In this briefing:
- Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger
- Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
- Sell Bombardier: Core EBIT Fell, Core Cashflow Is Negative, Covenants Maybe Under Stress
- HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)
- The Panalpina Conundrum
1. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger
- Hyundai Autoever offers a total 3,510,000 shares. Split is 9.9% primary and 90.1% secondary. Shares are preliminarily priced at ₩40,000~44,000. This puts the company value at ₩840~924bil. Bookbuilding will be Mar 13~14.
- Valuation is a bit aggressive. It is being heard that local institutions are not particularly excited about this IPO mainly because of Autoever’s 90% captive business. That is, growth story isn’t looking fancy. At a 17x PER on Autoever’s FY19 expected earnings, it is sitting in the middle of the indicative price band. There shouldn’t be much room to play around.
- The major shareholder was expected to sell as much as 50% of their shares through secondary distribution. Actual offering size is much smaller. This sparks the speculation that Autoever will soon be merged with Glovis. Much smaller offering size may be for facilitating the merger. It can pave a less controversial path for another merger attempt with Mobis.
- But this speculation can render this IPO meaningless though. I expect this IPO will be a dull event. I wouldn’t avoid it completely though. Stable income stream and connected car are are still something worthy. I’d buy them at the right price. Low end should be the right price.
2. Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
When the Tender Offer / MBO for Kosaido Co Ltd (7868 JP) was announced last month, my first reaction was that this was wrong. It was couched as being management-supportive, had one large independent shareholder agreeing to tender, and the it was touted as an effort to improve the printing and other “info” businesses such as staffing, and similar.
There was no mention of the fact that 94+% of the profits the last few years came from a majority stake in an external company which conducted funeral rites and services across a well-known chain of six large funeral parlours in Tokyo. Neither that company’s name nor the business segment it operates in were mentioned in the document (Japanese only) announcing the intention to conduct the MBO and if you look on the Kosaido website, you have to dig somewhat deeply to figure out that it is even a thing. In the company’s quarterly statements and semi-annual presentations of earnings, there is one line with revenues. One has to go into the fine print of the yukashoken hokokusho to discover more, and if one does, one sees that it is the profitable funeral parlour business which is effectively being purchased at 0.5x book and the rest of the company is being purchased at 1x book.
I published my original opinion in Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? suggesting that the only way this was likely to not get done is if some brave activist came forward. I concluded…
This is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.
This company is an example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.
It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A.”
It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, I expect this gets done.
If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.
Shortly afterwards, an activist did come forward. Long-time Japan activist Yoshiaki Murakami bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. I thought the stock had run too far at that point (¥775/share). While still cheap, I did not expect Bain to lift its price by 30+% and I did not expect a white knight to arrive quickly enough. This was discussed in Kosaido: Activism Drives Price 30+% Through Terms.
The New News
In the wee hours of Monday 18 February, with 11 days left to the Tender Offer, toyokeizai.net published an article (partially paywalled) suggesting that the longstanding external auditor Mr. Nakatsuji and lead shareholder Sakurai Mie (descendent of the founder of Kosaido, who originally founded a company called 桜井謄写堂 (Sakurai Transcription) in 1949, which later became Sakurai Kosaido, then just Kosaido) were against the takeover.
THAT is interesting. And the backstory here is even more interesting.
3. Sell Bombardier: Core EBIT Fell, Core Cashflow Is Negative, Covenants Maybe Under Stress
Core EBIT fell: FY2018 EBIT and cashflow were inflated by one-off gains.
Core cashflow remains negative: Bombardier Inc (BBD/B CN) is still unable to fund its annual US$1bn+ capex budget from core operating cashflow.
Covenants maybe under stress: We are very concerned that the consolidated capital structure presented to investors is very different to the structures used in their debt covenants.
4. HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this week’s HK Connect Discovery, we highlight the continuous inflow to China Tower prior to lock-up expiry, positive news development for automobile stocks, and the pork cycle beneficiary.
5. The Panalpina Conundrum
For years, Panalpina Welttransport Holding (PWTN SW) has underperformed expectations, and investors such as Artisan and Franklin Templeton have held stakes of a few percent to more (Artisan now owns 12%) and have complained more or less publicly. Swedish activist investor Cevian has also owned shares for years (now at 12.3% approximately) and complained quite publicly last October about the governance structure and management and suggested that management be open to a takeover. The company pooh-poohed that, but a week later announced that Chairman Peter Ulber – one of Cevian’s governance targets – would not stand for re-election in May 2019 at the AGM.
A week after that, Kuehne + Nagel International A (KNIN VX) CEO Detlef Trefzger said in Swiss finance magazine Finanz und Wirtschaft (German) it would be happy to open talks with Panalpina but would not pursue a hostile merger. Fast forward less than 8 weeks and DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP but was even better by day end and by Friday’s close was 8.5% higher.
A couple of weeks after Panalpina shares spiked, the Chairman of K&N Klaus-Michael Kühne was quoted in the press saying Panalpina was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. He IS chairman, AND his name is on the door, AND he indirectly controls 53% of the stock so his word carries weight.
A body of Panalpina workers came out against the idea of a DSV acquisition, and the board of major shareholder The Ernst Göhner Foundation apparently told Panalpina it supported Panalpina management’s model of growing by its own consolidator strategy, which Panalpina CEO Stefan Karlen said on the 13th in a phone interview with Bloomberg could involve taking on debt.
A day later, interviews with the Thomas Gutzwiller, chairman of the Göhner Foundation’s Panalpina committee, said the Foundation doesn’t fundamentally oppose a takeover of Panalpina and would be prepared to reduce its stake in “any transactions within the scope of implementing the strategy,” (Luzerner Zeitung). He also said that the foundation had supported the company’s major investments (in IT) in recent years and wanted to reap the benefits.
It wasn’t clear whether which approach takes priority. Does the foundation want to wait? Is it just looking for a higher price? I think the two are not incompatible.
Frustrated by the lack of transparency on whether Panalpina was considering DSV’s approach or not, major shareholder Artisan Partners earlier this week wrote an open letter to Panalpina’s board explicitly asking Panalpina to entertain the bid and open negotiations, and to ensure that conflicted members of the board recuse themselves.
This puts the #2, #3, and long-time #4 shareholders (Franklin Templeton was a long-time #4) firmly and publicly in the camp of trying to get something done. In fact, a fund manager at Franklin Templeton was quoted in a Bloomberg article recently saying the Foundation was perhaps the only shareholder against the deal. There is an enormous amount of frustration at these holders who have held for years (9, 10+, and several) have not seen margins improve. Since the deal was announced, two major risk arb funds have purchased a combined 5+%, and others appear to be in as well.
The New News
On Friday, Panalpina confirmed media scuttlebutt that it was in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse which has a market cap of about US$3.7bn. A Bloomberg report suggested a deal could be reached as early as this week for its logistics business (presumably leaving the infrastructure business in Agility’s hands. The same article suggested the Göhner Foundation is supportive of the new talks.
Also on Friday, DSV announced a new all cash CHF 180/share offer for Panalpina, and Panalpina shares rebounded from CHF 149.00 to CHF 156.10/share that day. That leaves 15.3% to the cash offer, though the original cash and scrip offer is now worth CHF 184.5/share, which is an even better premium to pre-offer terms.
It’s all still in play, but for the moment, EVERYTHING comes down to the Foundation – for one simple reason embedded in the Panalpina Articles of Association.
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