Brief Industrials: Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III) and more

In this briefing:

1. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)
2. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
3. Cracking the Keyence Conundrum
4. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score
5. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

1. Versum Materials – Merck KGaA Dials Up the Pressure and Launches Unsolicited Tender Offer (Part III)

Merck KGaA (MRK GR) took off the gloves yesterday in its pursuit of Versum Materials (VSM US) , announcing and launching an unsolicited, fully financed $48 per share cash tender offer for all outstanding shares of VSM. Merck also announced the filing of its definitive proxy materials with the SEC for solicitation of proxies of VSM shareholder against the VSM/Entegris Inc (ENTG US) merger, which is scheduled to be voted on at a special shareholder meeting on April 26^th, 2019.

Along with its press release announcing the offer yesterday, Merck also published its second open letter to Versum shareholders underscoring its commitment to complete the acquisition of the Company. This follows Merck’s presentation to VSM shareholders published on March 14, 2019.

The tender offer is scheduled to expire on 5pm, New York City time on June 7, 2019.

We explore the terms of the tender offer and Merck’s proxy materials below. Readers are reminded to review my earlier research pieces, Versum Materials – Entegris Beaten to the Punch by Merck KGaA and Versum Materials – Merck KGaA Not Going Away (Part II) to get the full background on this situation.

2. The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho

It was announced on March 26th after market close that the Korea National Pension Service (NPS) will vote against the re-election of the Cho Yang-Ho as a Director of Korean Air Lines (003490 KS). The final results will become available today when the AGM of Korean Air is completed (AGM starts at 9AM). This has been one of the most anticipated AGMs in Korea, since there is a good chance that Chairman Cho will not be re-elected. Chairman Cho needs at least 2/3 of the participating shareholders’ approval in order to be re-elected. 

Foreigners currently own a 24.77% stake in Korean Air, up significantly from 20.61% as of end of 2018. This increase of 4.1% stake represents $128 million. The increase in ownership by the foreigners is a good sign since it suggests that many hedge funds and long-only institutional investors think that finally the tides have turned and Chairman Cho may need to step down from his position in the BOD.

In our view, if Chairman Cho is finally defeated in this AGM, this should have a definite positive impact on Korean Air’s share price. In the near term, we think Korean Air Lines (003490 KS)‘s share price could shoot up by nearly 20% and retest the previous resistance level at around 39,000 won.

3. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).

4. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score

• Our proprietary corporate governance scoring system now covers over 1,800 stocks including 70 Electricity, Alternative Energy, Distribution, Water and Utilities companies in Emerging Markets.
• This report includes the Energy and Utilities names currently under coverage.
  The lowest score in this group is Korea Gas (44/100).
• We have found that scores below 50/100 indicate poor corporate governance and higher risk of fraud.
• Korean companies often have lower scores as a result of a lack of board independence and convoluted corporate structure.
• Of the groupings presented here Alternative Energy has the highest average score at 64/100.
  We welcome requests from clients of names they want to see added to the universe.

5. Lynas (LYC AU): Wesfarmers’ Unattractive Bid

Wesfarmers Ltd (WES AU) launched a conditional, non-binding indicative proposal for Lynas Corp Ltd (LYC AU), one of the world’s only rare earths suppliers based outside China. Wesfarmers’ proposal of A$2.25 cash per share values Lynas at A$1.5 billion. Lynas’ share price jumped 35% to A$2.10 before going into a trading halt.