Daily TMT & Internet: Toshiba Buyback: Proceeding Apace, But That’s Slow and more

In this briefing:

1. Toshiba Buyback: Proceeding Apace, But That’s Slow
2. GER Upcoming EVENTS Calendar
3. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price
4. M1 Offer Despatched – Dynamics Still Iffy
5. Would a Sale of Founder’s Holdco NXC Corp Trigger a Tender Offer for Nexon (3659 JP)?

1. Toshiba Buyback: Proceeding Apace, But That’s Slow

In November 2017, Toshiba Corp (6502 JP) bowed to the inevitable and issued shares in order to shore up shareholder equity ahead of the 31 March 2018 deadline where if the company had not announced a positive shareholder equity number, it would have been delisted according to the Enforcement Rules of the Tokyo Stock Exchange. 

So it issued ¥600 billion of equity in an accelerated privately-negotiated placement to hedge funds. There was some jawboning later from domestic institutions who had not gotten the show on the deal, but they would do well to remember that when Toshiba was in dire straits earlier that year, and continued listing was not guaranteed because of accounting issues which were later overcome (before the equity issuance), it was the hedge funds who bought dozens of percent of the company – not domestic financial institutions. In any case, the equity was predictably needed, but as a way of making it clear that it would not be forever, the release accompanying the financing said the company would accelerate returns to shareholders once the sale of Toshiba Memory Corporation was complete. 

That return of capital to shareholders was announced in June 2018 after the closing of the TMC transaction had been confirmed. Toshiba would buy back ¥700 billion of shares. At the time, that was up to 40% of shares outstanding, but the shares rose as the shares of companies with large buyback plans do, and it took until November to dot the “i”s and cross the “t”s on making sure that the cash in the bank account was deemed distributable capital surplus. On November 8th, a year after announcing the sale of equity, Toshiba announced the start of a Very Large Buyback. A few days later the company announced a large ToSTNeT-3 buyback, offering to buy back all  ¥700 billion of shares the following morning at that day’s close. A week later the company had bought back ¥243 billion or more than 35% of the total buyback then announced further purchases would be made in the market. 

That’s when the fun began. 

For previous recent treatment on the Toshiba buyback, see the following:

    Toshiba: King Street’s Buyback Proposals Lack Required Detail (5 Oct 2018)
    Toshiba’s Buyback – How It Might Work (9 Nov 2018)
    Toshiba’s ToSTNeT-3 Buyback: Unwinding? Another Game of 🐓? (12 Nov 2018)
    Toshiba ToSTNeT-3: Round 2 (¥579bn To Go) (14 Nov 2018)
    Toshiba ToSTNeT-3 Buyback Means 1/3 Done. Off To Buy In The Market Now! (21 Nov 2018)
    Toshiba Buyback Update – Not Banging Down Doors To Get Stock Yet (3 Dec 2018)

2. GER Upcoming EVENTS Calendar

We have received requests to provide a calendar of upcoming catalysts for near-term M&A, stubs and erstwhile event-driven names. Below is a list of catalysts over the near-term for such names as below. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

3. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price

After initially being very skeptical of the China Tower (788 HK) IPO given it is essentially a price take to its three largest shareholders, we changed our view in early December to a more positive outlook. What changed our view has been series of calls and meetings with the company that suggested a more shareholder friendly approach than expected and a real opportunity to reduce capex substantially through the use of “social resources” (e.g. electricity grid, local government sites). These can be used to deliver co-locations without building towers and poles and imply much lower capital intensity at a time when revenue growth will be accelerating as 5G is rolled out.  Management has also given more detail on non-Tower business prospects which can generate higher returns (not under the Master Services Agreement). While small now (2% of revenue) they are growing rapidly. With lower capex than initially guided and a more shareholder friendly management (i.e. higher dividends are possible) we reduce the SOE discount and raise our forecasts (again). We remain at BUY with a new target price of HK$2.20

4. M1 Offer Despatched – Dynamics Still Iffy

On January 7th after the close of trading, Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). 

The closing date, as clear there, is 4 February. 

After three-plus months of speculation that Axiata Group (AXIATA MK) was unhappy with the price and might make a counter-offer, no offer has been forthcoming. 

After I wrote on the 2nd in M1 Offer Coming – Market Odds Suggest a Bump But… that the reward/risk did not look that great, shares drifted downward from the S$2.09-2.11 area and into the afternoon of the 7th, traded in the S$2.05-2.07 range, which was the first time in months the shares had traded at or below the prospective offer price. 

Some 20mm+ shares (5.5% of the shares out other than the three major holders) traded between 3pm Singapore time on the 7th and a few minutes after the open the day after the announcement. Then part-way through the day, someone bought a large number of shares lifting the share price two spreads for a while. Since then, the shares have settled back down to the $2.07-2.08 range.

Depending on your opinion of the likelihood of a bump, your execution strategy will differ. It’s still not clear that a bump or counterbid will be forthcoming, but at S$2.07, the risks are better than they were higher. 

5. Would a Sale of Founder’s Holdco NXC Corp Trigger a Tender Offer for Nexon (3659 JP)?

It was reported on January 3rd that Korean founder and heretofore effective controller of Nexon Co Ltd (3659 JP) Mr. Kim Jung-Ju and family, who exercise their ownership of Nexon through near 100% (98.64% according to Douglas Kim) control of NXC Corp (Korea) and NXC’s control of NXMH B.V.B.A (Belgium), planned to sell their stakes in NXC for up to 10 trillion won (US$8.9 billion).

Those two companies – NXC Corp (Korea) and NXMH (Belgium) – own 253.6mm shares and 167.2mm shares respectively, or direct and indirect ownership by NXC of just under a 48% stake in Nexon (3659 JP). Yoo Junghyun (Kim Jung-Ju’s wife) directly holds another 5.12mm shares at last look. 

The speculation is that it might be sold to Tencent Holdings (700 HK) or another global buyer because it might be too big a mouthful to swallow for NCsoft Corp (036570 KS) and Netmarble Games (251270 KS), each of which have a market cap in the area of 10 trillion won themselves. 

Nexon was founded in Korea in 1994 and moved its headquarters from Seoul to Tokyo in 2005, listing itself on the TSE in December 2011. The company is a well-known gamemaker (over 80 PC and online/mobile games), with famous games such as MapleStory, Dungeon & Fighter, and Counter Strike.

Douglas Kim has started the discussion of this situation in Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon? and Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?. 

The Korea Economic Daily said in its report on the 3rd of January that Deutsche Bank and Morgan Stanley had been selected as advisors to run a sale process, and a formal non-binding offer to potential bidders was expected next month. A Korea Herald article suggested that “potential buyers, according to industry speculation, include China’s Tencent, Korea’s Netmarble Games, China’s NetEase and Electronic Arts of the US.”

The Big Question

In the second piece, Douglas Kim questions whether Kim Jung-Ju would sell NXC (and NXMH) as reported by the local press, or whether NXC and NXMH would sell their stakes in Japan-listed Nexon, the implication being that if they sold the stake in Nexon, it would mean buyers would get a large stake in a single company, whereas there is a bunch of other stuff floating around in NXC and its subsidiaries. 

The other question is whether Tencent or another buyer buying NXC would trigger a mandatory Tender Offer for the shares in Nexon in Japan. The letter of the law in the TOB Rules changed a bit over 10 years ago would indicate not, but there are questions (and precedents) here.

Discussion ensues.