In this briefing:
- GPSC To Proceed With Glow Takeover, But At What Price?
- Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
- Sigma Healthcare Market Update: Strategic Review Expects More
- API/Sigma Merger: Sigma’s Hand Strengthens to Improve the Terms of API’s Bid
- Poongsan Holdings Reverse Stub Trade: Current Status & Trade Approach
1. GPSC To Proceed With Glow Takeover, But At What Price?
Global Power Synergy Company Ltd (GPSC TB) announced on the 20 June last year an intention to acquire 69.11% of Glow Energy Pcl (GLOW TB) from Engie SA (ENGI FP) at Bt96.5/share (reduced to Bt94.892/share subsequent to an interim dividend of Bt1.608), valuing Glow at US$4.4bn or 2.86x P/B. Once the acquisition was approved, the remaining 30.89% of shares would be subject to a mandatory tender offer.
The key issue raised at the time was that the transaction would give GPSC a monopoly on power purchase agreements in Map Ta Phut, Thailand’s largest industrial park.
Despite what appeared to be a non-issue from an anti-trust point of view (as discussed in Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal), on 11 October 2018 the Energy Regulatory Commission (“ERC”) notified the public of its decision not to give its approval for the transaction. Glow’s shares declined ~6% on the news.
An appeal to reconsider ERC’s decision was dismissed on 14 December.
After an announcement alluding to multiple interests for Engie’s stake, on the 27 December Glow announced that ERC has resolved to approve the merger with GPSC, provided Glow sells its Glow SPP1 plant before or at the same time as the merger. A number of conditions were also attached to some of the remaining power plants.
No price has been disclosed for the 69.11% stake in Glow, ex the SPP1 plant.
The current upside is (at best) 6.8% to an indicative offer price Bt95.86, assuming Glow can sell SPP1 at the same multiple under GPSC’s initial offer and GPSC continues to assign the same multiple to Glow even after the sale of SPP1. That would appear a stretch. However, SPP1 is estimated to account for just ~5% of Glow’s energy output and revenue. And media are reporting Engie itself may acquire the plant, which should smooth and expedite the completion of the transaction.
2. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.
3. Sigma Healthcare Market Update: Strategic Review Expects More
In my first insight on this potential deal situation in December API Tilts at Sigma Healthcare: Expect More, I noted that despite the 69% premium and very large jump on Day1 there was still room below the cash and scrip terms of Australian Pharma Industries (API AU)‘s (“API”) non-binding offer (of 0.31 shares of API and A$0.23 in cash for each share of Sigma Healthcare (SIG AU) held), which were arguably light (i.e. ascribed too much value to API shareholders for the shares portion). Also, given the nature of “opportunistic bids” made when a recently bombed out former growth stock and the “sunk cost” model of investor and executive mentality, there was every possibility that Sigma would come out saying they were worth more.
My concluding recommendation was to expect that API would have to bid more, and to think about trading this from a “long gamma” perspective and said I would be long Sigma vs API in the interim (either long-short or against terms). So far that has worked, but mostly because Australian Pharma Industries (API AU) has fallen in price. What had been a 24.9% spread to terms when I wrote was down to 13.6% last Friday and to 7.6% after the move Monday after the New News.
The New News
Friday morning, Sigma Healthcare released a 2-page Market Update saying the four month Business Review, assisted by Accenture, had identified A$100mm of annual cost savings, confirmed the FY19 EBIT guidance of A$75 million, and confirmed the FY20 EBITDA guidance of $55-60mm (strictly speaking, the conversion from EBIT to EBITDA had been pinpointed to be $54-64mm, so the range has shrunk and the top end has come down).
The business review sees 10% underlying EBITDA growth from FY20 to FY23 so that after cost savings are included, FY23 sees the same EBITDA as FY19 [i.e. almost A$90mm].
The last bullet point suggests to expect “minimal net debt by FY20” despite an “extensive capital reinvestment program” and “retention of a high dividend payout.” This suggests some use of the capital release from withdrawing from the MC/CW deal to pay down debt.
There is a fair bit one can do to read between the lines. It is worthwhile doing so.
4. API/Sigma Merger: Sigma’s Hand Strengthens to Improve the Terms of API’s Bid
Today, Sigma Healthcare (SIG AU) announced the results of its four-month-long strategic review. As a reminder, on 14 December, Australian Pharma Industries (API AU) lobbed an indicative cash-scrip proposal for Sigma. Under the proposal, Sigma’s shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share.
Sigma said that reciprocal due diligence with API has commenced but the merger “needs to be assessed in the context of what is in the best interests of Sigma shareholders.” We believe that should API continue to pursue the merger; the strategic review strengthens Sigma’s hand to improve the terms of API’s bid.
5. Poongsan Holdings Reverse Stub Trade: Current Status & Trade Approach
- Poongsan Holdco/Sub duo is now at +277% of σ on a 20D MA. This is the highest in 120 days. Price ratio wise, they are a little above 120D mean. Holdco discount is 52% to NAV.
- Sub share price has been closely correlated to the US-China trade war lately. Copper price is the single most important factor of Sub share price. US-China talks are currently affecting copper price enormously. Sub has again become a punching bag of short sellers amid fresh concerns over US-China trade.
- Sub is now hitting a 9x PER on already harshly adjusted FY19 earnings. This level is substantially lower than FY18 yearend PER of 12.0x. Valuation wise, Sub shares seem to be hitting bottom at this point. Sub shares moving at least sideways will lead to a mean reversion on Holdco/Sub price ratio.
- I expect it to happen at this point regardless of which direction the US-China talks are heading. Given Sub’s current valuation, Sub wouldn’t take more beating. I’d go long Sub and short Holdco now. Just, Holdco liquidity can be an issue to many of us here.
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