Brief Event-Driven: Japan Post Holdings – The Future Is Complex, But Interesting and more

In this briefing:

1. Japan Post Holdings – The Future Is Complex, But Interesting
2. Asiana Airlines Bailout: KDB Demands a Massive Rights Offer
3. PT Indofoods’ Voluntary Offer for 74% Held Sub IFAR
4. Japan Post Holdings and Japan Post Bank – Early Thoughts on a Choice of Two Trades
5. MergerTalk:China Oceanwide/Genworth Financial (GNW US) – A Friend In The Spread

1. Japan Post Holdings – The Future Is Complex, But Interesting

On 9 April 2019, after a press release by the Ministry of Finance saying that it had commenced the selection procedure for underwriters to assist on such a sale, the Nikkei carried an article  (Japanese-only) saying that the government would sell down a stake in Japan Post Holdings (6178 JP) from its current 60-odd percent to a level of “over one-third” (presumably a level relatively close to one-third and a share) which is the minimum ownership level mandated by the Postal Service Privatization Act.  The proceeds of the sale are designed to raise money for reconstruction related to the 2011 Tohoku Earthquake. 

Currently, the Ministry of Finance owns 2.5595 billion shares out of the 4.5bn shares outstanding which is 56.88%, but the company has 10.34% of its shares as treasury shares so the MoF has voting rights of 63.3%. Another Nikkei article suggested the news meant a maximum sale of approximately 1.06 billion shares out of those 2.56bn shares held to bring the position down to 1.5bn shares exactly.

Importantly, IF the government got down to the “one-third plus one share” level (or close enough to it), that would complete the required privatization by the government based on the formal legal terms of the Privatization Act.

At Tuesday’s close of ¥1,286/share, 1.06bn shares would be ¥1.36 trillion as an offer size less fees and a discount to the close.  The Japan Postal Service Privatization Act specified that the amount raised reach ¥4 trillion in total. The amount raised in sales so far is ¥2.8 trillion according to the Nikkei. That suggests the minimum acceptable price at which such an Offering could take place is around ¥1,160-1180. However, the word used in the Nikkei article is profit so despite the government’s very low accounting basis, it is possible that the minimum price would be closer to the current price, or it could even be higher.

In any case… it is important to note other factors here.

Pricing is a problem. The current price remains below the last two times the government tapped the market.

Making the deal attractive is a problem. JPH is required to continue to own 100% of the postal service and the 24,000 post office branches across the country. With the use of physical post services declining, JPH needs to have some profits elsewhere to support that. Those postal branches are to some degree supported by payments made by JPI and JPB for fair usage, but it is not enough. JPH needs to do some M&A and it has stated its policy includes more of it. The first round (buying Toll Holdings) did not go well. The second round of buying 7% of Aflac Inc (AFL US) is (I think) a great idea, but it doesn’t hit the income statement for a couple of years.

Buybacks at the JPI and JPB level raise EPS at those two entities. However, it doesn’t raise the level of EPS at the JPH level. For that, you need to reduce the denominator there too. 

Exactly how this works. There are reasons to suspect that any offering later this year would be substantially smaller than what the Nikkei says, and as described in my original pre-IPO pieces Japan Post Holdings: The post-IPO details make for interesting possibilities and JAPAN POST GROUP : Bookbuilding Said “Mixed” But Know Your Details, the longer-term “solutions” to then-visible “issues” were obvious.

HOWEVER, this is interesting news.

There is light at the end of the tunnel, and it is not a train. 

2. Asiana Airlines Bailout: KDB Demands a Massive Rights Offer

KDB’s press release came out WRT Asiana Airlines (020560 KS) liquidity crisis shortly after the market closed yesterday. KDB clearly said that Kumho Asiana Group’s self-rescue plans aren’t acceptable. KDB made it clear that there will be only two ways here: massive rights offer and asset selloff.

3. PT Indofoods’ Voluntary Offer for 74% Held Sub IFAR

Indofood Agri Resources (IFAR SP) has announced PT Indofood Sukses Makmur Tbk, its controlling shareholder with 74.52%, has made a voluntary conditional cash offer of $0.28/share for all IFAR shares it does not own. The offer price, which is a 7.7% premium to last close, is not final. Any dividend declared will reduce the consideration under the proposal.

The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.

There is no requirement for a downstream offer for Salim Ivomas Pratama (SIMP IJ), 73.46% held by IFAR.

IFAR’s share price has increased 27% this month – evidently, there was some news leakage ahead of the announcement – positioning its discount to NAV at ~50%, around its narrowest inside a year, but on a look-through basis, the Offer price backs out just 0.4x P/B.

The Offer price represents a premium of approximately 21.5%, 26.3%, 29.0% and 23.1% over the VWAP for 1M, 3M, 6M and 12M. IFAR traded above the Offer price as recent as May last year. One wonders if the consideration is sufficient to achieve the 90% condition. 

4. Japan Post Holdings and Japan Post Bank – Early Thoughts on a Choice of Two Trades

Post market close on 9th of April, as per media reports, the Japanese government said that it plans to sell another 1.06bn share of Japan Post Holdings (6178 JP) (JPH). The government aims to do so as soon as Sep 2019. The sale, at around US$12bn, would amount to 23.5% of the company and nearly 41% of the government’s current shareholding. It would mark the second sell down by the government since JPH listed in 2015. Post the news release, JPH shares closed down 3% on 10th of April. They are now trading below the IPO price, below the last placement price and just off their all-time lows.

The postal service privatization act seems to be in full swing, with JPH about to enter its third round of selling and Japan Post Insurance (7181 JP) (JPI) in the midst of its first post IPO sell down. However, Japan Post Bank (7182 JP) (JPB) has yet to see a sell down even though the recent deposit ceiling revision required JPH to reduce its holding in JPB. Were JPH to sell some of its JPB stake ahead of the government sale of JPH, it could mitigate a large part of its own placement using the cash that it generates from JPI and possible JPB stake sale to buyback some stock. Thus, there is a possibility that JPB placement might come before JPH’s next placement.

For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPI Placement: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact
• JPI Placement: Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar

5. MergerTalk:China Oceanwide/Genworth Financial (GNW US) – A Friend In The Spread

At AlphaSituations, we look for unusual spreads in announced US M&A deals of  >$400MN in size with the intention of identifying and highlighting misunderstood and/or under the radar risk arb opportunities. In our current list of unusual spreads, the most compelling relates to the China Oceanwide/Genworth Financial (GNW US) transaction which was announced more than two years ago. The merger spread currently stands at 40%. Below, we explain why we are confident that this deal will move to completion giving the arbs an opportunity to profit substantially.

Unusual Merger Spreads (As at April 9, 2019)

4Q 2016-1Q 2019 Live US M&A Announced Deals (>$400 MN) & Spreads

Source: AlphaSituations