In this briefing:
- Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
- Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
- Nidec (6594 JP): Big Downward Revision
- Korean Air – Six Important Catalysts
- Beleaguered Panalpina Gets An Unsolicited Takeover Offer
1. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
Mitsubishi has finally given up its hope of convincing Aeon to merge Ministop (9946 JP) with Lawson and is selling its stake in the largest retail group.
There will be no change to the extensive supply relationship between the two companies and Mitsubishi’s food wholesale arm, Mitsubishi Shokuhin (7451 JP).
While Aeon seems to have spurned Mitsubishi for now, it is hard to see how Aeon will progress in the convenience store sector without Mitsubishi’s help. In the short-term Ministop looks like a poor investment but Aeon may have to sell to Mitsubishi eventually and will want a good price for it.
2. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.
Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.
Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.
Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.
3. Nidec (6594 JP): Big Downward Revision
Nidec has cut FY Mar-19 sales guidance by 9.4%, operating profit guidance by 25.6% and net profit guidance by 23.8% to reflect what management calls unexpectedly weak demand, the need for large inventory adjustments, and anticipated restructuring charges.
Management attributes this to U.S. – China trade friction, but weak demand for hard disc drives (HDDs) caused by excessive date center investment and falling NAND flash memory prices, and declining auto sales in both China and the U.S., appear to have compounded the problem.
Nidec’s share price was up ¥60 (+0.49%) today to ¥12,395, but the announcement was made after the market closed. Management plans to discuss the situation at a press conference starting at 18:30 Tokyo time today.
4. Korean Air – Six Important Catalysts
Shares of Korean Air Lines (003490 KS) are down nearly 60% since its highs in 2010 and we believe this decline has been excessive. The stock has started to recover and we expected continued outperformance this year. We like both Korean Air (Common) (003490 KS) and Korean Air (Pref) (003495) at current levels. However, we think Korean Air (Pref) has a higher upside. We are including Korean Air (Pref) (003495) in our model stock portfolio. The following are the major catalysts that could boost Korean Air (Common) and Korean Air (Pref) shares by 20-30%+ in the next 6-12 months.
- Increasing possibility of a breakthrough in corporate governance with potential help from KCGI & NPS
- Cheap valuation/Increasing interests from both value funds and hedge funds
- Reduced political conflict between China & South Korea
- Turnaround of the aerospace business unit
- Huge investment plan by the Incheon International Airport to expand facilities by 2023
- Current ratio of Korean Air Pref/Common is below the 1 sigma level
5. Beleaguered Panalpina Gets An Unsolicited Takeover Offer
After investors lashed out at Panalpina Welttransport Holding (PWTN SW)‘s board late last year (after years of griping by some of the top holders), forcing the main shareholder to support the installation of a new chairman of the board, management may have thought they had some breathing room.
They did not.
Rival Kuehne + Nagel International A (KNIN VX) quickly (a couple of days later) showed interest in friendly negotations via the press, and Panalpina responded in the press that it wanted to stay independent. Danish rival DSV A/S (DSV DC) had shown interest before, then had gone after Ceva Logistics AG (CEVA SW) as discussed by David Blennerhassett in CEVA’s Days Of Independence Appear Numbered when the CMA CGM deal came out.
Now DSV has lobbed in a bid for the company.
The New News
On January 16th Panalpina Welttransport announced that it had received an unsolicited, non-binding proposal from DSV A/S (DSV DC) to acquire the company at a price of CHF 170 per share, consisting of 1.58 DSV shares and CHF 55 in cash for each Panalpina share.
The offer comes at a premium of 24% to Panalpina’s closing share price of CHF 137.5 as of 11 January 2019 and 31% to the 60-day VWAP of CHF 129.5 as of 11 January 2019.
Following the announcement, Panalpina’s shares surged above the terms of the offer implying that the market was anticipating a higher bid from DSV or one of its competitors.
DSV claimed in its announcement that the “combination of DSV and Panalpina would create a leading global transport and logistics company with significant growth opportunities and potential for value creation” and that the structure of the offer will allow Panalpina’s shareholders to participate in the benefits of the combination.”
They also stated that “the combined business would generate expected revenues of more than DKK 110bn and EBITDA of more than DKK 7bn on a pro-forma 2018 basis (excluding any synergy benefits).”
DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’s Ceva Logistics AG (CEVA SW). Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.
Media reports suggested that Switzerland’s Kuehne & Nagel was also rumored to be considering an offer for Panalpina.
Panalpina’s response is “According to its fiduciary duties, the Board of Directors of Panalpina is reviewing the proposal in conjunction with its professional advisers.”
Amid Panalpina’s struggles in ocean freight, IT system delays and below-average growth, activist investor Cevian Capital, which owns 12.3% of Panalpina has publicly urged Panalpina to be open for a takeover.
Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46% and any deal will depend significantly on its approval.
Given the fragmented nature of the industry, DSV sees scale as a clear competitive advantage in the logistics market as operational leverage and purchasing power increase with rising freight volumes. As a result, M&A is currently an integral part of their strategy.
This is an interesting situation. The question is whether it gets interestinger.
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