In this briefing:
- Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P
- Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
- MYOB Setting Up As A Riskier Trade
- Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
- Sea Ltd (SE US): Placing Price Leaves Money on the Table
1. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P
- Local street began to speculate on this story since early last year when Lee Jae-yong got released from prison. NXP was widely considered as Lee’s first M&A attempt since his release. This could make sense both symbolically and business fundamentally. He needed something big to justify to general public about him being back in Samsung’s top position. Business wise, NXP would be a home-run in terms of fulfilling the three goals for non-memory business.
- Korea’s local street began to speculate on this since early last year when Lee Jae-yong got released from prison. This story was reignited earlier this year when the news broke that Samsung’s M&A head Sohn Young-kwon privately met NXP CEO Rick Clemmer. This morning Invest Chosun reported that Samsung may make a big announcement in the pretty near future.
- I suggested going long 1P/short Common last week on the grounds that falling memory prices would be pressing down Common more harshly. Now we are hearing a more elaborate story about NXP acquisition. Circumstantially, I don’t think this NXP takeover story will go unnoticed by the market. This should be more of a Common price pusher than Pref. I’d wrap my current position at this point.
2. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
It was reported in numerous local Korean media yesterday that POSCO (005490 KS) and SK Group are leading contenders to acquire a Korean company called KCFT (KCF Technology) for about 1 trillion won. KCFT specializes in making copper foil and thin film products, especially for the lithium ion batteries sector. KCFT’s major customers include Samsung SDI, LG Chem, NEC, and Panasonic.
The KKR private equity firm is the seller of KCFT. In February 2018, KKR acquired a 100% stake of LS Mtron’s copper foil and thin film business for 300 billion won and after this acquisition, renamed it KCFT. It has been reported that should these groups (POSCO or SK) low bid for KCFT, KKR may opt for an IPO of KCFT instead.
If POSCO is able to acquire KCFT, this should help to accelerate the POSCO Group’s expansion of the rechargeable battery related materials business and enhance its vertical integration of this business. If the deal gets completed at about 1 trillion won, this would represent a P/S of about 3.3x and P/E of about 25x, using 2018 figures.
3. MYOB Setting Up As A Riskier Trade
When I wrote about KKR’s purchase of 17.6% of MYOB Group Ltd (MYO AU) from Bain in October – a trade which got KKR to a 19.9% holding, my take on it was that the deal was probably a bit light. It was not outrageously bad because a) Bain agreed to sell their 17.6% at A$3.15 vs the A$3.65 IPO , and b) something like 93% of volume traded since the IPO in May 2015 had taken place below the proposed indicative offer price, but it was still one of the few platforms on which someone could take a stand to compete against the likes of Xero Ltd (XRO AU) and Intuit Inc (INTU US), it was not overly expensive as SaaS platforms went, and its online presence was growing rapidly.
The full write-up is MYOB: KKR Launches a Proposal. Lightish?
About three weeks later, KKR bumped their indicative offer to A$3.77/share, and MYOB opened its books to allow KKR due diligence. That suggested the price was in the range of the acceptable to MYOB’s board (but that A$3.70 was borderline).
Then KKR did its due diligence, global equities continued to fall out of bed (down 10+% in two months for many major indices including Australia’s S&P/ASX200), KKR’s due diligence process came down to the wire, and the final bid presented came in at A$3.40, with a very short “take-it-or-leave-it” deadline. The immediate reaction of MYOB’s board was, as David Blennerhassett wrote in Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer,
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (David Blennerhassett ‘s emphasis)
Four days later, KKR and MYOB entered into a Scheme Implementation Agreement (SIA) at A$3.40/share, putting MYOB at a A$2bn market cap.
David Blennerhassett discussed the SIA and the upcoming schedule of events in some detail in MYOB Caves And Agrees To KKR’s Reduced Offer. MYOB’s board unanimously recommended shareholders vote in favour of the Offer in the absence of a superior proposal and subject to an independent expert concluding the Offer was in the best interest of shareholders. There was a specific “go-shop” provision through the 22nd of February – when MYOB was expected to release FY results. No offer was forthcoming. KKR had matching rights but if they did not match an offer which was 5% higher and all-cash, then KKR would be obliged to sell its shares into the higher offer.
The New News
While not new new, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has reached a stake of 9.99%. This was declared on Monday. On Tuesday Manikay sent a letter to MYOB (discussed below). This morning MYOB responded saying “The MYOB Board continues to unanimously recommend the Proposal subject to no Superior Proposal being forthcoming, and the receipt of an IER [Independent Experts’ Report] concluding that the Proposal is in the best interests of MYOB Shareholders.”
The Scheme Booklet is currently with ASIC and is expected to be despatched “in coming weeks” (original schedule was for mid-March with Scheme Meeting April 19). The wording in the MYOB release suggests that might get pushed back a little, meanwhile Manikay is likely to make more noise.
4. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:
A significant slowdown in e-commerce
Is the gaming division a one-hit wonder?
Expecting another 800mn cash burn into 2019
Consensus has priced in further upgrades while cash flow metrics worst in the sector
NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.
Sea Ltd (SE US): Placing Price Leaves Money on the Table
Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story
5. Sea Ltd (SE US): Placing Price Leaves Money on the Table
Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.
In our previous note, we stated that we would participate in the public offering at or below the last close price of $23. While the share price will initially trade around the placing price, we believe that share price will recover as Sea post-placing fundamentals are now materially stronger.
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