In this briefing:
- ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
- Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
- CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
- Kosaido: Activism Drives Price 30+% Through Terms
1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.
The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.
J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.
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Terms & Schedule
Terms & Schedule of J-Will Partners MBO on ND Software | |
Tender Offer Price | JPY 1,700 |
Tender Offer Start Date | 8 February 2019 |
Tender Offer Close Date | 25 March 2019 |
Tender Offer Settlement Date | 29 March 2019 |
Tender Agent | SMBC Securities |
Maximum Shares To Buy | 17,632,501 shares (100%) |
MINIMUM Shares To Buy | 11,755,000 shares (66.67%) |
Irrevocable Undertakings | 5,512,800 shares (31.26%) |
With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…
BUT…
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
- It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
- SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
- With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
- CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
- It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
- Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
- Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.
4. Kosaido: Activism Drives Price 30+% Through Terms
In my piece Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? discussing the Kosaido Co Ltd (7868 JP) MBO by Bain, even the title suggested it was a lowball bid with the wrong price.
The deal was announced at ¥610/share which was a 40+% premium to last, but it was still being done at a 44% discount to Tangible Book Value Per Share. I mentioned in the conclusions the following four points…
This is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.
This company is an example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.
It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A.”
If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.
The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher. As of today’s close, the stock is 28% through terms.
Yesterday the shares briefly traded almost 40% through terms.
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Terms & Schedule of Bain Tender Offer for Kosaido | |
Tender Offer Price | JPY 610 |
Tender Offer Start Date | 18 January 2019 |
Tender Offer Close Date | 1 March 2019 |
Tender Agent | SMBC Securities |
Maximum Shares To Buy | 24,913,439 shares |
MINIMUM Shares To Buy | 16,609,000 shares |
Currently Owned Shares | 100 shares |
Irrevocable Undertakings | Sawada Holdings’ 3,088,500 shares or 12.40% (includes the holdings at both Sawada Holdings and HS Securities). |
Something is up.
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