Brief Event-Driven: TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau and more

In this briefing:

1. TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau
2. China Three Gorges’ Rebuttable Presumption
3. Severgroup Puts in a Cheeky Bid for Lenta – TPG and EBRD Bail
4. Yinson Tenders a Lifeboat for Ezion
5. DSV Improves Bid and Göhner Foundation and Panalpina Agree

1. TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau

Visitors to Macao will notice the gaudy designs of new properties like Studio City and the City of Dreams owned by Melco. Few will know that the Melco of today traces its roots back almost 100 years when it was named The Macau Electric Lighting Company. Melco was listed in Hong Kong in 1927 when it was still managing the electricity supply service for the island of Macau, which it had done since 1906. After the CEM was established in 1972 to supply power in Macau, Melco changed its name to Melco International Development Limited and became a subsidiary of Stanley Ho’s real estate holding company, Shun Tak Holdings (242 HK). With the burden of supplying electricity off its shoulders, the company did what any logical Hong Kong firm would do when its business disappears, it bought real estate.

To this day, Melco International Development (200 HK) still maintains ownership of one of these classic Hong Kong destinations which I will take a closer look at in my note. In the rest of this insight I will:

• finish the historical overview of Melco
• present my trade idea and rationale
• give a detailed overview of the business units of Melco International
• recap ALL of my stub trades on Smartkarma and the performance of each 

2. China Three Gorges’ Rebuttable Presumption

In my initial insight on China Power New Energy Development Co (735 HK, “CPNED”)‘s privatisation by China Power New Energy Limited (the Offeror) by way of a Scheme, I concluded China Three Gorges, CPNED’s largest shareholder with 27.10%, will likely be required to abstain at the Court Meeting as it is presumed to be a connected party to the Offeror as per the Takeovers Code.

But the announcement states that CTG has given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

It seems illogical to mention in the irrevocable CTG will vote for the Scheme when in actuality it cannot vote. So, which one is it?

The short answer is: CTG cannot currently vote. 

But understanding this requires diving into the minutiae of Hong Kong’s Takeovers Code. So I do.

3. Severgroup Puts in a Cheeky Bid for Lenta – TPG and EBRD Bail

In the middle of last week, Russia’s largest chain of hypermarkets Lenta Ltd (LNTA LI)  announced that it was aware that there were ongoing discussions between Luna (TPG’s holding entity, which owns 34.13% of Lenta’s capital) and Alexey Mordashov’s Severgroup, for Luna to sell its stake in Lenta to the Russian conglomerate. A day later, Lenta announced the company was aware of discussions between Severgroup and the EBRD (7.40% holder). 

Reuters reported last night that Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those two sellers, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company. 

Later last night, Lenta announced on its website (full press release here) a cash offer for all the shares had been proposed. The Offer has a pre-condition dealing with the above-mentioned transactions being approved by those who need to approve.

The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs. 

There may be something interesting to do here.

4. Yinson Tenders a Lifeboat for Ezion

Long-suffering lifeboat market play Ezion Holdings (EZI SP) has received a bail-out from Malaysia’s Yinson Holdings (YNS MK).

Yinson’s proposal is two-fold:

1. A conditional debt conversion agreement to capitalise all of the “relevant debt” of US$916mn via the allotment and issue of up to approximately 22,573,570,909 new ordinary shares of Ezion at an issue price of S$0.055/share (27.9% premium to last close).
2. A conditional option agreement for the proposed grant by Ezion of 3,360,495,867 non-listed and transferable share options to Yinson at the exercise price of S$0.0605 per option Share. 

This shareholder structure will take the following shape, with Yinson holding 85.9% of shares out after the conversion and 87.5% after both the conversion and the exercise of the share options.

However … as per the more detailed Bursa announcement:

It is the intention of YEPL (wholly-owned sub of Yinson) to acquire up to US$916mn of the Relevant Debts for a consideration to be agreed with the Designated Lenders. Tentatively, YHB (Yinson) expected its cash outlay shall be in the region of USD200mn and some EHL (Ezion) Shares that will give YEPL a shareholding of not less than 70% in EHL at the point of the completion of the Proposed Debt conversion and Subscription. In any event, assuming all convertible securities of EHL are converted, YHB expects its eventual shareholding in EHL shall be a controlling stake of at least 51%.

Ezion is also in negotiation with the major secured lenders to restructure its existing debts which would result in the conversion of certain debts to redeemable convertible preferences shares to be issued by Ezion.

As this is effectively a hybrid takeover, there exist a number of conditions required to complete this proposal. Of importance is the waiver from the Securities Industry Council of Singapore for Yinson not to make a mandatory general offer for Ezion under Rule 14.1 of the Takeover Code, as the share subscription takes Yinson’s stake >30%.

On Ezion

Ezion develops, owns, and charters offshore assets to support offshore energy markets, via three key segments:

• Lifeboats/liftboats – these are self-propelled rigs involved in the production and maintenance of the O&G and windfarm industry. This segment accounted for 57.9% of revenue in FY18.
• Jack-up rigs – engaged in non-self propelled rigs involved in the production and maintenance of the O&G and windfarm industry. The segment accounted for 34.1% of revenue in FY18.
• And offshore support logistic services, accounting for 7.5% of revenue in FYT18.

Ezion is primarily Asian focused with revenue split between Singapore, India, and the rest of Asia as to 8%, 5.3% and 54%. The Middle East and Africa account for 15.6% and 15.2% respectively.

Fundamentals

• Revenue declined by US$125mn in FY17 due to a reduction in charter rates and delays in re-deployment of the Ezion’s liftboats due to working capital constraints. The loss before tax was exacerbated by impairment losses totalling US$897mn.
• Revenue declined by US$74mn in FY17 due to a drop in the utilisation rates of liftboats and jack-up rigs. FY18 also saw an increase in impairments loses of US$84.5mn, while loses in associate and jointly controlled entities increased to US$39mn in FY18 from US$16mn in FY17.

Effect on NTA from the conversion/options

Assuming the subscription and options were completed on 31 December 2018, the effects of the Ezion’s NTL/NTA per share would be as follows: 

Peer Comparisons

Substantial Shareholders of Ezion

5. DSV Improves Bid and Göhner Foundation and Panalpina Agree

Late Sunday night Bloomberg reported that DSV A/S (DSV DC) had sweetened its offer for Panalpina Welttransport Holding (PWTN SW) from the previous CHF 180/share and that the new bid had won the support of the Foundation. 

This morning quite early we have an agreed deal and what had seemed a tough deal now seems easy.

According to a press release a short while ago.

DSV and Panalpina have reached an agreement on the terms and conditions of a combination by way of a Public Exchange Offer to all Panalpina shareholders. The board of directors of Panalpina recommends that Panalpina shareholders accept the Public Exchange Offer. The Public Exchange Offer already has the support of shareholders representing 69.9% of the registered shares of Panalpina, who have irrevocably agreed to tender their shares into the Public Exchange Offer. This includes Panalpina’s largest shareholder, Ernst Göhner Foundation and Cevian and Artisan*.

The deal is 2.375 shares of DSV for every share of Panalpina, which as of Friday’s close had a value of CHF 195.80/share which is a 43% premium to the CHF 137/share where Panalpina was trading the day before DSV’s first bid.

Exact terms of the Exchange Offer have not been disclosed but there will be an 80% acceptance condition (including the 69.9% who have already irrevocably agreed to accept the Offer), and other conditions will include “receipt of all necessary regulatory approvals, approval of a capital increase at an extraordinary general meeting in DSV, approval of a listing prospectus and admittance of the new DSV shares for trading at NASDAQ Copenhagen and effectiveness of a US Registration Statement.” (DSV press release)

In light of the Exchange Offer, the Ernst Göhner Foundation asked the board of Panalpina to postpone the April 5th EGM which was set to decide on the one-share one-vote.