Brief Consumer: Korea M&A Spotlight: LGUplus to Acquire CJ Hellovision: What’s Next for Tbroad and D’Live? and more

In this briefing:

1. Korea M&A Spotlight: LGUplus to Acquire CJ Hellovision: What’s Next for Tbroad and D’Live?
2. ZOZO: The Kingmaker Abandons His King
3. OUE C-REIT – Beware of the CPPU Timebomb
4. BGF Holdco/Sub Trade: Sub Overbuying Wouldn’t Last Another Day
5. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

1. Korea M&A Spotlight: LGUplus to Acquire CJ Hellovision: What’s Next for Tbroad and D’Live?

• It was finally announced today that LG Uplus Corp (032640 KS) will acquire a 50 percent + one share in Cj Hellovision (037560 KS) for 800 billion won.
• LG Uplus’ acquisition of CJ Hellovision is likely to further accelerate the consolidation of the Korean cable TV/media sector. KT Corp (030200 KS) is now likely to aggressively try to acquire D’Live cable company. SK Telecom (017670 KS) has shown some interests in acquiring Tbroad cable company. 
• Potential M&A Valuation Price for Tbroad- If we assume our base case EV/EBITDA valuation multiple to be 5.5x for Tbroad and assume annualized EBITDA of 181.8 billion won in 2018, this would suggest an implied EV of 1.0 trillion won. After adjusting for net cash, the implied market cap would be 1.2 trillion won for Tbroad. Thus, if Taekwang Industrial decides to sell just over 50% stake in Tbroad, this could potentially be worth about 600 billion won. Taekwang Industrial currently has a market cap of 1.7 trillion won so its stake (53.9% stake in Tbroad) could be nearly 35% the value of its entire market cap.
• The long battle to acquire CJ Hellovision has been completed (with the final stamp of approval from FTC). This move should help to consolidate the cable TV industry with SK Telecom and KT potentially battling out for either Tbroad or D’Live. In the midst of these uncertainties, there could be some further positive momentum for Taekwang Industrial (003240 KS), the majority owner of Tbroad.

2. ZOZO: The Kingmaker Abandons His King

United Arrows’ (7606 JP) decision to cancel its e-commerce services contract with ZOZO Inc (3092 JP) was not a surprise at all but could not have come at a worse time. While a move to direct operation of its online store was expected, United Arrows did not have to choose a moment when Zozo’s stock was collapsing. That it did shows how much cooler relations are between the two firms, a critical development given United Arrows was the principal reason for Zozo’s emergence as the leading fashion mall in the early 2000s.

United Arrows will still be selling through Zozotown and its president last week praised Zozotown’s capacity to bring new and younger customers to its brand. The bigger problem is that United Arrows relies less and less on sales from Zozotown each year and more from its own online store – direct e-commerce sales have increased from 20% of all e-commerce sales in FY2016 to 27% in 9M2018.

At Baycrews, another leading merchant on Zozotown, 50% of e-commerce sales are from its own online store, up 12 percentage points in two years.

A further problem is that other merchants are leaving. We reported before that Onward’s departure, while significant, is less of a threat than it might first appear given that Onward already garners 70-75% of sales from its own store so it did not cost much to leave Zozo. 

However, another big retailer, Right On, also quit Zozo last month despite the fact that more than 50% of its online sales come from Zozo and it has intermittently been one of the top 20 merchants on Zozo. Right On has struggled in recent years, so leaving Zozo cannot have been an easy decision, suggesting just how seriously upset it was.

Other merchants are likely to view these departures with some concern. Six months ago, the idea of quitting Zozo was not even a remote thought in Japan’s fashion industry but it is now a lively subject of discussion. While most merchants will stay,  the recent high profile departures will make a threat to leave look much more real, giving merchants more leverage to negotiate, particularly on Zozo’s take rates.

3. OUE C-REIT – Beware of the CPPU Timebomb

Whilst OUE C-REIT’s DPU yield and Price-to-NAV appears to be attractive vis-à-vis its peers, investors should take note of the implications of the S$375 mil Convertible Perpetual Preferred Units (“CPPU”) and its impact on OUE C-REIT’s DPU going forward.

Assuming that all S$375 mil CPPUs are converted, a total of 524.2 mil new OUE C-REIT will be issued to OUE Ltd, and the total unit base of OUE C-REIT will expand by 18% to 3,385.8 mil units.

For minority investors of OUE C-REIT, they face the risk of having their DPU yield diluted from a projected 7.1% (before conversion) to 6.2% after conversion.

 A Rights Issue to fund CPPU Redemption will be more dilutive than the conversion scenario. Assuming a Rights Issue at 20% discount, DPU yield of OUE C-REIT will drop from a projected 7.1% (before conversion) to 5.8% after Rights Issue.

Minority investors are likely to be at the losing end of this CPPU issue and suffer from yield dilution. Investors should avoid OUE C-REIT for now as the uncertainty over the CPPU conversion remains.

For investors who are still keen to take a position in OUE C-REIT, a fair post-conversion diluted DPU yield would be 6.6%, translating to a recommended entry price of S$0.465 per unit.

4. BGF Holdco/Sub Trade: Sub Overbuying Wouldn’t Last Another Day

• BGF Sub had a 5.39% gain on better-than-expected 4Q18 results. Holdco stayed flat. As a result, we had a 2+σ jump from 95% of σ to -133% of σ. This is the widest jump in 120D. Holdco discount is currently at 47% to NAV.
• On a 120D horizon, price ratio is still well below 120D mean. Despite recent gains, Holdco price relative to Sub is nearly 20+%p down since 120D ago. 4Q results seem to be encouraging. But local sentiments are still heavily divided on Sub’s fundamentals. 4Q results aren’t strong enough to turn the tide drastically.
• Sub has been one of the most heavily shorted stocks in Korea lately. Yesterday’s huge gain might have been a short covering. This shouldn’t be a structural price pushing up for Sub. Sub staying below -1σ wouldn’t last another day. I expect a quick mean reversion at this point.

5. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.