Brief Event-Driven: Xenith Is Running Out Of Excuses and more

In this briefing:

1. Xenith Is Running Out Of Excuses
2. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
3. DHICO Rights Offer: Arb Yields for Early Arb Traders & Trade Approach for Late Arb Traders
4. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
5. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

1. Xenith Is Running Out Of Excuses

When IPH Ltd (IPH AU) gate-crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a scheme proposal comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, versus QANTM’s all-cash offer (1.22 QANTM), the key risk to IPH’s Offer was ACCC opposing its Offer. As announced today, ACCC will not oppose.

This decision was largely expected and previously discussed here. Although IPH, QANTM, and Xenith are the only three ASX-listed intellectual property companies, privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. The ACCC agrees and signed off on an IPH/XIP tie-up as it did on the 21 March, by not opposing the merger of XIP and QANTM.

XIP acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exists a number of concerns as detailed in its 19 March announcement. IPH responded to those concerns on the 20 March. These include:

1. Shareholders of Xenith will hold an immaterial % of the merged IPH entity compared to QANTM.
   • IPH’s scrip portion accounted for (then) 35% of its Offer (now ~37%), shares which have superior liquidity versus QANTM given IPH’s position in the ASX200. 
   • The cash portion also provides added certainty on value into the Offer compared to QANTM’s all scrip offer.
2. The control premium as at 11 March is insufficient.
   • Probably the most contentious concern. QANTM’s all-scrip offer on the 27 November backed out an indicative offer price of $1.598/share or a 28.4% premium to last close.
   • IPH’s $1.97/share indicative offer (a 60% premium to XIP’s undisturbed price, and a 31% premium to the independent expert’s mid-point fair value (page 55)) compared to QANTM’s indicative offer of $2.03 immediately before IPH’s announcement.
   • Circumstances have changed materially since, with IPH’s cash/scrip offer now worth $2.02 as I type, versus $1.67 for QANTM.
     

     

     Source: CapIQ
3. The increased execution risk concerning ACCC. Now a non-issue.
4. It is questionable whether employees, controlling 40% of Xenith, would support the offer.
   • Employees are free to decide on what they consider to be the most compelling Offer. IPH has offered to hold discussions with XIP employees. 
5. CGT rollover will likely be lower via the large cash element under IPH’s offer vs. QANTM’s all scrip offer.
   • Maybe. Possibly. An all-scrip offer typically affords greater rollover relief. Nevertheless, Xenith is trading below its 2015 IPO price of $2.72/share.

With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH. The scheme meeting to decide on the QANTM Offer is scheduled for the 3 April.

2. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

3. DHICO Rights Offer: Arb Yields for Early Arb Traders & Trade Approach for Late Arb Traders

• As well expected, DHICO was heavily shorted yesterday, ex-rights day. We had a heavy buying movement by short-term arb traders at both local and foreign on DHICO right before ex-rights. As shown in the second table, yesterday’s shorting was mostly done by short-term traders again both local and foreign alike.
• These early arb traders had presumably bought DHICO shares at ₩8,076 on Mar 25~26. They then disposed shares at ₩6,974 yesterday. They then shorted the same amount of shares additionally at ₩6,983. As a result, at ceiling price ₩5,550 their yield is virtually fixed at 4.10%. If the offering price goes down to the bottom of ₩5,000 which is a very high possibility at this point, their yield will go up as high as 10.91%.
• For those who haven’t made early moves, there are now two options to play this event. You can either trade now and hope that subscription right price won’t hit breaking price level or wait until Apr 19~25 subscription rights period for a perfectly risk-free entry point. At the current price ₩6,800, breaking price for subscription rights is still at a comfortable level. That is, I’d make trades right now by shorting DHICO shares.

→ DHICO price just got down nearly 3%. At this reduced price, below are updated numbers for late arb traders’ arb yield. To me, it still seems we won’t be in a losing position if we make trades now. But we’d better hurry up.

4. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger

Today Nissan Motor (7201 JP) released its report from the Special Committee for Improving Governance. The FT also reported that Renault SA (RNO FP) (i.e. the French government) was keen to restart merger talks within twelve months with an eye towards then acquiring Fiat Chrysler Automobiles Nv (FCAU US).

The details of the former are unsurprising but disappointing, while Renault’s M&A ambitions just seem delusional at this point.

5. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.