In this briefing:
- Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
- Shaky Situations at DEMCO and Pranda
- Havells India
- SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
- Xenith Is Running Out Of Excuses
1. Last Week in Event SPACE: Nissan, Naspers, Lynas, Xenith, Versum, Scout24, PCCW
Last Week in Event SPACE …
- The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
- The value enhancement to Naspers Ltd (NPN SJ) from spinning off and separately listing its stake in Tencent Holdings (700 HK) is not apparent.
- Trading around its “undisturbed” levels, Lynas Corp Ltd (LYC AU) looks like a short after rejecting Wesfarmers Ltd (WES AU)‘s left-field unsolicited proposal.
- The gloves are off as Merck KGaA (MRK GR) announced an unsolicited $48/share cash tender offer for Versum Materials (VSM US).
- With the ACCC’s blessing, now is a good time for Xenith Ip (XIP AU) to jettison Qantm Intellectual Property (QIP AU) and engage with IPH Ltd (IPH AU).
- While the deal for Scout24 AG (G24 GR) is likely to get up, someone else coming over the top at this late stage is not impossible.
- PCCW Ltd (8 HK) is “cheap” relative to HKT Ltd (6823 HK) – a catalyst to narrow the discount would be helpful.
Plus other events, CCASS movements and upcoming key dates for M&A transactions.
(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)
EVENTS
Nissan Motor (7201 JP) (Mkt Cap: $32bn; Liquidity: $98mn)
Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.
- Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
- If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
- Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP. He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
- Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.
Links to:
Mio’s insight: Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger.
Travis’ insight: Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
Samsung Electronics (005930 KS) (Mkt Cap: $265bn; Liquidity: $464mn)
Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.
- And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
- SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.
(link to Sanghyun’s insight: Samsung Electronics DRAM Economics: Adj. Valuation Shows Upside Potential at Current Price)
Briefly …
Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)
M&A – ASIA-PAC
Lynas Corp Ltd (LYC AU) (Mkt Cap: $1bn; Liquidity: $7mn)
Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme. This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.
- Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia.
- This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago. Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25.
- A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
- At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
(link to Travis’ insight: Wesfarmers Puts Out A Bid for Lynas)
Xenith Ip (XIP AU) (Mkt Cap: $115mn; Liquidity: $1mn)
The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.
- None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
- With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.
(link to my insight: Xenith Is Running Out Of Excuses)
China Power New Energy Development Co (735 HK) (Mkt Cap: $581mn; Liquidity: $1mn)
SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.
- This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
- Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
- The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend.
(link to my insight: China Power New Energy To Be Delisted After SOE Injection Abandoned)
M&A – US
Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $79mn)
Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.
- Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
- The shareholder vote on the VSM/ENTG is scheduled for April 26th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
- Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”
(link to John DeMasi‘s: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III))
M&A – UK
Scout24 AG (G24 GR) (Mkt Cap: $5.6bn; Liquidity: $20mn)
A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer. The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.
- The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming.
- Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
- Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.
(link to Travis’ insight: Scout24 Tender Offer Launched: Price Still Not Quite Full)
STUBS & HOLDCOS
Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)
Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.
- Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
- The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”. It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing.
- Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return. I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.
(link to my insight: StubWorld: Naspers Embeds Another Layer Into Tencent)
PCCW Ltd (8 HK) / HKT Ltd (6823 HK)
Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.
- The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
- As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.
(link to Curtis’ insight: TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On)
OTHER M&A UPDATES
- Hong Kong International Construction Investment Management Group Co., (687 HK)‘s SPA has completed – you can see the movement in shares on CCASS – triggering the MGO.
Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.
Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.
Ophir Energy (OPHR LN)‘s shareholders approved Medco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.
- 9.12% of shares out have tendered into Delta Electronics Thai (DELTA TB)‘s Offer, bringing the Offeror’s total holding to 30.05%.
- The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Name | % chg | Into | Out of |
10.29% | SHK | Huarong | |
46.29% | Yuanyin | Outside CCASS | |
20.48% | Citi | UBS | |
13.11% | Sun Int’l | Outside CCASS | |
20.25% | China Merchants | Zhongrong | |
28.83% | GF | Deutsche | |
Riverine (1417 HK) | 70.12% | China Ind | Outside CCASS |
UPCOMING M&A EVENTS
Country | Target | Deal Type | Event | E/C | |
Aus | GrainCorp | Scheme | April | Binding Offer to be Announced | E |
Aus | MYOB Group | Scheme | 17-Apr | Scheme Meeting | E |
Aus | Healthscope | Scheme | 24-Apr | Despatch of Explanatory Booklet | E |
HK | Harbin Electric | Scheme | 7-May | H Share Class meeting/EGM | C |
HK | Hopewell | Scheme | 17-Apr | Expected latest time for trading of Shares | C |
India | GlaxoSmithKline | Scheme | 9-Apr | Target Shareholder Decision Date | E |
Japan | Showa Shell | Scheme | 1-Apr | Close of offer | E |
NZ | Trade Me Group | Scheme | 3-Apr | Meeting for Shareholder Vote | C |
Singapore | PCI Limited | Scheme | 2-Apr | Scheme Meeting | E |
Thailand | Delta Electronics | Off Mkt | 1-Apr | Closing date of offer | C |
Finland | Amer Sports | Off Mkt | 2-Apr | Payment for shares tendered during Subsequent Offer Period | C |
Switzerland | Panalpina | Off Mkt | 5-Apr | EGM | C |
US | Red Hat, Inc. | Scheme | March/April | Deal lodged for approval with EU Regulators | C |
2. Shaky Situations at DEMCO and Pranda
We visited two companies with very different trajectories.
- Renewable power specialist DEMCO is struggling, despite doing really well in the past, while jeweler Pranda, once struggling, is on the recovery path.
- DEMCO reported gross profit and revenue decline of 8% and 7% respectively. Their earnings more than doubled, but that’s solely due to dividends from Wind Energy, an investment that cost them Bt800m and is embroiled in scandal.
- Pranda’s operating cash flows surged from Bt12m to Bt230m, as they restructured their store network.
- We’d still be caution on PDJ, as management doesn’t feel the restructuring is over. More stores could be closed down in the future.
3. Havells India
As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity. Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters. At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.
4. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
It is seeing decent organic growth, led by a focus on third party logistics (3PL). This will carry on. The recently acquired Ricoh Logistics should eventually see margins improve as it is integrated into SBS. This year’s operating profit forecast of Y9bn (+10%) is conservative. An increase of Y1bn this year will come from Ricoh Logistics alone, and then we have organic growth. In our view operating profit will be at least Y10bn. There is the unrealised profit on land, which add some Y85bn to a company whose market cap is Y71bn. Despite the outperformance over the last 12 months, this remains a decent long-term domestic buy, and one in which foreigners still own only 12%. The shares trade on 13x 12/19 assuming an operating profit of Y10bn.
5. 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:
- 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.
- 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
- The increased execution risk concerning ACCC. Now a non-issue.
- 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.
- 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.
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