Daily Event-Driven: Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company? and more

In this briefing:

1. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?
2. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model
3. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments
4. PCI Ltd – All Over Before It Starts
5. Softbank: Reduced Yield Competitiveness, End of Passive Buying and Softbank Group’s Hunger for Cash

1. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?

According to a local media outlet called Chosun Daily, it stated that one of the bankers in the deal (Deutsche Bank), already sent teaser letters of this deal to Tencent Holdings (700 HK) and KKR and in the teaser letter, it mentioned about potentially selling nearly 47% of Nexon Co Ltd (3659 JP) (Japan).

The question about whether or not Kim Jung-Joo decides to sell NXC Corp (Korea) or Nexon Co Ltd (3659 JP) (Japan) has important consequences not just for him and his family but also to the minority shareholders of Nexon Co Ltd (3659 JP). If Kim Jung-Joo decides to sell NXC Corp (Korea), there may not be much upside for the minority shareholders of Nexon Co Ltd (3659 JP) since current regulations do not require the buyers to pay potentially additional control premium to the minority shareholders as well. 

However, if Kim Jung-Joo decides to sell Nexon Co Ltd (3659 JP) (Japan), there may be an opportunity for the minority shareholders to gain from an additional control premium. We think that this is one of the reasons why Nexon Co Ltd (3659 JP) shares are up 13% YTD as some of the investors may think that there could be a higher probability that Kim Jung-Joo ends up selling Nexon Co Ltd (3659 JP) (Japan), instead of NXC Corp (Korea). 

2. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model

Would Wal Mart Stores (WMT US) have paid USD16 bn last year for Flipkart, a leading online Indian retailer, if the recent clarification on India’s policy on FDI in e-commerce were in place back then? Foreign owned online retailers in India ( Amazon.com Inc (AMZN US) , Wal Mart Stores (WMT US) and Alibaba Group Holding (BABA US)  ) will need to rejig their operating models and may face prospects of slower growth and even more distant breakeven targets, if the Indian Government is indeed determined to enforce its policy that e-commerce ‘Marketplaces’ operate only as platforms for third party vendors. Unsurprisingly, Amazon.com Inc (AMZN US) and Wal Mart Stores (WMT US) have reportedly teamed up to lobby the government on these regulations. 

The Indian Government had posted a one-page circular on Dec 26th giving further clarifications to its existing policy on foreign owned e-commerce entities. The detailing of policy specifics seems to be an attempt to enforce the existing policy restrictions on foreign owned online retailers; compliance has so far been sketchy. India do not allow majority foreign ownership in multi brand retail stores and online retailers are allowed to operate only as ‘Marketplaces’ and not as B2C entities. With national elections due in next few months, the Government cannot ignore demands from domestic lobby groups to reign in free play by deep pocketed foreign operators that have been hurting local retailers.

In the detailed note below, we present (1) an overview of the regulatory framework and restrictions under which online retailers operate in India (2) the updated policy and its impact on operating models of Amazon and Walmart in India (3) expectations for India’s e-commerce players. Also, there is a likely gainer from all these – a listed Indian player aspiring to trump global majors in India’s online retail turf.

3. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments

In this report, we discuss some of the major changes in regulation and recent important news related to the Korea National Pension Fund Service (NPS), including changes to the voting rights of outsourced Korean equity investments by NPS as well as how it may deal with the Hanjin Kal Corp (180640 KS) corporate governance issues. 

It was reported yesterday that the NPS will allow 57 trillion won ($51 billion) of Korean equity investments which are currently managed indirectly by numerous outsourced asset management companies to have their own respective voting rights. The Financial Services Commission (FSC) announced yesterday that an amendment to the enforcement ordinance of the Capital Market Act was passed allowing NPS’s indirectly managed Korean equity investments’ voting rights to be exercised by the outsourced asset managers rather than by NPS itself passed the Cabinet meeting. 

What are the major implication? As a result of this move, this will act as a key positive catalyst spurring on greater corporate activism since NPS’s outsourced fund managers will have greater freedom to make more aggressive decisions to improve shareholder value of Korean companies. In addition, it also reduces the overall responsibility of carrying out the Stewardship Code changes to not just on NPS but on the rest of the major asset management companies in Korea. 

4. PCI Ltd – All Over Before It Starts

After gaining 22.5% over seven trading days back in mid-September, Pci Ltd (PCI SP) responded to an SGX query over this price action that “it has been approached by a third party in connection with a potential transaction in relation to the securities of the Company. The discussions are on-going …“.

All was revealed on 4th January 2019, when PCI announced that Pagani Holding  (a SPV indirectly owned by Platinum Equity Advisors) had made a S$1.33/share cash offer for the company by way of a scheme.

Chuan Hup Holdings (CH SP), which holds 76.7% in PCI, has given an irrevocable undertaking to vote its stake in favour of the scheme resolution, and to reject or vote against any competing offers. PCI’s executive chairman, Peh Kwee Chim, is Chuan Hup’s majority owner. 

The price presents a ~18% premium to the last close, but a 49% premium to the “undisturbed” price back in early September and a 60% premium over the 12-month VWAP. The Offer values PCI at US$195mn.

With the 75%-for scheme condition satisfied and a lifetime-high takeover price, this is a done deal, and is duly reflected in the gross/annualised spread of 2.3%/6.8%, assuming mid-May completion.

5. Softbank: Reduced Yield Competitiveness, End of Passive Buying and Softbank Group’s Hunger for Cash

We are once again turning negative on Softbank Corp (9434 JP) as the stock price is now 18% above the ¥1,200 level which we mentioned looked cheap, outperforming Topix by 20% and the Nikkei by 21%. 

Softbank Corp: When Does It Become a Buy?

In our view this IPO was oversold and probably to numerous weak hands who may now be looking at the large price drops that Softbank Group has occasionally suffered. We would hazard a guess that many of the individuals looking to flip the shares may still not have sold, however, if the stock dips below ¥1,200 we believe risk-reward would tilt positive until the passive buying is complete. Our view on this large drop is mostly that Softbank over-reached in terms of the size of the sale and the valuation.

The business, while subject to various headwinds should still be highly cash generative and at the current price is on just under 13x EV/OP. That’s not particularly cheap but nor is it ridiculously expensive if you believe OP will not drop (we believe it will). With a bit more of a discount and once the initial selling pressure from flippers dies down we believe the yield and passive buying should help the stock find a temporary floor. We do not view this as an attractive long-term holding in any way shape or form, but as a short-term trade the potential to make a 5-10% return on the back of a bounce following panic selling by retail supported by the yield and passive buying seems reasonably good.

Prior to that, we had flagged that retail demand for the IPO could be fragile in Softbank IPO: Signs Point to Risk of Early IPO Price Break and while there was a stronger sell-off than we expected immediately post listing, we would hazard a guess that there could still be an overhang close to the IPO price as there could be significant latent sell volume from retailers hoping to break-even and if that opportunity opens up in a weak market we believe many could choose to sell despite the rebound.

We would point to the news today regarding Softbank Group lowering its planned investment in WeWork from $16bn to just $2bn due to investors in the Vision Fund balking. As perhaps the most aggressive tech investor of the last few years, Softbank stepping back is not a good sign overall and raises questions about the viability of the valuations that other companies in its investment portfolio, namely Uber, are targeting for their upcoming IPOs. With news sources suggesting that Softbank Group is also looking to offload its Nvidia Corp (NVDA US) stake, the tide appears to have truly turned for tech in general and the chronically unprofitable platform companies such as Uber and WeWork in particular.

This raises the governance risks we initially highlighted regarding the use of Softbank Corp for funding the overall Softbank Group. As such, despite a final round of passive buying for Topix buying at the end of the month, the stock price looks vulnerable here.