Brief Event-Driven: Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines and more

In this briefing:

1. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines
2. Versum Materials – Merck KGaA Not Going Away (Part II)
3. MINT’s First Post-Acquisition Update
4. MYOB (MYO AU): Head for the Exit
5. Lynas: Between a Hard Place and Just Rock

1. Last Week in Event SPACE: MYOB, Lynas, Versum, Jardines

Last Week in Event SPACE …

• Not a bad reward/risk as Manikay greenmails KKR’s MYOB Group Ltd (MYO AU) offer.
• If the Malaysian government impasse cannot be resolved, Lynas Corp Ltd (LYC AU) will be left holding just a bunch of rocks.
• Antitrust issues are not deal breakers, while the strategic logic of the Versum Materials (VSM US) acquisition for Merck KGaA (MRK GY) is compelling.
• The ongoing circularity creep as Jardine Matheson Hldgs (JM SP) increases its stake in Jardine Strategic Hldgs (JS SP).
• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

MYOB Group Ltd (MYO AU) (Mkt Cap: $1.4bn; Liquidity: $10mn)

While not new news, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has now reached a stake of 11%. The last chunks purchased appear to have been done at (or around) A$3.40/share, which is equal to terms. The Manikay letter to the Board asks the Board to consider the market movements since December and posits a fair value in excess of A$4.00/share.

• Manikay says that it is interested in becoming a long-term shareholder. But the letter seems to level its criticism of the deal price most pointedly at the fact that the deal was offered and agreed to just a few days off a two-year low in the S&P/ASX200 Index and since then the index has rebounded to within 1.5% of an 11-year high.
• A “market context” bump is not a bad case in and of itself because of where peers have moved and where the market has moved, and we won’t know whether that point is taken up by the IER in the Scheme Document. 
• This strikes Travis Lundy as not a bad reward/risk to buy up to 1-2% through terms. The back end “undisturbed price” has risen and the recent earnings release shows online penetration continues to grow. 

(link to Travis’ insight: MYOB Setting Up As A Riskier Trade)

Lynas Corp Ltd (LYC AU) (Mkt Cap: $758mn; Liquidity: $6mn)

Irrespective of whether the Malaysian rare earth processing licence provided to Lynas was without adequate due process (as has been speculated) or whether the facility is indeed an environmental concern; the fact remains the Malaysian government has reneged on the previously agreed-upon three-step licence process – imposing unachievable pre-conditions by the licence renewal date this September – and that is wrong.

• Ongoing negotiation with the Malaysian government is the only course of action by which Lynas will achieve the renewal of its operating licence (unencumbered or with “acceptable” caveats). The agreed management pathway for NUF provides scope for a positive outcome from extensive consultation. 
• But even if a viable resolution is reached, it would only serve to temporarily manage Lynas out of its current predicament – given the vocal domestic opposition, the long-term prognosis is likely the shuttering and removal of the LAMP.
• Shares are down 45% from the pre-general election (for Malaysia) peak and ~24% down from when the Review Committee was first mooted in September 2018, and roughly a similar % compared to the 3 December closing price, the day before the pre-conditions were introduced. That still appears too optimistic. Resolving the Malaysian government roadblock will quite likely be a stop-gap measure, at best.

(link to my insight: Lynas: Between a Hard Place and Just Rock)

POSCO Chemtech (003670 KS) (Mkt Cap: $758mn; Liquidity: $6mn)

Posco Chemtech is to merge with POSCO ESM through a stock swap at a ratio of 1 to 0.2172865. The merger will be effective as of April 1. The merged company is planning to move from KOSDAQ to KOSPI. These proposals will be put to the vote at the upcoming AGM scheduled for March 18. 

• KOSPI 200’s re-balancing reference date is after the close of the last trading day in April and the change takes effect on the next trading day after the 2nd Thursday of June. If the KRX approves it before the end of April, Chemtech’s KOSPI inclusion will happen this June. If not, it will have to wait until next year. 
• New passive money flowing into Chemtech is estimated at ₩68bn. This represents 1.69% of market cap and 4.82% of float market cap. This is less than twice total daily trade value.

(link to Sanghyun Park‘s insight: POSCO Chemtech: Merger, Renaming, KOSPI Move & Joining KOSPI 200)

Versum Materials (VSM US) (Mkt Cap: $5.3bn; Liquidity: $75mn)

In a follow-up note John DeMasi provides an update of events, looking into VSM’s corporate governance documents, reviewing relevant landmark Delaware takeover case law, and elaborating on a possible path to control of Versum for  Merck KGaA (MRK GR). 

• Merck has now filed form DFAN14A filed with the SEC. The talking points/Q&A confirm that the VSM/Entegris Inc (ENTG US) deal caught Merck by surprise as they had not been contacted by Versum as part of any market check.
• Other important takeaways include number 7, where Merck stress (yet again) they are fully committed to pursuing their proposal; number 11, where they don’t rule out raising their price; and number 21, where they answer whether they have purchased any VSM shares with “The number of shares of Versum common stock held by Merck … does not exceed a level that would require disclosure.”
• Merck continues to speak and act like a bidder who is not going away, and its upcoming roadshow in New York with shareholders underscores its commitment to the deal, adding to the pressure on the Versum Board. 

(link to John’s insight: Versum Materials – Merck KGaA Not Going Away (Part II))

Briefly …

Bristol Myers Squibb Co (BMY US) has responded to Starboard Value’s (& other critics) opposition of its perceived overpaying for Celgene Corp (CELG US) with a comprehensive and substantive presentation, increasing the likelihood this deal gets up. (link to ANTYA Investments Inc.‘s insight: Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

JM has bought 662k shares in JS since the beginning of March, averaging 47.5% of daily volume, narrowing the simple ratio (JM/JS). JM has consistently bought back shares in JS over the years. Since December 2011, buybacks have taken place at an average price/book (for JS) of 0.75x (it is currently at 0.70x according to CapIQ) and at an average JM/JS ratio of 1.75x. The current ratio is 1.70x, bang in line with its 7+ year average. The 20-year average is 1.82x.

• Presumably the Keswick family’s long-term plan is collapsing the circularity. But given the significant costs involved – either JM privatizing JS or vice versa – for now, the family will likely opt for the circularity creep, by continuing to chip away at minority ownership as JS takes its dividends in-specie, JM acquires JS, gradually increasing the inter holdings of the two entities.
• JS is also trading “cheap”, at a 42% discount to NAV, adjusted for cross-holdings. JS is now around 25% points “cheaper” than JM (which has a discount to NAV of 17%), compared to a one-year average of ~24%.  A year ago, the % difference was 6%.
• JM has bought 1.8mn shares YTD compared to 2.5mn for the same period last year, while 4.9mn shares were acquired in 2018, compared to 7.6mn, 8.2mn, and 2.1mn in 2015-2017 respectively. The very long-term ratio is marginally in favour of JM, yet the more recent yearly average suggests it is line. JS looks cheap on a discount to NAV basis and it makes sense for JM to continue to acquire shares, favouring JS near-term. I also tilt in favour of this outcome.

(link to my insight: StubWorld: Matheson’s Strategic Buying of Strategic)

Briefly …

• Sanghyun estimates HDC Holdings (012630 KS) and its major sub HDC Engineering & Construction (294870 KS) are at 247% of σ on a 20D MA for the first time since mid Nov last year, and recommends to go long the Sub and short Holdco. (link to Sanghyun’s insight: HDC Holdco Trade: Holdco Re-Rating Should Be Transferred to Sub, Time to Long Sub/Short Holdco)
• Orion Holdings (001800 KS) /Orion Corp (271560 KS) is now above +2σ on a 20D MA and is currently at a 120D high. Sanghyun recommends it is time to go long Sub and short Holdco. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 46% compared to a the 12-year average of 48%. The parent is, though, very illiquid. (link to Sanghyun’s insight: Orion Holdco/Sub Trade: Holdco’s Price Catching up Was Overworked, Time for Sub to Catch Up)
• Youngone Holdings (009970 KS)‘s 50.5%-held sub Youngone Corp (111770 KS) accounts for 70% of NAV. On a 20D MA, they are now at 312% of σ while the current price ratio is at a 120D high. Sanghyun recommended a set-up. The parent is up 9% this week vs 12% down for the sub. The NAV discount is now out of whack – plugging Sanghyun’s numbers I get a discount to NAV of 35% vs. an average of 48%. The parent is very illiquid. (link to Sanghyun’s insight: Youngone Holdco/Sub Trade: Price Divergence Got Too Wide)

• ISS and Glass Lewis are understood to have recommended the offer for Hopewell Holdings (54 HK).

• Restaurant Brands Nz (RBD NZ) has announced “Consent has now been granted in respect of the Partial Takeover by certain subsidiaries of Yum! Brands“. The remaining condition is receipt of acceptance from 75% of shareholders. Acceptances currently total 40.68%.

• The circular for China Goldjoy (1282 HK) has been delayed to the 26 March from 5 March.
• The Yungtay Engineering (1507 TT) Tender close has been extended to April 22 – big extension. Hmmm….
• NASDAQ raised its bid for Oslo Bors VPS Holding ASA (OSLO NS) to NOK 158 and lowered its minimum acceptance condition from 90% to two-thirds. The offer period is extended to 29 March. The Long Stop is extended to 4 Mar 2020.
• Panalpina Welttransport Holding (PWTN SW) has decided to call an EGM for April 5th, and approves the One Share One Vote amendment to the Articles of Association.
• Anta-Led Group Says 94.38% of Amer Sports Oyj (AMEAS FH) shares tendered.
• Hong Kong International Construction Investment Management Group Co., (687 HK)‘s possible MGO at $3.00/share.
• Michelin has acquired a 88% stake in Multistrada Arah Sarana Tbk (MASA IJ) and will make a mandatory offer for remaining shares.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. Versum Materials – Merck KGaA Not Going Away (Part II)

Since my initial report on Versum Materials (VSM US)  last week, Versum Materials – Entegris Beaten to the Punch by Merck KGaA , I’ve dug deeper and feel even more confident that Merck KGaA (MRK GR) is intent on seeing its proposal to acquire Versum to a successful conclusion, with or without a recommendation from the Versum board.

In this follow-up note I provide an update of events since last week, look at VSM’s corporate governance documents, review relevant landmark Delaware takeover case law, and elaborate on a possible path to control of Versum for Merck KGaA.

3. MINT’s First Post-Acquisition Update

We caught up with MINT and Bangkok Dec-Con today. Some highlights from the meeting:

• MINT has gained international presence following the acquisition of NH Hotels in Spain, but the first benefits is mainly coming from the top line side (34% revenue growth) rather than profit level at this stage. Having said that, NH itself has turned around significantly.
• Synergies expected through branding, loyalty programs, and cross-selling, though perhaps not all at once. 
• Leverage reduction. Much has already been achieved by asset revaluation, but the next step involves sales of some selected Tivoli assets and issuance of new warrants entailing a maximum dilution of 20%.
• Bangkok Dec-Con acquired a 40% stake in Phuket water concessionaire Gold Shores in December for Bt600m. A sizable diversification, eventhough they are really growing their profits like crazy in 2018.  

4. MYOB (MYO AU): Head for the Exit

On 5 March 2019, Manikay Partners, an 11% shareholder, wrote to MYOB Group Ltd (MYO AU) chairman Justin Milne to reveal that it believed that KKR & Co Inc (KKR US)’s recommended offer of $3.40 cash per share was too low due to the significant market rally and normalisation of financing markets.

5. Lynas: Between a Hard Place and Just Rock

Lynas Corp Ltd (LYC AU) has been in the news of late for all the wrong reasons.

The change in Malaysia’s government last May appears to have caught up with Lynas’ rare earth processing plant in Kuantan – or Lynas Advanced Materials Plant (LAMP) – a facility that has faced persistent environmental opposition since its initial proposal in 2006.

The LAMP’s licence stipulates that residue/waste should be recycled, and if that does not occur, then stored in a permanent disposal facility (PDF). Removing/Exporting the residue was the last resort. Lynas is still in the first phase of the licensing guidelines, having submitted a plan to build the PDF but Lynas has not received specific instructions where to build this facility. 

Events reached a head on the 4th December 2018 with two pre-conditions imposed by the Minister for Energy, Science, Technology, Environment and Climate to rolling over the processing licence by September this year:

By some accounts, there is 500k+ tonnes of WLP, conceivably requiring in excess of three years to export. This resulted in Ernst & Young concluding (page 15) in the interim results (released last week) there is a material uncertainty for Lynas to continue to operate on a going concern basis.

Irrespective of whether the licence was provided to Lynas without adequate due process (as has been speculated) or whether the LAMP is indeed an environmental concern; the fact remains the Malaysian government has reneged on the previously agreed-upon three-step licence process, and that is wrong.

This is a binary outcome: either Lynas re-negotiates on the residue management and LAMP’s ongoing operations; or Lynas ceases operation in Malaysia and its rare earth deposit is just a bunch of rocks – until an alternative processing facility is established.

A Brief Timeline of Events

The Residues of LAMP

The LAMP produces two solid residues, the Neutralization Underflow Residue (NUF) and the Water Leached Purification Residue (WLP). 

• The NUF is a magnesium-rich gypsum and is non-toxic, non-carcinogenic, non-ecotoxic, and non-radioactive.  NUF can be used to “condition poor agricultural soil, and to rejuvenate and rehabilitate unproductive and depleted land“.
• The WLP residue is classified as a radioactive material and has the same radioactivity level as the feedstock material used in the LAMP process (about 6 Bq/g of Th). This material is classified as low-level radioactive material. The LAMP operation does not enhance or alter this natural radioactivity. 

The Terms of the Licence

WLP is managed under the terms of the Full Operating Stage Licence (FOSL), first granted in 2014. The terms of FOSL state that WLP residue should be recycled, and if that fails, then it should be stored in a Permanent Disposal Facility (PDF). Exporting WLP is only to be considered in the event neither recycling nor PDF are possible.

• The WLP is currently stored in temporary storage facilities on site (temporary residue storage facility (RSF)) and in accordance with the current licence. The RSF is designed and constructed and is managed to meet the requirement of a PDF within the LAMP.
• Lynas’ PDF Planning Framework and Site Protection Plan were approved by the Atomic Energy Licensing Board (AELB) on February 25, 2014. The Pahang State Government has given its consent to the location of the PDF in Pahang, should it be required. AELB is holding a US$34mn bond on behalf of Lynas to build the PDF. 
• Occupational and health exposures monitored since 2012 have shown that risks to employees from radiation and chemicals are well within the permissible limits.

The Details of the 4th December Reports

Both reports are in bahasa Malaysia. 

• The Review Committee Report found Lynas’ operations are low risk and compliant with applicable laws. However, on page 94 it does state:

  • The Executive Committee found that there was an increase in heavy metal concentrations for nickel, chromium, lead and mercury in-ground waste. Nickel and chromium are carcinogenic substances for human beings.

  • One recommendation by the Committee was to determine the location and build a PDF for the WLP residue, including identifying sites for PDF construction before the renewal of the next licence.
  • The report said to “Be prepared to export WLP residues from Malaysia if the PDF location is not identified or approved.“
  • The review committee comprises six members according to this link.  

• The Minister for Energy, Science, Technology, Environment and Climate Change (MESTECC) reported two new pre-conditions for its licence renewal on 2 September 2019 and future permission renewals in relation to residue management, those being:
  • The export of WLP residue before 2 September 2019; and the submission of an action plan on the disposal of NUF (current approval valid until 15 February 2019).
    • Following consultation with the government and regulators, an agreed pathway for the management of NUF was reached on the 14 Feb.
  • This pre-condition is inconsistent with the Review Committee’s recommendation on the PDF facility for WLP residue. The Review Committee said that Lynas should be prepared to export WLP residues from Malaysia only if the PDF location is not identified or approved.
  • All senior management of MESTECC were appointed following the 2018 general election. The AELB is an agency/department under MESTECC.

On the Political Front

After being elected as a Member of Parliament for Kuantan in 2008, Fusiah Salleh spearheaded the “Stop Lynas Rare earth Refinery” campaign.

• This campaign cause was buoyed by the Mitsubishi  Chemical Corporations incident in Ipoh in the 80s and 90s, together with the 2011 Fukushima nuclear disaster – although the latter is not wholly pertinent.
• Bowing to pressure the AELB conducted a review of LAMP in 2011 and ultimately claimed they were not able to identify any non-compliance with international radiation safety standards at the plant. Environmentalist pointed out this report did not address the long-term waste management nor the possible contamination of surface water and atmosphere by radioactive waste material.
• Despite extensive and ongoing opposition, Lynas was offered a 12-year tax holiday at the onset, and was issued a 2-year full operating licence in 2014. 
• The re-election of Mohammad Mahathir in 2018 provided a more sympathetic ear to the campaign’s voice compared to that under Najib Razak (PM from Apr-09 to May-18), resulting in the Review Committee to conduct the environmental impact assessment of LAMP. 
  • Indeed, projects and investments made by Najib are being reviewed such as LAMP and Belt & Road proposals.
• Fusiah Salleh was appointed the chair of this Committee, although she withdrew her position in October to “prevent Lynas from shifting the focus from the real issue“.  She is currently the deputy minister in the PM’s department.

Just How Radioactive?

It’s low but it’s not nothing – there is no such thing as zero harm. One issue, to me, is a decent layman’s overview of the radiation. In previous slides issued by Lynas it mentioned the limits for members of the public to be 1.0 mSv (milisievert) per year, while Lynas’ residue radioactive content is 6 Bq (becquerels)/g Th-232. 

Converting becquerels to sieverts is easier said than done. Conversions in the table via this link provide some context; it also shows Thorium 232 to have the second highest half-life, and the highest inhalation dose.

Arguably the radiation of this waste is low – and further backed up in this IAEA report (page 20) – but the reality is, if so low, why not process in Australia in the first place? And why are rare metal processing plants generally thin on ground worldwide?

Where Can It Be Exported?

Lynas has an estimated 500,000+ tonnes of WLP stored on site. Even filling one FEU (40-foot container, carrying 40 tonnes) every two hours around the clock, would take at least three years to clear the backlog – not factoring into account new residue being created. A price tag for the export of the residue has been estimated at A$60mn.

But who would (or can) accept this waste?

• This report is a little over two years old, but on page 18, to the exception of Malaysia, rare metal processing only incurs in China (the world leader), Estonia, and India (marginal production). There appears to be some purification/separation/refining in Kazakhstan and Russia, but there is limited data. 
• Australia’s Arafura Resources (ARU AU) is expected to build its own rare earth separation plant in Australia, having previously touted the idea of building such a plant in South Korea. 
  • Sending the waste back to Australia appears to be the go-to response from various quarters in Malaysia. But this is a heavily regulated space.
  • Legislation should not be captured under this Nuclear Waste Storage and Transportation (Prohibition) Act 1999 as the residue is not derived from a nuclear plant. 
  • It may be captured under the Hazardous Waste Act, based on the definitions under the Basel Convention. Here is also a list of Basel Convention members. 
  • A 7-year old article mentions that “National legislation stipulates that Australia will not accept responsibility for any waste product produced from offshore processing of resources purchased in Australia such as iron ore, mineral sands and the rare earth produced by Lynas Corporation.” I have yet to sight this legislation.
  • According to the AFR (paywalled), Robin Chapple, a Greens member in the Western Australian Legislative Council, said the safest place for the radioactive waste would be Western Australia, where it was originally located. Which makes a degree of sense, assuming the waste is in dry form, not liquid, which could then potentially leach into the water table. Of interest, Chapple has been a vocal critic of Lynas in the past.
  • The Australian government may make an exception to such an import in that the radiation is understood to be exactly the same as when it left Australia. And the expected approval of the Arafura plant may suggest an openness to importing this waste. 
• China won’t accept this waste – it has its own environmental issues to deal with after years of rare earth production. 

Establishing a Plant in Australia

Arafuna has secured Northern Territory (NT) and Australian government environmental approvals for its project in Australia. However, mining regulations in Australia are state/territory based – what is approved in NT does not necessarily translate to approval in WA, where Mt Weld is located; but it should help.

CEO Amanda Lacaze was quoted (paywalled) in the FT saying: 

We could reorganise our assets with time in a way that would allow us to continue to serve our customers. Short term we may need to partner in China; longer term we would re-establish our operations outside of China. Australia is a pretty good place.

“Re-establish” potentially includes disassembling/re-assembling LAMP, but this is not stipulated. Lynas’ PPE has a net book value of ~A$600mn, including rotary kilns, centrifuges, solvent extractors and pumps, most of which presumably could be shipped and railed to Mt Weld, or in close proximity, fast tracking the construction time. Assuming necessary approvals are in place. 

A Show of Support

Since rumours of the Review Committee surfaced, Greencape Capital has increased its stake in Lynas to 9.27% from 6.13%; while FIL has increased its holding to 7.32% from 5.01%. Both shareholders increased their stake after the 4th December reports.