Industrials

Brief Industrials: Xenith Caves And Recommends IPH’s Superior Offer and more

In this briefing:

  1. Xenith Caves And Recommends IPH’s Superior Offer
  2. MonotaRO (3064 JP): Slow March, Strong 1Q
  3. Japan Post Holdings – The Future Is Complex, But Interesting
  4. Asiana Airlines Bailout: KDB Demands a Massive Rights Offer
  5. Japan Post Holdings and Japan Post Bank – Early Thoughts on a Choice of Two Trades

1. Xenith Caves And Recommends IPH’s Superior Offer

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On the 27th November 2018,  Xenith Ip (XIP AU) and Qantm Intellectual Property (QIP AU), both leading providers of IP origination services in Australia – and two of the three listed IP plays – announced a merger via an all-scrip scheme, such that Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group, respectively. Xenith’s board unanimously recommended the merger to its shareholders.

The same day IPH proposed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a A$0.05 dividend) by way of a scheme. QANTM’s board rejected the proposal due to its highly conditional nature.

IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) on the 13 February 2019 and said that is does not support the QANTM scheme. IPH followed up with a scheme proposal for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, which was summarily rejected by Xenith.

Execution risk, especially ACCC approval was an express concern for Xenith. At the time, this appeared spurious given privately owned companies collectively hold a larger market share – and growing – compared to the three listcos currently in play.

The ACCC agreed and signed off on the IPH/XIP tie-up on the 21 March, and a IPH/Xenith merger on the 28 March. Xenith continued to stonewall and backed QANTM’s proposal.

On the 8 April, IPH bumped the scrip portion of its proposal for Xenith. The revised terms were cash (A$1.28) and 0.1261 IPH shares – or $2.15/share – at the time of the announcement.  There is a mix & match facility wherein shareholders can choose 100% cash or 100% scrip, subject to scale back.

Xenith approached QANTM to provide a counter proposal to match IPH’s updated offer, however QANTM opted out. Xenith had run out of excuses not to back IPH’s proposal.

The New News

And right on cue, this morning Xenith unanimously recommended IPH’s updated offer.

This is a done deal and will trade tight to terms. Conditions include the termination of the QANTM scheme implementation deed (which will take place shortly with Xenith incurring a A$1.6mn break fee) and Xenith shareholder approval.

The Scheme meeting is tentatively scheduled for the week commencing the 15 July with an expected implementation date early August.

2. MonotaRO (3064 JP): Slow March, Strong 1Q

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MonotaRO’s domestic (parent company) sales growth rate declined in March, but was up in 1Q as a whole. We expect no change to FY Dec-19 guidance when consolidated results are announced at the end of April. 

Parent company data for March show sales up 17.4% year-on-year in nominal terms, but up 23.3% when adjusted for the number of working days in the month. The adjusted figures for January and February were 30.5% and 26.6%. In the three months to March, adjusted sales were up 26.5% vs. 24.2% growth in 4Q of FY Dec-18 and 26.2% a year earlier. 

At ¥2,366 (Thursday, April 11, close), the shares are selling at 51x our estimate for FY Dec-19 and 44x our estimate for FY Dec-20. Price/sales multiples for the same two years are 4.5x and 3.9x. Projected valuations look high, but are on the low side of their recent historical ranges. Continuing double-digit growth should support the share price.

3. Japan Post Holdings – The Future Is Complex, But Interesting

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On 9 April 2019, after a press release by the Ministry of Finance saying that it had commenced the selection procedure for underwriters to assist on such a sale, the Nikkei carried an article  (Japanese-only) saying that the government would sell down a stake in Japan Post Holdings (6178 JP) from its current 60-odd percent to a level of “over one-third” (presumably a level relatively close to one-third and a share) which is the minimum ownership level mandated by the Postal Service Privatization Act.  The proceeds of the sale are designed to raise money for reconstruction related to the 2011 Tohoku Earthquake. 

Currently, the Ministry of Finance owns 2.5595 billion shares out of the 4.5bn shares outstanding which is 56.88%, but the company has 10.34% of its shares as treasury shares so the MoF has voting rights of 63.3%. Another Nikkei article suggested the news meant a maximum sale of approximately 1.06 billion shares out of those 2.56bn shares held to bring the position down to 1.5bn shares exactly.

Importantly, IF the government got down to the “one-third plus one share” level (or close enough to it), that would complete the required privatization by the government based on the formal legal terms of the Privatization Act.

At Tuesday’s close of ¥1,286/share, 1.06bn shares would be ¥1.36 trillion as an offer size less fees and a discount to the close.  The Japan Postal Service Privatization Act specified that the amount raised reach ¥4 trillion in total. The amount raised in sales so far is ¥2.8 trillion according to the Nikkei. That suggests the minimum acceptable price at which such an Offering could take place is around ¥1,160-1180. However, the word used in the Nikkei article is profit so despite the government’s very low accounting basis, it is possible that the minimum price would be closer to the current price, or it could even be higher.

In any case… it is important to note other factors here.

Pricing is a problem. The current price remains below the last two times the government tapped the market.

Making the deal attractive is a problem. JPH is required to continue to own 100% of the postal service and the 24,000 post office branches across the country. With the use of physical post services declining, JPH needs to have some profits elsewhere to support that. Those postal branches are to some degree supported by payments made by JPI and JPB for fair usage, but it is not enough. JPH needs to do some M&A and it has stated its policy includes more of it. The first round (buying Toll Holdings) did not go well. The second round of buying 7% of Aflac Inc (AFL US) is (I think) a great idea, but it doesn’t hit the income statement for a couple of years.

Buybacks at the JPI and JPB level raise EPS at those two entities. However, it doesn’t raise the level of EPS at the JPH level. For that, you need to reduce the denominator there too. 

Exactly how this works. There are reasons to suspect that any offering later this year would be substantially smaller than what the Nikkei says, and as described in my original pre-IPO pieces Japan Post Holdings: The post-IPO details make for interesting possibilities and JAPAN POST GROUP : Bookbuilding Said “Mixed” But Know Your Details, the longer-term “solutions” to then-visible “issues” were obvious.

HOWEVER, this is interesting news.

There is light at the end of the tunnel, and it is not a train. 

4. Asiana Airlines Bailout: KDB Demands a Massive Rights Offer

KDB’s press release came out WRT Asiana Airlines (020560 KS) liquidity crisis shortly after the market closed yesterday. KDB clearly said that Kumho Asiana Group’s self-rescue plans aren’t acceptable. KDB made it clear that there will be only two ways here: massive rights offer and asset selloff.

5. Japan Post Holdings and Japan Post Bank – Early Thoughts on a Choice of Two Trades

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Post market close on 9th of April, as per media reports, the Japanese government said that it plans to sell another 1.06bn share of Japan Post Holdings (6178 JP) (JPH). The government aims to do so as soon as Sep 2019. The sale, at around US$12bn, would amount to 23.5% of the company and nearly 41% of the government’s current shareholding. It would mark the second sell down by the government since JPH listed in 2015. Post the news release, JPH shares closed down 3% on 10th of April. They are now trading below the IPO price, below the last placement price and just off their all-time lows.

The postal service privatization act seems to be in full swing, with JPH about to enter its third round of selling and Japan Post Insurance (7181 JP) (JPI) in the midst of its first post IPO sell down. However, Japan Post Bank (7182 JP) (JPB) has yet to see a sell down even though the recent deposit ceiling revision required JPH to reduce its holding in JPB. Were JPH to sell some of its JPB stake ahead of the government sale of JPH, it could mitigate a large part of its own placement using the cash that it generates from JPI and possible JPB stake sale to buyback some stock. Thus, there is a possibility that JPB placement might come before JPH’s next placement.


For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

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