In this briefing:
- FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
- CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend
- Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer
- LG Holdings Stub Trade: Current Status & Trade Approach
- NTT Buybacks Will Roll On
1. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook.
Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in.
Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.
THEY GOT NOTHING.
I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners.
In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.
“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected.
The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.
There was a clearly-available trading strategy based on that.
The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).
2. CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend
- CJ Corp (001040 KS) announced a 0.15 stock dividend. CJ will issue a new class B pref. Both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10 year duration. It gives an extra 2% of the face value to what Common gets. A total 4,226,513 new class B prefs will be issued.
- CJ previously had two class B prefs. Based on the historic discount % of these two, 2P’s discount to Common on the listing day is estimated at 33%. There will be nearly 10% price dilution in both Common and 1P. There will be a 10+%p difference in gain per share. 1P’s dilution-adjusted net gain per share stands at 13.61%, whereas Common is only 0.66%.
- Price ratio wise, 1P is in an undervalued territory. On a longer horizon, it is currently close to the 2Y mean. This stock dividend should push 1P further upward above the 2Y mean. CJ also said that it would give cash dividend. Current div yield difference is a historic high at 1.53%p. This should be another reason to push up 1P. I’d go long 1P and short Common at this point.
3. Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer
A last-minute lump of coal in the stocking from accounting software and services provider MYOB Group Ltd (MYO AU)?
Kohlberg Kravis Roberts has reduced its indicative offer to $3.40 from $3.77 after sifting through MYOB’s books, with MYOB announcing:
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)
KKR’s revised non-binding proposal is scheduled to expire at 5pm Friday, providing a day and change for MYOB to sound out shareholders as to the next move. Either the lower tilt is grudgingly accepted, or MYOB rejects and KKR walks away (for now), or goes hostile.
Either way, with MYOB’s VWAP above the revised proposal on all but 6 days since the initial announcement on the 8 October and $3.47/share on average, there won’t be a lot of Ho Ho Ho’ing.
Shares are down 11% as I type, implying 13% upside and 11% downside (using the ASX performance-adjusted price) or ~18% downside when pegged to peers. That’s not an attractive risk/reward heading into year-end.
4. LG Holdings Stub Trade: Current Status & Trade Approach
- LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
- I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
- I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.
5. NTT Buybacks Will Roll On
There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc.
One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.
Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.
This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs.
