Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Deal rationale remains unclear but we would be inclined to take a leap of faith 

Event-Driven

At 2pm local time, almost exactly one hour before the close of the month, quarter, and half year for investors, the Nikkei saw fit to leak information to the effect that SONY would issue "about 400bn yen" of shares (70-80%) and a CB (the remainder), issuing shares for the first time in 26yrs. &nbsp;Presumably, this was in line with outgoing JPX (merged entity of the Tokyo and Osaka Stock Exchanges) CEO&nbsp;Mr. Atsushi Saito's opinion - he&nbsp;was <a href="http://www.bloomberg.com/news/articles/2015-06-15/japan-bourse-head-says-earnings-leaks-to-local-press-not-unfair" target="_blank">quoted</a>&nbsp;just two weeks ago saying that&nbsp;publishing companies&rsquo; financial results in the local press before they are officially announced isn&rsquo;t unfair. Presumably this also applies to "leaking" the announcement of one of the largest capital raises of an existing company in a long while just one hour before the end of a month, quarter, and half-year.&nbsp;I am sure SONY investors were less than impressed. &nbsp;The immediate reaction was that the stock tanked almost 8%. The immediate thinking was that SONY was going to buy out the 40% of SONY Financial that it does not own (which conveniently, if offering a 15% premium to then-current share price, would cost something like the 440bn yen being raised). So SONY Financial, after first dipping slightly,&nbsp;jumped 9% in 8mins.&nbsp;SONY ended down 5.7% and SONY Financial ended up 4+% from where they were&nbsp;trading just before the news.&nbsp;<ul><li>The company is strongly net cash positive on a consolidated basis&nbsp;(and very little of that is in SONY Financial), has not quite twice that in annual EBITDA, and is forecast to have free cash flow in excess of the money being raised for the next couple of years. &nbsp; It is not clear they really need this cash.&nbsp;</li></ul>SONY came&nbsp;out with an official announcement 20mins later. This creates its own problems because EDINET has such a poor server that it&nbsp;constantly asks users to come back later. It also creates problems because of Japan's adoption of Reg M and what it means to short-sellers who jumped on the news, expecting to be able to short sell until at least the close before having to stop.&nbsp;The stated use of proceeds is "to secure funds to invest in growth and to strengthen Sony Corporation's financial base." The details are boring, but are dealt with below. &nbsp;Including greenshoe/secondary shares, 60% of the offering is aimed at international investors, and 40% at domestic (most of which will be retail investors).&nbsp;The 5yr CB issue will be 120bn yen through a domestic offering.There will be a LOT of questions asked of Sony. The document is "clear" but the financial rationale is not. Since a famous US activist&nbsp;reportedly exited its position 9mos ago, the stock had basically doubled,&nbsp;as has the consensus Street Target Price (now ~4400).&nbsp;My initial thought is that this equity offering will NOT be taken well by investors. They will have understood that the growth in CMOS&nbsp;capex and sales was part of the reason why net cash levels had been lifted the last couple of years. Now they find out it is not. This is REAL DILUTION&nbsp;vs most people's expectations and must be considered slightly bearish unless some really bullish commentary comes from the expected roadshow.More below the fold.

At 2pm local time, almost exactly one hour before the close of the month, quarter, and half year for investors, the Nikkei saw fit to leak information to the effect that SONY would issue "about 400bn yen" of shares (70-80%) and a CB (the remainder), issuing shares for the first time in 26yrs. &nbsp;Presumably, this was in line with outgoing JPX (merged entity of the Tokyo and Osaka Stock Exchanges) CEO&nbsp;Mr. Atsushi Saito's opinion - he&nbsp;was quoted&nbsp;just two weeks ago saying that&nbsp;publishing companies&rsquo; financial results in the local press before they are officially announced isn&rsquo;t unfair. Presumably this also applies to "leaking" the announcement of one of the largest capital raises of an existing company in a long while just one hour before the end of a month, quarter, and half-year.&nbsp;I am sure SONY investors were less than impressed. &nbsp;The immediate reaction was that the stock tanked almost 8%. The immediate thinking was that SONY was going to buy out the 40% of SONY Financial that it does not own (which conveniently, if offering a 15% premium to then-current share price, would cost something like the 440bn yen being raised). So SONY Financial, after first dipping slightly,&nbsp;jumped 9% in 8mins.&nbsp;SONY ended down 5.7% and SONY Financial ended up 4+% from where they were&nbsp;trading just before the news.&nbsp;The company is strongly net cash positive on a consolidated basis&nbsp;(and very little of that is in SONY Financial), has not quite twice that in annual EBITDA, and is forecast to have free cash flow in excess of the money being raised for the next couple of years. &nbsp; It is not clear they really need this cash.&nbsp;SONY came&nbsp;out with an official announcement 20mins later. This creates its own problems because EDINET has such a poor server that it&nbsp;constantly asks users to come back later. It also creates problems because of Japan's adoption of Reg M and what it means to short-sellers who jumped on the news, expecting to be able to short sell until at least the close before having to stop.&nbsp;The stated use of proceeds is "to secure funds to invest in growth and to strengthen Sony Corporation's financial base." The details are boring, but are dealt with below. &nbsp;Including greenshoe/secondary shares, 60% of the offering is aimed at international investors, and 40% at domestic (most of which will be retail investors).&nbsp;The 5yr CB issue will be 120bn yen through a domestic offering.There will be a LOT of questions asked of Sony. The document is "clear" but the financial rationale is not. Since a famous US activist&nbsp;reportedly exited its position 9mos ago, the stock had basically doubled,&nbsp;as has the consensus Street Target Price (now ~4400).&nbsp;My initial thought is that this equity offering will NOT be taken well by investors. They will have understood that the growth in CMOS&nbsp;capex and sales was part of the reason why net cash levels had been lifted the last couple of years. Now they find out it is not. This is REAL DILUTION&nbsp;vs most people's expectations and must be considered slightly bearish unless some really bullish commentary comes from the expected roadshow.More below the fold.

SONY:  Horrible way to announce an investment, but NOT likely a takeover of Sony Financial