Brief Consumer: Rakuten to Covertly Cut Merchant Commission Rates? and more

In this briefing:

1. Rakuten to Covertly Cut Merchant Commission Rates?
2. LG Uplus – CJ Hello Acquisition: Current Yield Is 10%, CJH Overhang Concerns Will Push It Up
3. Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
4. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched
5. Korea M&A Spotlight: LGUplus to Acquire CJ Hellovision: What’s Next for Tbroad and D’Live?

1. Rakuten to Covertly Cut Merchant Commission Rates?

Rakuten (4755 JP) has been under pressure recently from Amazon (AMZN US) and other competitors in its core online mall business and now seems to be giving more attention once again to the original Rakuten Ichiba, including a plan to cut shipping fees, although this also looks like a face-saving way to cut merchant commissions.

Rakuten is also investing in new logistics infrastructure to try and match the customer services levels of Amazon and ZOZO (3092 JP).

As part of this effort, Rakuten just announced a 9.9% stake in a logistics firm called Kantsu. The deal is part of Rakuten’s strategy to accelerate the move towards consolidated shipments of orders on Rakuten Ichiba – one of the key weaknesses of the Rakuten model compared to Amazon and Zozo.

Rakuten also just announced its year-end results this week: Domestic GMVs rose 11.2% to ¥3.4 trillion for the year ending December 2018. While GMVs rose and revenue increased by 9.2% to ¥426 billion, operating income on domestic e-commerce fell 17.7% to ¥61.3 billion partly due to higher logistics costs. For 4Q2018, operating income fell 27.3%.

2. LG Uplus – CJ Hello Acquisition: Current Yield Is 10%, CJH Overhang Concerns Will Push It Up

• LG Uplus Corp (032640 KS) actually pays ₩800bil (not ₩1tril) for the controlling stake of CJ Hello (037560 KS) from CJ ENM (035760 KS). LG Uplus gets not all of the shares owned by CJ ENM. It gets a total 38,723,433 shares. This is 50% + 1 share. Cost per share is ₩20,659. This is a 107% premium.
• I suggested a long/short trade on LGU+/CJH starting this Monday on the grounds that their MC ratio should revert back to above 10. This trade is paying off very handsomely now. Current yield stands at 10.5%. But I wouldn’t close this position yet.
• CJ ENM still owns nearly 4% CJH stake. SKT owns 8.61%. Neither of them has any reason to retain these shares. LG Uplus doesn’t seem to be interested in getting any of these additional shares. This means one thing. It is very likely that CJH will suffer huge stock overhang concerns.
• Not only that, merger between them is inevitable. The LGU+/CJH MC ratio should be reverted back to 10. The MC ratio is now at 8.4. We still have more room on this. I expect it to reach at least near 9 level in very near future. I’d hold onto this position until then.

3. Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China

Anheuser Busch Inbev Sa/Nv (ABI BB), the world’s largest brewer, is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn, as per media reports, which will make it one of the largest listings for 2019. Earlier this month, the company picked JPM and MS to lead the deal.

When listed, the company will be the third biggest brewer in China and the largest in South Korea and Australia.

While we have to wait for the application proof to be filed later this year to get more details on the operations, in this insight I’ll take a early look at the Asian operations using the data already available in the parent’s annual and quarterly reports. I’ll primarily address where the business is now and how it has shaped up over the past few years.

4. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

Three months ago, Minebea Mitsumi (6479 JP) announced that it would launch a Tender Offer for U Shin Ltd (6985 JP) and it would take just under three months until the approvals were received and it could officially start the Tender Offer process. It took a couple of weeks longer, as proposed by U Shin’s update on 30 January, which indicated anti-trust approvals had been received.

The background to the Tender Offer was discussed in Minebea Mitsumi Launches Offer for U-SHIN in early November.

My first conclusion in November was that this was the “riskiest” straight-out non-hostile TOB I had seen in a while. 

This is a wide-open deal. The buyer owns 1 round lot. The largest holder is an activist. The deal is being proposed at not such a super-high multiple (8x forecast FY earnings for the year ending 31 December 2018) and 4.9x EV/EBITDA. It is 3.7-4.0x when taking into account the 67 different equity positions they held at the end of last year, some of which they have recently liquidated. 

from (8 Nov 2018) Minebea Mitsumi Launches Offer for U-SHIN

In the interim, the activist dropped their position in half (necessitating a filing of a Large Shareholder Report for going below 5% – and they may have completely liquidated by now), and an investment bank has gone above 5% since then.

The financial advisory “valuations” at the time were more than questionable. A discussion of the valuation levels can be found in the previous insight (I don’t need to repeat them here, just go there).

Today, the company raised its OP and Ordinary Income forecasts for the year ended 31 December 2018, but lowered its Net Income forecast by 98.8% due to writeoffs at many overseas facilities. Then the promptly reported earnings (also only in Japanese) a few seconds later (only available in Japanese). 

Op is now forecast to drop 2% in 2019 vs 2018, but the 2019 forecast is 11+% higher than the 2018 forecast was just yesterday. The forecast for Net Income is ¥99.35/share, putting the deal at <10x forecast PER. And even less if one considers that the cross-shareholdings could be reduced. 

The New News

Today Minebea Mitsumi announced the launch of its Tender Offer, to commence tomorrow, at the same price as originally planned (¥985/share), and to run for 38 days. 

This deal is still perplexing to me. It’s easy enough from an industrial standpoint. I mean, why not buy relatively cheap assets then see if you can cross-sell or assume some attrition. But for investors… I wonder why they put up with this.

5. 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.