In this briefing:
- LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
- TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade
- Largest Panalpina Shareholder to Other Shareholders: Get Stuffed
- Medco’s “Okay” Offer For Ophir After Fortuna Setback
- RPC Group PLC – It Ain’t Over ’til It’s Over
1. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
- LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
- On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
- We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.
2. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade
In my original insight on December 11, 2018 TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of Toyota Industries (6201 JP) that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, Toyota Industries (6201 JP) has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn’t exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.
In this insight I will discuss:
- Performance of ALL my recommended stub trades
- a post-mortem trade analysis on the Toyota Industries stub
- alternative data support for my actions
3. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed
A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies.
This was more than a little confusing.
Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.
Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.
But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.
The New News
This morning, Panalpina offered a press release saying…
Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.
According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.
The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal.
This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive.
At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher. If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.
The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.
4. Medco’s “Okay” Offer For Ophir After Fortuna Setback
On 30th January 2019, Indonesian oil and gas company Medco Energi Internasional T (MEDC IJ) announced an agreement to acquire Ophir Energy (OPHR LN) in a £390mn cash deal (at an offer price of £0.55/share).
Medco initially made an unsolicited approach for Ophir at £0.58/share on 22nd October 2018, and indicated a “willingness to consider offering Ophir’s shareholders additional potential consideration via contingent value rights in relation to the Fortuna LNG asset in Equatorial Guinea (which at the time was awaiting an extension approval) subject to further analysis and due diligence“. Given uncertainty that persevered on Fortuna’s license extension, Medco revised its bid to £0.538/share on 20th December 2018.
On 7th January 2019, Ophir announced that it was recording a $300mn non-cash impairment following the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. Ophir had previously written down $310mn back in September. Subsequently, Medco revised its bid further down to £0.485 on 11th January 2019 but this offer was rejected by Ophir’s board.
Medco’s latest offer of £0.55/share is a 66% premium to the closing price of £0.33 on 28 December 2018. Ophir’s board has unanimously recommended the latest offer stating that the deal offered “upfront cash value” to its shareholders and that the offer price “reflects the future prospects of Ophir’s high-quality assets“.
The deal is conditional on receiving 75% shareholder approval, receiving of clearances from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.
Medco’s offer does provide long-suffering Ophir shareholders with an okay exit in a less-than-ideal situation. Ophir’s shares have been trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder may warrant such an outcome. But I’d be disinclined to chase through terms.
5. RPC Group PLC – It Ain’t Over ’til It’s Over
RPC Group PLC (RPC LN) (“RPC” or the “Company”) is a leading global plastic products design and engineering company based in Rushden, Northamptonshire, less than two hours north of London, and has over 188 operations in 33 countries with FYE March ’18 sales of £3.75 billion. RPC’s products are used in food and non-food packaging, including in beverage, health care and personal care.
After media speculation, RPC confirmed on September 10, 2018 that preliminary discussions were taking place with each of Apollo Global Management (APO US) and Bain Capital which may result in an offer for the Company. After five “put up or shut up” (“PUSU”) extensions, the Company issued a Rule 2.7 announcement of a recommended final cash offer for RPC Group PLC by a unit of Apollo on January 23, 2019 for 782p cash per share intended to be implemented by way of a scheme of arrangement.
The price of 782p was a disappointment to some, with two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, expressing disappointment with the offer valuation.
On January 31, 2019 Berry Global Group, Inc. a former Apollo Global Management portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence information from RPC for this purpose. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.
The shares closed Friday, February 1st at 793p, 1.4% above the agreed deal price. In this piece we’ll get up to speed with the relevant facts and explore how things might play out from here.
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