Brief Event-Driven: Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings and more

In this briefing:

1. Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings
2. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender
3. Earthport the Winner as Mastercard/Visa Jostle For Position
4. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon

1. Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings

It was reported yesterday after market close that Hyundai Heavy Industries (009540 KS) (HHI) may be interesting in buying Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME). Hyundai Heavy Industries has mentioned that it is reviewing this potential merger but that nothing has been determined so far. Korea Development Bank (KDB) currently owns a 55.7% stake in DSME, which is currently worth 2.3 trillion won as of January 31st. The local media have mentioned there there could be some formal announcement of the deal on March 31st at the HHI’s board meeting. 

We have provided the five major scenarios of the potential deal structure between DSME & HHIH. While we do not rule out a potential rights offering of the common shares, we think that a greater probability is that HHIH may use a combination its treasury shares, cash, and new issue of dividend preferred stock (Scenario V) to complete this purchase of the 55.7% stake of DSME. 

What trade has the best risk/reward? At this point, it would appear that the best trade would be to go long on Samsung Heavy Industries (010140 KS). 

2. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for Ceva Logistics AG (CEVA SW).

Ceva’s Board has concluded that “the offer price of CHF 30 per CEVA share is reasonable from a financial perspective and that the Offer provides a fair exit opportunity for shareholders who wish to receive cash for their CEVA shares”.

However, CEVA Board does not recommend that shareholders tender shares in the belief that shareholders could realise a higher value with their continuing investment, due to:

• the growth potential inherent in the CEVA business.
• the effects of the acquisition of the freight management business of CMA CGM.
• the strategic partnership between CEVA and CMA CGM.

According to Ceva, “the valuation of the revised business plan indicates a midpoint value of 40 francs per share, well above the share price of 30 francs offered“.

CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. It is the intention of CMA CGM to maintain CEVA’s listing. 

After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended.

Shares are currently trading (marginally) through terms.

3. Earthport the Winner as Mastercard/Visa Jostle For Position

Mastercard Inc Class A (MA US) has a made a £233mn Offer to take over cross-border payments firm Earthport plc (EPO LN), trumping Visa Inc Class A Shares (V US)‘s offer late last month by 10%.

EPO’s board has recommended Mastercard’s Offer to its shareholders. Visa’s Scheme meeting, initially scheduled for the 21 February, has been adjourned.

Mastercard’s £0.33/share offer compares to Visa’s £0.30/share tilt, and represents a 340% premium over EPO’s undisturbed price of £0.075/share.

The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  Mastercard will move to cancel the shares on AIM if it achieves 75%.

EPO’s shares increased to £0.282 following Visa’s offer, but currently trades at ~£0.37, 12% above the latest offer, suggesting a higher bid is likely, or at least expected. 

Cross-border payments are an estimated US$30tn business and both credit card giants are registering higher annual growth and billions of dollars in fees. EPO is a drop in the ocean for Mastercard (US$205bn market cap) and Visa (US$297bn).

Arguably this deal could run significantly higher – the question is how desperate these two players are towards buying now as opposed to building.

And it’s not just small transactions in the payment industry getting attention, after Fiserv Inc (FISV US)‘s announcement earlier this month it would merge with First Data Corp (FDC US) in a US$22bn transaction, and Paypal Holdings (PYPL US)‘s US$2.2bn acquisition of Sweden’s iZettle last year.

4. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon

• Common was up 4.81% yesterday. 1P went up 2.45%. The duo is now at 232% of σ. Pref discount stands at 40.32%. This is above 120D mean. This much premium on Common is the highest since October. On 120D, price ratio is above 120D mean.
• Current PER on FY19 earnings is 27x. Valuation wise, there doesn’t seem to be much room for further upside. Local sentiments on the fundamentals outlook are relatively divided. This suggests that it’d be hard to build sustainable price momentums.
• I’d trade this duo on the current divergence. Just, we are moving towards March shareholder meeting cycle. Div yield difference on Common/1P is also pretty minimal. I’d have this trade with a very short-term horizon.