Brief Event-Driven: Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump and more

In this briefing:

1. Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump
2. Will Rakuten Get A Near-Term Lyft?
3. Doosan E&C Rights Offer: Conditions & Timetable
4. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable
5. GrainCorp (GNC AU): Pressure Mounts, Diminishing the Prospects of a Bump to the LTAP Bid

1. Saputo to Buy Crest Dairy; Initial Market Response Wants a Bump

Saputo Inc (SAP CN) and Dairy Crest (DCG LN) today announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement which the two parties say is likely to close in Q2 2019.

Saputo is a Canada-listed dairy company which has grown through serial acquisition – more than 30 acquisitions in the last twenty years – but curiously none of the acquisitions have left it with any operations in the UK. Dairy Crest is a leading UK-based dairy and cooking staples company whose best-known products are Cathedral City Cheddar Cheese, Clover margarine, Country Life butter, and Frylight cooking oil as well as other minor butter-similars and butter-replacement spreads.

This would be Saputo’s largest purchase in ten years – by a factor of three over their second largest – the purchase of Warrnambool Cheese & Butter Factory in Q1 2014.

Shares are trading through terms early, perhaps on expectations the wide open register means shareholders can try to hold out for a higher price. 

At a decent premium (13.9x TTM EV/EBITDA at 620p) to where the rest of the smaller-cap dairy products sector trades (below 10x on a median basis), and the highest EV/Revenue or EV/EBITDA multiple that I can find Saputo having paid, asking for more may not get you more, but investors clearly think it worth a try. 

An extra 10% would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017. It would put March 2019 PER at just under 20x and just under 13.9x March 2019 expected EV/EBITDA.

2. Will Rakuten Get A Near-Term Lyft?

Rakuten Inc (4755 JP) is much in the news for many reasons – one of which being a plunge into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, having officially applied for the license in February 2018 and seeing it approved in April.  – the license for which it applied a year ago, with approval received in April 2018. The goal has been to use its initial foray into the MVNO business where it has more than 1.5 million users, and increase its footprint to attract some of its 100+mm Rakuten IDs, 7mm Rakuten Bank accountholders, 3mm Rakuten Securities accountholders, so that it can increase the LTV (LifeTimeValue) of its existing customer base. 

The goal is to introduce service this year (also a requirement of the terms of its license), growing steadily to have 15mm subs in 10 years. The estimated hardware spend is said to be ¥600-700bn on base stations and equipment, initially concentrating on areas in and around mass transit stations in urban areas such as Tokyo and Osaka, and then expand outward. The company has signed deals with numerous partners in electricity distribution such as Tokyo Electric Power Co (9501 JP), Chubu Electric Power Co (9502 JP), and Kansai Electric Power Co (9503 JP) to install transmission equipment on these companies’ power poles and other infrastructure.

The shares have suffered mightily since the plan came to light in mid-December 2015, underperforming the TOPIX Info & Communications Sector Index by more than 20% in the fourteen months through yesterday. The sharp drop on the left hand side of the chart was a two-day sell-a-thon by investors convinced the company was about to waste billions of dollars. The Info & Communications Sector Index also dropped sharply on that day on fears that a fourth entrant with a declared goal of dropping monthly charges by 40% would increase churn at the existing Big Three (NTT Docomo Inc (9437 JP), Softbank Corp (9434 JP), and KDDI Corp (9433 JP)) and possibly cause a price war. The shares dropped from about ¥1140 to ¥1020/share, and then slid another 30-odd percent in the next six months to ¥700/share.

The shares have rebounded, fell back in autumn general market weakness, rebounded a tie-up on payments with KDDI announced Nov1 and decent Q3 numbes announced less than 2 weeks later, got crushed in the sharp global selloff in November and December, then had a v-shaped rebound at the start of 2019. 

At the end of January Rakuten Mobile Network received blanket licenses to transmit on 1.7Ghz in the major regions  covering Tokyo, Kyoto, Osaka, Nagoya and Yokohama from the local Bureaus of Communication, and expects to receive others soon. Last week, Rakuten reported full-year earnings through end-December with revenues up 16.6%yoy to just over ¥1.1 trillion, OP (IFRS) at ¥170.4bn, and Net Income at ¥142bn and on the same day announced Nokia had been granted the contract to deploy a turnkey solution as had been previously tested and speculated. 

There are numerous telecom and retailing experts publishing on Smartkarma who have more expertise on Rakuten’s telecom plans and their plans to compete harder against Amazon Japan and Yahoo Japan and others in the e-tailing space. 

I am not going to pretend to their level of knowledge on telecom or retailing (I found Kirk Boodry’s piece on the upcoming 5G allocations in March to be particularly informative) but I will note that Rakuten has a) the ability to borrow against the hardware and licenses, b) can roll out hardware quarter-by-quarter, and c) the KDDI/Rakuten deal is important. In it, KDDI will give Rakuten access to its nationwide roaming network, and Rakuten will provide KDDI with expertise on mobile payments – especially relevant as KDDI is now building out au Financial as briefly discussed here. 

But There is More NewsFlow To Come, And THAT is Interesting

In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mm in a then just-become-unicorn ride-sharing company called Lyft Inc (0812823D US), which at the end of the Series E round in May 2015 would leave it with ~11.9% of the company at a ~US$2.4-2.5bn post-money valuation. Recent articles suggest that Rakuten remains the top investor (though a WSJ article 2 weeks ago noted there would be golden shares. Hiroshi Mikitani remains a board member of Lyft.

That becomes important as by all accounts I can find (much more detail below), Rakuten continued investing in the four subsequent funding rounds through last summer, leaving the company as the largest single shareholder in Lyft as it prepares for its IPO later this spring. Lyft confidentially filed its IPO paperwork (a “draft S-1”) with the SEC in early December 2018, leaping ahead of Uber in the race to IPO first so the much larger Uber valuation doesn’t block Lyft’s chances for raising funds.

Reuters carried an article Thursday night Asia time saying Lyft planned to start its roadshow the week of March 18th, with an expected valuation of US$20-25 billion, and the first-mover advantage would allow Lyft to set the metrics it wants to use upon which to be judged and priced (if it waited, it would have to be compared to Uber). That could mean more emphasis on the company’s strong suite of self-driving partnerships (drive.ai, Ford, GM, Jaguar, Nutonomy, Waymo, others). A March 18th roadshow would require a full S-1 filing two weeks prior to that.

A successful IPO story based on picking up market share (reportedly doubled to 28% by end-2018 vs end-2016) might make Rakuten’s other investments look good too (Rakuten led Series B, C, D, and E funding for Spanish-language ride-hailing app cabify from 2014-2018 (and reportedly pushed cabify to merge with Lyft last year) and has invested in multiple rounds in SE Asian version GoJek.

The runup to this IPO and the clarity a filing could provide on ownership could provide a near-term fillip to Rakuten’s share price. 

3. Doosan E&C Rights Offer: Conditions & Timetable

• Doosan E&C’s rights offer is pretty much in line with the street’s initial expectation. They raise an estimated ₩420bil at an offer price of ₩1,255. The recently amended KRX rule allows an issuer to freely set an offer price. They set it at ₩1,255 based on the Feb 13~20 prices with a 15% discount.
• Final price will be fixed on Apr 30. Whichever higher of ₩1,255 or Apr 26~30 VWAP at a 40% discount will be a final offering price. So, offering price must be at least ₩1,255. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
• ₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C stake. With a 20% oversubscription, nearly ₩300bil will likely come from DHICO. This is like DHICO is helping E&C at an even heftier price. This is why the market is being much softer on E&C relative to DHICO.

4. DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable

• This is a total ₩608.4bil rights offer. This is larger than initially expected. A projected ₩543bil will be raised through common share issuance. The other ₩65bil will be raised in the form of RCPS. This is a combined 72.56% capital increase with a 42.05% share dilution.
• 80% will be allocated to the stockholders. Per share allocation for the stockholders is 0.58. Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights will be listed and trade on Apr 19~25 only for Common. May 2 is for final pricing. New Common shares will be listed on May 29.
• Offering size is much larger than initially expected. In the short-term, DHICO shares will likely take a harsh beating. At this point, we’d better stay away from it for now.

5. GrainCorp (GNC AU): Pressure Mounts, Diminishing the Prospects of a Bump to the LTAP Bid

Frustration on the slow progress of the LTAP bid came to a head at the recent AGM, where shareholders registered what appeared to be protest votes aimed at Graincorp Ltd A (GNC AU)’s director elections and remuneration. The Board has currently three options to unlock shareholder value – achieve a binding LTAP bid, commence the portfolio review driven sale process or adopt the Tanarra Capital proposal.