Brief Event-Driven: Hopewell’s Egregiously Bad Offer, But What Can You Do? and more

In this briefing:

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?
2. Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?
3. Last Week in GER Research: Best World, Graincorp, Myob and New Century IPO
4. Aveo Group (AOG AU): An Emerging Bidding Battle Presents an Opportunity
5. Nintendo Offering & Buyback: The Import & The Dynamics

1. Hopewell’s Egregiously Bad Offer, But What Can You Do?

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.  The IFA (China Tonghai Capital) considers the $38.80/share Offer to be fair & reasonable. The Scheme is conditional on ≥75% for, ≤10% against from disinterested shareholders. As Hopewell is HK-incorporated, there is no “head count ” test.  The full timetable is as follows:

After hearing conflicting opinions on what constitutes a blocking stake, a chat with the banker confirmed the blocking stake, as per the Companies Ordinance, is tied to 63.07% of shares out (i.e. Scheme shareholders – see page 95); whereas the Takeovers Code is tied to 59.42% of shares out. Effectively there are two assessments on the blocking stake and the more stringent (the 59.42% out in this case) prevails. 

With the Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years (the Glorious Property (845 HK) offer, which incidentally was voted down), the IFA creatively argues that extenuating factors such as the premium to historical price needs to also be taken into account. Hardly original, but that is where investors must decide whether this is as good as it’s going to get – given the Wu family’s control, there will not be a competing offer – or to hold out for a superior price longer term. This is a final offer and it will not be increased.

What the IFA fails to discuss is that the widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.

Therein lies the dilemma – what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. And that is the disingenuous conclusion from the IFA that the premium to last close and with reference to historical pricing, is in effect the overriding reason to conclude the Offer is reasonable. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.

A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ).

Trading at a wide gross/annualised return of 7%/37.5%, reflecting the risk to completion, and the significant downside should the scheme be voted down. Tough one – the premium to last close and with reference to the 10-year price performance, should be sufficient to get it over the line, and the basis for this “bullish” insight. But only for the brave.

2. Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

On Friday 22 February after the close, Nintendo Co Ltd (7974 JP) announced a buyback (E, J), a share cancellation (E, J), and a public equity offering of secondary shares (J-only). This kind of event is not abnormal in a year when profits are weaker and share prices are down. Cross-holders often sell shares into the end of the year in order to realise profits and let unrealised gains from the balance sheet filter into the income statement.

This time it is five sellers from four banks which all hail from the area: Bank Of Kyoto (8369 JP), Nomura Trust (which holds shares in a trust account for the MUFJ Bank pension fund as a beneficiary), Mitsubishi Ufj Financial (8306 JP)‘s MUFJ Bank, Resona Holdings (8308 JP), and Shiga Bank (8366 JP). The MUFJ Bank holdings likely originate from Sanwa Bank which was Osaka-based before merging with BOT-Mitsubishi almost 15 years ago, and Resona is also from Osaka – next door to Kyoto where Nintendo was founded – and Shiga Bank is the prefecture next door.

This would look like a normal sell-down… except for one thing.

There was a note in the announcement to the effect that “in the context of how companies deal with their policy cross-holdings becoming the subject of greater focus, we confirmed that several shareholders desired to sell shares, and as a company subject to such cross-holdings, we are conducting the above-mentioned Offering.”

The “greater focus” comes from the both the change in the Japan Corporate Governance Code which was introduced last spring and went live June 1st (discussed in Japan’s Corporate Governance Code Amendments – A Much Bigger Stick for Activists and Stewards) which raised the bar for disclosure of reasons, and results, of such policy crossholdings in a revised version of Principle 1.4, and an example of how a board should make decisions and execute an unwind of corporate crossholdings. This example was given by Japan Exchange Group (8697 JP) itself regarding the TSE’s stake of 4.95% in Singapore Exchange (SGX SP) and was discussed in Japan Crossholdings: Japan Exchange’s Sale of SGX Shares Sets A Precedent – Watch Closely.  

In the TSE crossholding of SGX situation, the sale was not the most important part. The explanation of how the Board came to its decision and what they decided to do about it was important. 

On the other hand, Japan’s Corporate Governance Code (the Code), which was introduced in 2015, requires listed companies to examine and explain the economic rationale and future outlook of holding shares of other listed companies for reasons other than pure investment purposes. Following a review of the requirements under the Code, JPX reached the conclusion that the existing cooperative relationship with SGX would continue even without holding the shares of SGX.       [my bold]

The Japan Exchange Group had now provided the example for why even companies with cooperative business relationships should not own cross-holdings. And it is, if active stewards of capital choose to make it so, more subtle. Shareholders have even an even better pressure point. IF a company’s cooperative relationship with another company would not survive the unwinding of cross-holdings to improve capital efficiency for both sides, is that company truly independent? Is that company beholden to the company whose shares it holds? Is the cross-holding board doing its job?

And the Japan Exchange Group had said it would unwind its holdings of SGX over three years, so as not to overly impact the market for SGX shares. This provided an example of HOW to unwind, in addition to the WHY to unwind announced above.

The BIG QUESTION (And Nothing Else Matters)

The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains.

The Nintendo-specific situation is discussed in Nintendo Offering & Buyback: The Import & The Dynamics. 

An analysis of the Bank of Kyoto-specific situation is discussed below.

3. Last Week in GER Research: Best World, Graincorp, Myob and New Century IPO

In this version of the GER weekly research wrap, we assess the controversy surrounding potentially inflated revenue concerns for Best World International (BEST SP) . Secondly, we dig into the latest M&A situation for Graincorp Ltd A (GNC AU) amidst a testy AGM and a slow resolution to a binding bid which may limit a bump. In addition, we update on the KKR bid for MYOB Group Ltd (MYO AU) which Arun contends is unlikely to receive a counter bid due to KKR’s blocking stake. Finally, we initiate on the IPO of hotelier Zhejiang New Century Hotel Management Group (ZHEKAIH HK).  A calendar of upcoming catalysts is also attached. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

4. Aveo Group (AOG AU): An Emerging Bidding Battle Presents an Opportunity

Aveo Group (AOG AU), an Australian retirement village operator, is amid a strategic review to sell itself. At its 1H19 results on 13 February, Aveo said it had received several non-binding bids from parties interested in acquiring the entire company.

5. Nintendo Offering & Buyback: The Import & The Dynamics

On Friday 22 February 2019 after the close, Nintendo Co Ltd (7974 JP)announced (J) a Secondary Shares Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. 

Applying a hypothetical 4% discount to the last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. 

On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33 billion worth (whichever is reached first) to last from the business day immediately following the delivery date of the Offering shares (practically speaking, a day on or between 13 March and 18 March 2019) to 12 April 2019. Based on an average daily volume traded of 2.2mm shares, 10% participation would mean the buyback would take 5 days to complete. 5% would take 9 days. The company also announced (E) it would cancel 10 million shares on 29 March 2019. That may only be 45% of the post-buyback treasury share position, but it leads to another event investors should watch.

This is the first buyback Nintendo has announced in five years. The Nikkei article discussing the situation suggests that the possibility of supply/demand being weak is the reason for the buyback. The stated reason for the Offering as proposed by Nintendo in its Offering announcement, suggested a goal of increasing and diversifying the shareholder base.

The real reason why this selldown is happening – also noted in the Offering Document “reason for the offering” – is because of the heightened focus on policy cross-holdings highlighted in the changes to the Corporate Governance Code (especially Principle 1.4) which went live June 1 2018. The major changes were discussed in Japan’s Corporate Governance Code Amendments – A Much Bigger Stick for Activists and Stewards at that time, but the hint of how this might play out was discussed in Japan Crossholdings: Japan Exchange’s Sale of SGX Shares Sets A Precedent – Watch Closely from 1 April 2018. In an announcement after the close on the last day of the last fiscal year, Japan Exchange Group (8697 JP) announced it would sell down its 4.95% stake in Singapore Exchange (SGX SP) over the space of three years. 

The fact that JPX was selling the shares was not important. The reasoning was. And JPX provided an example of how it should be done (as explained in the insight). 

My words then still stand.

And JPX provided an example of how it should be done (as explained in the insight). The ramifications are significant.

The ramifications of this Offering are significant too. This is a lot more than just an offering by entities looking to take profits.