In this briefing:
- TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade
- Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
- CEVA Logistics: Okay, Now You Can Tender
- Harbin Electric’s Offer: One For The Brave
- Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait
1. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade
In my original insight on January 15, 2019 TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity, I proposed setting up a stub trade to profit from the mis-priced stub business of Amorepacific that was trading at its widest discount to NAV in at least three years. During the 65 calendar days that followed, Amorepacific Group (002790 KS) has gained 7.3% and the outperformed Amorepacific Corp (090430 KS) by 2.84%. The trade has reverted to average levels in a period of about two months and 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-trade analysis on the Amorepacific stub
2. Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
I should have seen this coming. The asset is juicy enough, and they have a large enough stake, and the company is small enough, that this is an easy trade to do if you can get the funding. It makes eminent sense to be able to put the money down and go for it.
I have covered this minor disaster of an MBO (Management BuyOut) of Kosaido Co Ltd (7868 JP) since it was launched, with the original question of what one could do (other than refuse). Famed/notorious Japanese activist Yoshiaki Murakami and his associated companies started buying in and then the stock quickly cleared the Bain Capital Japan vehicle’s bid price. The deal was extended, then the Bain bid was raised to ¥700/share last week with the minimum threshold set at 50.01% not 66.67% but still the shares had not traded that low, and did not following the news. But Bain played chicken with Murakami and the market in its amended filing, including the words 「公開買付者は、本開買付条件の変更後の本公開買付価格を最終的なものとし、今後、本公開買付価格を一切変更しないことの決定をしております。」which roughly translates to “The Offeror, having changed the terms, has made This Tender Offer Price final, and from this point onward, has decided to absolutely not raise the Tender Offer Price.”
So now Murakami-san has launched a Tender Offer of his own. Murakami-affiliated entities Minami Aoyama Fudosan KK and Reno KK have launched a Tender Offer at ¥750/share to buy a minimum of 9,100,900 shares and a maximum of all remaining shares. The entities currently own 3,355,900 shares (13.47%) between them – up from 11.71% reported up through yesterday [as noted in yesterday’s insight, it looked likely from the volume and trading patterns prior to yesterday’s Large Shareholder Report that they had continued buying].
Buying a minimum of 9,100,900 shares at ¥750/share should be easier for Murakami-san’s bidding entity than buying a minimum of 12,456,800 shares (Bain Capital’s minimum threshold) at ¥700/share, but the Murakami TOB Tender Agent is Mita Securities, which is a lesser-known agent and it is possible that the main agent for the Bain tender (SMBC Securities) could make life difficult for its account holders.
The likelihood that Murakami-san doesn’t have his bid funded or won’t follow through is, in my eyes, effectively zero. Tender Offer announcements are vetted by both the Kanto Local Finance Bureau and the Stock Exchange. You know this has been in the works for a couple of weeks simply because of that aspect. But one of the two documents released today includes an explanation of the process Murakami-san’s companies have gone through to arrive at this bid, and that tells you it may have gone on longer.
So what next? The easy answer is there is now a put at ¥750/share. Unless there is not. Weirder things have happened.
Read on…
For Recent Insights on the Kosaido Situation Published on Smartkarma… | |
Date | Insight |
21-Jan-2019 | Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? |
7-Feb-2019 | Kosaido: Activism Drives Price 30+% Through Terms |
19-Feb-2019 | Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO. |
26-Feb-2019 | Kosaido (7868 JP) TOB Extended |
19-Mar-2019 | Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next? |
And now there is more below.
3. CEVA Logistics: Okay, Now You Can Tender
CMA CGM SA (144898Z FP) has 89.47% of Ceva Logistics AG (CEVA SW) and will now move to squeeze out and delist. The additional tender period will run from 20 March to 2 April.
After issuing the prospectus back in late January, CEVA’s board of directors recommended shareholders to not tender shares in the belief that shareholders could realise a higher value with their continuing investment.
Investors thought otherwise and have cashed out at CHF 30/share, a 62.8% premium to the undisturbed price. The massive share price under performance of CEVA subsequent to its listing on the 4 May 2018 – down 33% five months out from the IPO – would have crystallized that decision to tender.
CEVA’s board now recommend shareholders tender into the upcoming additional offer period. If delisting occurs, it is expected concurrently occur with a squeeze-out, which would be expected to take place in the third quarter of 2019 once all stock exchange and other legal conditions are fulfilled.
4. Harbin Electric’s Offer: One For The Brave
Harbin Electric Co Ltd H (1133 HK)‘s (“HE”) composite doc for its merger by absorption has been dispatched. HE’s major shareholder Harbin Electric Corporation (HEC), an SOE, is seeking to delist the company by way of a merger by absorption at HK$4.56/share, an 82.4% premium to last close. The offer has been declared final. The IFA (Somerley) considers the offer fair & reasonable.
As HE is PRC-incorporated with unlisted domestic shares, the transaction is executed as a hybrid scheme/tender offer. The proposal requires ≥ 75% for, ≤10% against, in a scheme-like vote from independent H-shareholders. HEC holds no H shares. A 10% blocking stake is equal to 67.5mn shares. Should the resolution pass, the tendering acceptance condition in this two-step Offer is 90% of H shares out. Those who do not tender will be left holding unlisted scrip.
Indicative Timetable
Date | Data in the Date |
27-Dec-18 | Announcement |
20-Mar-19 | Composite doc |
7-May-19 | H Share Class meeting/EGM |
20-May-19 | Close of acceptances, Last date to be declared unconditional. |
27-May-19 | Last day of trading on HKEx |
29-May-19 | Payment. Assuming unconditional on the 20 May. |
17-Jun-19 | Last day for Offer remaining open for acceptance, assuming unconditional on 20 May |
A Word on Harbin’s Net Cash
As at 31 Dec 2018* | Mine | Bloomberg | CapIQ | Eikon* |
Cash | 12,543 | 12,543 | ||
Debt | 2,073 | 2,373 | ||
Notes payable | 5,836 | – | ||
Net | 4,634 | 5,178 | 10,170 | |
CNYHKD exchange rate | 0.86 | 0.86 | 0.86 | |
In HK$ | 5,420 | 6,056 | 11,894 | 2,958 |
Shares out | 1,707 | 1,707 | 1,707 | 1,707 |
Per share | 3.18 | 3.55 | 6.97 | 1.73 |
In my prior insight, I discussed how the offer was below Harbin’s net cash, using CapIQ 1H18 numbers. That conclusion was not correct. While CapIQ’s net cash exceeds the consideration, its number excludes notes payable, a material number.
Using FY18 figures provided in the composite document, I estimate net cash/share of $3.18, ~70% of the consideration payment. Bloomberg’s number is higher again, while my understanding is Eikon’s $1.73/share (as at 30 June 2018) net cash figure includes (I have not verified, nor drawn a conclusion whether this would indeed be correct) deposits from customers and banks.
What to Do?
The significant offer premium to last close, the material drop in FY18 profit and the zero possibility of a competitive bidder emerging, suggests this Offer falls over the line.
The blocking stake at the H-share meeting is a risk. Although no single shareholder has the requisite stake to block the deal, collectively it is achievable.
The 90% tendering also, prima facie, appears a risk; yet such an acceptance threshold is not uncommon (Shanghai Forte (2337 HK) also required a 90% acceptance condition in 2011; while Hunan Nonferrous Metals H (2626 HK)‘s 2015 merger by absorption required 85%) and once the EGM resolution has been approved, there is little incentive to hold onto shares as Harbin will be delisted. Shares cannot be compulsory acquired.
However, I still consider “fair” to be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers.
Dissension rights are available, although I am not aware of any precedents, nor the calculation methodology of a “fair price” under such a dissension, nor the timing of payment.
Trading at a wide gross/annualised spread of 9.6%/61.4%, implying a >80% chance of completion. The current downside should this break is 40%. I don’t see an attractive risk/reward here.
5. Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait
I started writing this over the weekend after the results of the Itochu Corp (8001 JP) Tender Offer for 9.56% of Descente Ltd (8114 JP) were announced late Friday.
Itochu planned on buying 7.21 million shares out of the 75.37mm shares which bear voting rights (as of the commencement of the Tender), and 15,115,148mm shares were tendered, which led to a pro-ration rate of 47.7% which was 0.3% below my the middle of my “wide range” expected pro-ration rate of 42-54% and 0.7% beyond the 44-47% tighter range discussed in Descente Descended and Itochu Angle Is More Hostile of 28 February.
Two more central ideas were discussed in that piece:
- The hostility shown by Descente management during the Tender Offer had led Itochu to abandon discussions about post-tender management until after the Tender Offer was completed. Both sides indicated a willingness to pick up where things had left off – at Descente’s request – but Descente needed to stew a bit.
- The revelation by ANTA Sports in an interview with the CEO in the Nikkei in late February that ANTA supported Itochu meant that the likelihood of Itochu NOT having enough votes to put through its own slate of directors was almost zero. At a combined 47.0% of post-Tender voting rights, if 94% or less of shares were to vote, it would mean Itochu could get the majority of over 50% and determine the entire slate of directors themselves. If there was another shareholder holding a couple of percent which supported Itochu, it would be a done deal even if everyone voted. And that 2-3% existed.
So… the threat that Itochu would hold an EGM to seat new directors to oblige a stronger course for management was a very strong probability. Management who was rabidly opposed to Itochu owning the stake could not very well bow down in front of Itochu post-tender just to save its own hide – not after the employee union and the OB group came out against. President Ishimoto had effectively put himself in an untenable position unless a miracle occurred because Itochu could not legally walk away from its offer, and Ishimoto-san was bad-mouthing Itochu even as they were negotiating during the Tender Offer Period.
It was not, therefore, any surprise that President Ishimoto would step down. The surprise for me was that the news he would go came out as talks commenced over the weekend (but did not “bridge the gap” as the Nikkei reported), before we got to the first business day post-results.
Talks apparently continue with no resolution, and the media reports offer no hint as to what the issues might be.
Recent Insights on the Descente/Wacoal and Itochu/Descente Situations on Smartkarma | ||
Date | Author | Insight |
12-Sep-2018 | Michael Causton | Wacoal and Descente Agree Partial Merger to Head Off Itochu |
16-Oct-2018 | Michael Causton | Itochu Ups Stake in Descente – Refuses to Give up Dreams of Takeover |
21-Jan-2019 | Michael Causton | Itochu Confirms Intent to Deepen Hold over Descente |
31-Jan-2019 | Travis Lundy | No Détente for Descente: Itochu Launches Partial Tender |
10-Feb-2019 | Michael Causton | Itochu and Descente: Gloves Off |
10-Feb-2019 | Travis Lundy | Descente’s Doleful Defense (Dicaeologia) |
28-Feb-2019 | Travis Lundy | Descente Descended and Itochu Angle Is More Hostile |
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