Daily Event-Driven: DNO Closes In On Faroe and more

In this briefing:

1. DNO Closes In On Faroe
2. Healius (HLS AU): An Unattractive Bid
3. Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?
4. Jardine C&C (JCNC SP): Close the Stub Trade
5. StubWorld: A 2018 Review In Charts

1. DNO Closes In On Faroe

On 26 November 2018, 28.22%-shareholder DNO ASA (DNO NO) announced a cash offer for Faroe Petroleum (FPM LN) of GBP 1.52/share,  a 21% premium to the pre-announcement price on November 23rd, but a 44.8% premium to Faroe’s share price of GBP 1.05 as at 3 April 2018, the last business day before DNO announced its first acquisition of shares in Faroe. 

This is a hostile offer with DNO openly criticising the management’s corporate-governance culture, share performance, operational abilities, and deal-making. An indication of the level of this hostility can be found in the circular to shareholders (page 9):  “Since listing, no dividends have been paid and no capital otherwise returned to shareholders. Meanwhile, back at the ranch, the Faroe directors have been awarded a high number of share options at nil cost.” In response, Faroe’s board describes the deal as “opportunistic, unsolicited, and inadequate”, and has advised the shareholders to reject the offer. 

The deal was initially conditional on receiving a minimum acceptance of 57.5% of Faroe’s total issued share capital; however after acquiring shares in the market, DNO announced yesterday it held 30% of issued shares in Faroe, triggering a mandatory offer, and Faroe is now therefore subject to takeover regulation, and the deal requires a lower acceptance threshold of 50%.

Currently trading slightly through terms. Together with shares accepting its offer, DNO currently has 43.1%. 

The offer has now automatically been extended until the 18 January and DNO has until the 27 January to improve or revise the Offer. This may need a slight kiss to push it over the line. 

2. Healius (HLS AU): An Unattractive Bid

Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. On 3 January 2018, Healius received an unsolicited and highly conditional proposal from Jangho Group Co Ltd A (601886 CH) for A$3.25 cash per share.

3. Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?

It was reported today that Nexon Co Ltd (3659 JP)’s founder Kim Jung-Joo plans to sell a controlling stake in Nexon’s holding company NXC Corp for at least 10 trillion won ($8.9 billion). Kim Jung-Joo and other related parties plan to sell their entire 98.64% stake in NXC Corp, which owns a 47.98% stake in Nexon. The 10 trillion won or more anticipated acquisition price for NXC Corp would include a significant management premium. Nexon Group’s shareholding structure is basically as follows: Kim Jung-Joo → Nexon (Japan) → Nexon Korea → About 10 affiliates. 

One of the reasons why the Nexon’s founder Kim Jung-Joo, who is only 50 years old, is trying to sell his entire stake in Nexon may have been due to the recent allegations about him giving about $380,000 worth of Nexon stock (prior to its listing) to his old high school classmate (who is now a senior public prosecutor) for free. Kim Jung-Joo has repeatedly faced allegations and attended numerous court hearings on this matter in the past two years. He may have gotten a bit tired from all these allegations. 

Given the enormous size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not likely to purchase Nexon. Rather, the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK). The sheer huge size of this deal will represent one of the largest M&A deals in Asia in 2019. 

4. Jardine C&C (JCNC SP): Close the Stub Trade

In my original insight on October 17, 2018 TRADE IDEA – Jardine Cycle & Carriage (JCNC SP) Stub , I proposed setting up a stub trade to profit from volatility in the markets that caused the Jardine Cycle & Carriage (JCNC SP) stub to trade at a historically low discount to NAV. During the 78 calendar days that followed, Jardine Cycle & Carriage (JCNC SP) has gained 23% and the trade has made 5.03% on the gross notional. I now recommend closing the trade.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-mortem trade analysis on the JCNC stub

5. StubWorld: A 2018 Review In Charts

This week in StubWorld …

• The average NAV discount of a basket of 40 Holdcos steadily, and not altogether unsurprisingly, widened throughout the year.
• Passive, tech-related and illiquid Holdcos widened most; while cross-border and property Holdcos were the best of the worst.  
• Illiquid, property, and passive Holdcos’ underperformance (or widening) was more pronounced in the first half. Tech Holdcos primarily widened in the second half.
• Worst performers (discount widening): In absolute % terms, United Co Rusal Plc (486 HK) and Asm International Nv (ASM NA) roughly shared the largest moves; while Dah Sing Financial (440 HK), First Pacific Co (142 HK), Genting Bhd (GENT MK) and Pasona Group (2168 JP) are trading at or near their 52-week wides and 52-week low prices.
• Best performers (discount narrowing): China Conch Venture Holdings Ltd (586 HK) is the only Holdco in positive territory; while Japan Post Holdings (6178 JP) is trading closest to its narrowest level in the last 12 months.

Below the various NAV discount chart summaries of various baskets are my weekly setup/unwind tables.

This, and other relationships discussed below, trade with: 1) a minimum liquidity threshold of US$1mn on a 90-day moving average; and 2) a minimum 20% ‘market capitalisation’ threshold, whereby the value of the holding/Opco held must be at least 20% of the parent’s market cap.

Comments on Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP) also follow the setup/unwind tables.