases out more information on spinning-off and separately listing Tencent Holdings (700 HK).
• Melco International Development (200 HK) is potentially mispriced against Melco Resorts & Entertainment (MLCO US) after the release of FY18 earnings.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

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

Altaba Inc (AABA US) (Mkt Cap: $42bn; Liquidity: $452mn)

Altaba will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which Altaba currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63/share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba share value at the time of distribution, of $177.00/Alibaba share).”

• As p55 of the preliminary proxy makes clear, based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions.
• A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.
• It looks like there is upside as the stock closed at US$72.76 (at the time of the insight). But there is less than you think simply because it will take time to get out of it. And discount rates of the first portion may be low, but discount rates applied to the later payments post-delisting and post court workout for the Holdback Amount could be higher.
• Travis Lundy has opinions on what to do once you start getting into the arb risks. Do read his insight.

(link to Travis’ insight: ALTABA UNWINDING – Not Much Juice, and Considerably Different Skew)

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $50mn)

Sanghyun Park discussed Nexon sale after the FT reported bankers has stopped plans to sell the holding company NXC. The sale of NXC is probably the simplest exit path for Kim Jung-ju as it would be a more attractive tax outcome than selling Nexon Japan outright.

• But there’s a lot of other stuff in NXC that suitors don’t want to, which ideally should be sold before selling NXC. There’s also the issue of whether a tender offer would be required whether the sale of NXC or Nexon – Travis concludes an offer would be required while Sanghyun does not.

• Korean local news outlet reported that Tencent Holdings (700 HK)‘s US$6bn bond issuance may be a fund raising for a Nexon takeover. Still, South Korea would prefer keep Nexon’s ownership domestic, which may favour Kakao Games (1404796D KS) or PE outfit MBK.

(link to Sanghun’s insight: Nexon Sale: Key Questions at This Point & Most Realistic Answers)

Summit Ascent Holdings (102 HK) (Mkt Cap: $270mn; Liquidity: $1mn)

Summit Ascent announced that First Steamship (the major shareholder) and Kuo Jen Hao (chairman) are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 35%.

• Summit is trading at a trailing PER of 267x. CapIQ forecasts point to a threefold increase in earnings in FY19, although I would advise caution on those numbers given the tight cluster of target prices; historically, target prices for Summit have been wide of the mark.
• First Steamship bought in at $1.06 in December 2017, around the same price when this announcement was made. Should this sale complete, this would result in the third time the shares of the major shareholder have changed hands. This looks like a great opportunity to exit.

(link to my insight: Summit Ascent’s Slippery Slope)

MYOB Group Ltd (MYO AU) (Mkt Cap: $1.4bn; Liquidity: $10mn)

On the 20th March, MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them. Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.

• On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.
• Mid-week, Manikay caved and said intends to vote all its shares for the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote. This is now MUCH closer to being a done deal. It will trade tight.

• Travis is a trifle surprised Manikay did not wait a little longer. They were able to increase their stake in the low A$3.30s because of the uncertainty of their intentions, and they could probably have gone close to 20% in the low 3.30s before saying “Yes.” That would have been a welcome extra profit.

(link to Travis’ insight: Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer)

Ezion Holdings (EZI SP) (Mkt Cap: $219mn; Liquidity: $2mn)

Lifeboat market play Ezion has received a bail-out from Malaysia’s Yinson Holdings (YNS MK) via a capitalisation of debt and option agreement. Ezion remains suspended.

• On the surface, this looks like a bargain for Yinson which is ostensibly taking over Ezion for US$200mn. However, Yinson said that it is still negotiating with the designated lenders of the US$916mn debt on the terms and conditions..
• Yinson’s business risks include contact risk, oil price fluctuations and the level of activities in the O&G industry. These risks do not change should the Ezion proposal complete.
• And offshore support companies face a raft of challenges: Ezra Holdings (EZRA SP) entered bankruptcy in 2017, Pacific Radiance (PACRA SP) has been voluntarily suspended since 28 Feb 2018 as it seeks a way to complete its debt restructuring; while Swiber Holdings (SWIB SP)recently announced its own US$200mn injection from Seaspan Corp. (SSW US), after the company had laboured in judicial management for the past two years.

(link to my insight: Yinson Tenders a Lifeboat for Ezion)

Kingboard Copper Foil Hldgs (KCF SP) (Mkt Cap: $320mn; Liquidity: <$100k)

For the second time in two years parent Kingboard Laminates Holdings (1888 HK) (ultimate parent being Kingboard Holdings (148 HK)) has launched an Offer to fully privatize KCF. This time at SGD 0.60/share vs SGD 0.40 two years ago.

• The last time came on the heels of a long independent review by EY which found KCF had given up profit to the parent through a series of relatively unfair interested party transaction agreements.
• At the end, the Bermudan Court of Appeals went against a Supreme Court decision which had decided that a replacement counterparty decision was prejudiced against minorities, and despite the April 2017 deal being not fair and not reasonable according to the IFA, the parent acquired ~10% (of the 28% it did not own) bringing their stake to 82.3%. A year later the parent acquired another 5.5% bringing them to almost 88%.
• Now an offer at SGD 0.60/share (compared to the Revalued NTA of SGD 0.7086/share from the IFA report (p36) of two years ago gets closer to the mark, but crucially, it is designed to squeeze out minorities with the threat of delisting. Kingboard Laminates only needs 2.05% to oblige a delisting from the SGX. As far as Travis can tell, it would require more – at least 95% of shares – to oblige a mandatory squeezeout of minorities according to Section 102-103 of Bermuda Companies Act.
• Travis thinks this one gets through.

(link to Travis’ insight: Kingboard Starts Voluntary Unconditional Offer for 88% Held Sub Kingboard Copper Foil)

Ying Li International Real Estate Ltd (YINGLI SP) (Mkt Cap: $260mn; Liquidity: truly tiny)

China Everbright (165 HK) has launched an MGO at SGD 0.14/share for the rest of Ying Li International Real Estate Ltd (YINGLI SP) after last week purchasing the 30.00% stake formerly held by the CEO, bringing its stake to 58.9%.

• The deal is at a negligible premium and is far, far below Tangible Book Value Per Share (which is almost three times the offer price). Given that the acquirer bought a large stake in the company and offered perpetual capital of almost the current market cap at a significant premium to the MGO price, Travis thinks it an unattractive offer.
• It is puzzling as to why the CEO would sell his shares at such a discount, especially when the company and Everbright co-own some of the assets.
• While the stated intention of the Offeror is to keep the stock listed, and the MGO is presented almost as “technical”, it would be enormously to Everbright’s benefit to buy as many shares as they could down at this price level. It will go from being underwater on an equity affiliate stake purchase to having a huge writeup in value if Everbright consolidates the asset post MGO.
• For that, Travis thinks there is a possibility of a bump just to make it more attractive, though the IFA report could come out with a not fair and reasonable result which shows NTA or NAV far, far higher than the Offer Price, which is not yet declared final.

(link to Travis’ insight: Everbright Mandatory Offer for Ying Li Intl Real Estate – Going Cheap)

Briefly …

In a mainly technical piece, I explained why China Three Gorges, China Power New Energy Development Co (735 HK)‘s largest shareholder with 27.1% is currently required to abstain from voting at the forthcoming court meeting, despite the misleading statement in the  announcement that China Three Gorges has given an irrevocable undertaking to vote for the Scheme. (link to my insight: China Three Gorges’ Rebuttable Presumption)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $4.8bn; Liquidity: $27mn)

What was once a tough deal is now an agreed deal. The deal is 2.375 shares of DSV for every share of Panalpina, which as of the previous Friday’s close had a value of CHF 195.80/share which is a 43% premium to the CHF 137/share, where Panalpina was trading the day before DSV’s first bid.

• Panalpina is getting taken out at 28.1x reported 2018 EV/EBITDA multiple (pre-IFRS 16) calculated at a CHF 195.8 price. Panalpina shareholders will own ~23% of DSV shares out if all shares are exchanged and the Ernst Göhner Foundation will be the largest shareholder at ~11%.
• 69.9% of shares have irrevocably agreed to support the Exchange Offer. The customary condition is 80% to make it go through, meaning DSV needs another 10.1% out of the 30% extant (or just over one-third).
• Travis expects there is another 10-15% held by arbitrageurs and 5-7% held by indexers already so this deal looks to me like it is done. He expects the Exchange Offer may settle as early as early-August. If it trades tight, he would get out because DSV is probably priced to a very good level. 

(link to Travis’ insight: DSV Improves Bid and Göhner Foundation and Panalpina Agree)

Lenta Ltd (LNTA LI) (Mkt Cap: $1.7bn; Liquidity: $2mn)

Reuters reported that Alexey Mordashov’s Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those TPG and European Bank for Reconstruction and Development, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company. This was followed by Lenta announced confirming the cash offer. The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs. 

• The first 41.9% are sold conditional on FAS Clearance (presumably Mordashov has cleared this transaction with “the right people”) expected in May 2019, a few easily achieved conditions, and the condition of no sanctions being in play for any of the selling or buying parties. 
• Once cleared – expected in May 2019 – this becomes a straightforward offer with no minimum acceptances meaning that investors can sell shares into the deal or decide not to do so.
• It’s not an attractive offer price, with the possibility of a bump if enough people complain.  If you want to buy and hold, this deal is a put option.

(link to Travis’ insight: Severgroup Puts in a Cheeky Bid for Lenta – TPG and EBRD Bail)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Since announcing the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019” – together with a secondary, inward listing on the Johannesburg Stock Exchange – I calculate Naspers discount to NAV has narrowed to 34.4% from 37.1%, the day before the announcement, placing the current discount a shade below the 12-month average.

• The likelihood of NewCo trading at a tighter discount to where Naspers’ previously (& currently trades) is universally accepted. Naspers will benefit from that reduced discount via its 75% stake; but it is not known where Naspers’ own discount will trade after the spin-off.
• There are indications the management want to see the group discount narrow to 30%, possibly down to the 20% level, which implies a significantly lower discount for Naspers, potentially around 10%. That would seem optimistic as investors focus more on the directly-held Tencent vehicle, and the fact Naspers is a holding company, holding a stake in another holding company.
• Naspers’ discount may drift narrower on the expectation Naspers’ spin-off works its magic. Greater clarity on the option into Naspers or NewCo may provide an additional boost; but conversely, if such an option is limited, there is likely to be disappointment.

(link to my insight: StubWorld: Naspers’ Restructuring Update)

Melco International Development (200 HK) / Melco Resorts & Entertainment (MLCO US)

With Melco trading at a (then) 32% discount to NAV, Curtis Lehnert recommends a set-up trade on a dollar for dollar basis. The current level, as I write, is statistically the most attractive according to the Smartkarma Holdco Tool, sitting at -1.8 standard deviations from the 180 DMA.

• Stub assets are minimal – around 8% of GAV – if excluding gaming licenses, goodwill and trademarks. Net cash is $6.4bn or $4.27/share.
• Those stub assets are still loss-making, after deconsolidating out MLCO, to the tune of $386mn in EBITDA, but that was an improvement on (HK$682mn) figure in FY17.
• Still, Curtis thinks now is the time to enter the trade to take advantage of both the statistical and fundamental supports to the trade. 

(link to Curtis’ insight: TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau)

For the month of March, ten new deals were discussed on Smartkarma with a cumulative deal size of US$22.3bn. This overall number includes Blackstone and Hellman & Friedman’s proposal for Scout24 AG (G24 GR) after the Tender Offer was officially launched in March. This deal was first proposed in mid-January – which was rejected by the board – and subsequently an improved offer was tabled, which was then supported.

The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.

(link to my insight: M&A: A Round-Up of Deals in March 2019)

• Delta Electronics Thai (DELTA TB)‘s results of the CVTO have been announced.  42.85% of shares tendered, therefore the offeror held 63.78% of shares at the close of the offer. The MSCI downweight occurred at the close Thursday, however shares popped 17.5%.

• Hanergy Thin Film Power (566 HK)‘s Scheme document has been delayed until the 25 April, from the 2 April.

• The Dairy Crest (DCG LN) takeover by Saputo was approved at the Court Meeting and Scheme Meeting yesterday.

• Ap Eagers Ltd (APE AU), Automotive Holdings (AHG AU)‘s largest shareholder, has proposed an all-scrip merger offer. AHG recommends shareholders take no action at this time.

• Glow Energy Pcl (GLOW TB)‘s IFA recommends shareholders tender into Global Power Synergy Company Ltd (GPSC TB)‘s offer.

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.   

3. Las Vegas Sands: Singapore Expansion Impacts Our Valuation Now, Long Before Projected 2025 Debut

• LVS at $64 has runway to $80 by Q4 this year with more core catalysts than many peers.
• Just announced Singapore expansion solidifies LVS first mover MICE advantage as developer of choice in other jurisdictions.
• Singapore outlook adds credibility to LVS pole position in race for Japan IR license before year’s end, adding ballast to our PT.

4. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.

5. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?

Tesla’s 1Q delivery details released yesterday suggests one of three possible reasons for the dramatic drop across the company’s product lineup – either the impact of the federal tax credit phaseout is beginning to hit Tesla’s sales, the sales reflect an aging product portfolio or a combination of both.   We suspect that it might be a combination of the two.

Excitement over a new product typically lasts for 6-12 months, then should show a stabilizing pattern.  To be honest, the Model 3 should now be a mid-cycle product in the minds of consumers since the car has been around since mid 2017, although analysts’ clock began ticking on the product in 2Q18 given their P&L focus.  We are now in the 10th month following normalization of the Model 3 production which would suggest that we should be anticipating a Model 3 delivery range of 50-65,000 units based on delivery patterns for the past 3 quarters, but we also believe investors should keep in mind that for Tesla the federal tax credit phaseout kicked in on January 1, 2019.  The combination of these two factors could have very well led to a drop in deliveries in 1Q, with a 4Q18 front-load effect.  This seems to be especially noticeable on the drop in the deliveries of Models S&X that few analysts on the street seem to have focused on following Tesla’s press release.  We believe what is sorely needed for Tesla as a brand is a product portfolio refresh, not Model Y launch at this point.

Given the above, we would be inclined to model in a 200-250k units of the Model 3 deliveries in 2019 at this point, which would be conservative compared to the 360-400k units that Tesla is currently guiding.  The wild card would be if China demand for the Model 3 exceeds the initial indications of about 10k units per quarter (see JL Warren Capital’s Tesla China Q1 Delivery Revision ), which should be included in the 1Q shipment figures that were released by the company.

U.S. federal tax credit for EVs begin to phase out for EV manufacturers once the OEM hits cumulative sales of 200k units, and Tesla achieved this landmark back in July 2018.  The actual phaseout for the company began on January 1, 2019.  Granted we have been concerned about Tesla’s aging product portfolio for the past year (see Tesla: A Few Thoughts on Ageing Products Before 1Q Earnings Announcement, April 10, 2018), we also believe that the drop in the Models S&X deliveries in 1Q19 is highly likely to have been exacerbated by the tax credit phaseout and/or other factors.