Brief Event-Driven: Hanergy’s Hobson’s Choice and more

In this briefing:

1. Hanergy’s Hobson’s Choice
2. Hyundai Motor Share Class: Time to Short Common & Long Pref

1. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

2. Hyundai Motor Share Class: Time to Short Common & Long Pref

• Common is widening pref discount today as it is generating the highest gain mainly on the Elliott pushing. As of now (1PM in Korea time), Common and 1P/2PB gain difference is nearly 1.5%p. This is putting price ratio at nearly 120D high. On a 20D MA, both Common/1P and Common/2PB are above 200% of σ. We see this level for the first time since mid Dec last year.
• It is unlikely that Elliott’s ₩4.5tril dividend demand will get shareholder approval in the upcoming Mar 22 AGM. But it is enough to create a market mood that Hyundai Motor will hand out more generous shareholder friendly measures. Generally, common gets favored market sentiment as we move into AGM cycle. This time should be different. Each time Elliott factor came in, HM Pref tended to outperform Common.
• This should be time again for HM Pref to shine more. Both 1P and 2PB are sufficiently undervalued relative to Common. Div yield difference to Common is also at the highest for both pref types. I’d go short Common and long 1P or 2PB now. 1P seems a little more safe bet. But 2PB is more liquid. Either way wouldn’t go terribly wrong.