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
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.
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