Brief Event-Driven: Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation and more

In this briefing:

1. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation
2. LG Uplus – CJ Hello Acquisition: Current Yield Is 10%, CJH Overhang Concerns Will Push It Up

1. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

• Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
• Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
• Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil.  At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.

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.