Last Week in Event SPACE (13 August 2017)

Wharf Holdings Ltd (4 HK) vacillated after announcing its IP spin-off is at an advanced stage; industry heavy weights inject welcome-support into PCCW Ltd (8 HK)'s media ops; Thai Beverage Pcl (THBEV SP) grabs Yum! Brands Inc (YUM US)'s KFC ops, placing Central Plaza Hotel Pcl (CENTEL TB) under the hammer; the risk/reward on Energy Development Corp (EDC PM)'s partial offer look attractive, and Advantest Corp (6857 JP) is a stand out in the recent JPX-Nikkei 400 rebalance.

(Market capitalisation and liquidity discussed below are in US$. Liquidity is assessed on a 3-month average)

M&A

Energy Development Corp (EDC PM) (Mkt Cap: $2.5bn; Liquidity: $2.1mn)

• This interesting partial offer has a minimum proration of ~79%. Coupled with a simplistic back-end price of PHP 6.0/share (the undisturbed price), the blended gross spread is 2.1%. I estimate that proration to be above 90%, increasing the blended spread above 4%.
• The Bidders (Macquarie Infra & GIC) along with major shareholder First Gen, intend to delist the company at a later date. Delisting only requires a board approval. There is no appraisal right in a delisting. There are perceived scare tactics in the announcement by the Bidder/Fist Gen for minorities to tender, but pricing appears fair. Current risk/reward looks attractive at these levels. The offer is now open.

(link to insight: EDC - The Squeeze Is On)

Hitachi Kokusai Electric Inc (6756 JP) (Mkt Cap: $2.7bn; Liquidity: $21.5mn)

• The KKR TOB is essentially toast with the announcement this week the deal may be delayed or cancelled. There is no timing on this.
  • What are the options? One obvious route is that KKR bumps its offer up to say ~¥3000/share to factor in the re-increase in the OP forecast.
  • Keep in mind this Sale process has been in the works since last September, which involved a beauty contest, so arguably the price already on the table was very full. It’s not unheard of to bump, but bumps have come in various sizes in recent years.
  • Travis Lundy would be a seller at ¥2950-3000/share or higher.

(link to insight: Hitachi Kokusai TOB - Curbing My Enthusiasm)

Sabana Shari’ah Compliant REIT (SSREIT SP)(Mkt Cap: $368mn; Liquidity: $0.5mn)

• A Reuters article early in the week reported e-Shanbg Redwood (ESR) was kicking tyres on SREIT. A follow-up announcement from SREIT stated the strategic review was ongoing.
  • As a Shari'ah-compliant REIT, a straightforward takeover won’t cut it. One circumvention is injecting some or all of the assets into ESR-REIT (EREIT SP).
  • Assuming a possible takeout price of ~S$0.515 and a break price of S$0.40/share, the market is estimating around a 75% probability of completion. Pranav Rao would look to short if its trades back to the $0.495/share.

(link to insight: Sabana REIT: Much Ado About Something)

Soda Aromatic Co Ltd (4965 JP) (Mkt Cap: $104mn; Liquidity: $0.1mn)

• Travis discussed this small tender offer by a super majority. It’s a done deal, so will trade tight. The acquiror doesn't have to make an offer and could simply squeeze out minorities.
  • The fairness opinion is characteristically bogus – 4x EBITDA, with EBITDA expected to double in five years. If minorities are dissatisfied, appraisal rights are available.

(link to insight: Toray and Mitsui Start Tender Offer on Soda Aromatic)

Stubs/Holdcos

Wharf Holdings Ltd (4 HK) (Mkt Cap: $28.3bn; Liquidity: $38mn)

• Wharf touched an all-time high after announcing the in-specie distribution of IP Wharf REIC, by way of introduction, is at an advanced stage. The vehicle would have an estimated value of $230bn.
  • After Wharf's 13.95% price increase (vs. Wheelock & Co Ltd (20 HK) 's 10.85%) subsequent to the announcement, I argued Wharf’s downside was more susceptible than Wheelock's, as the benefits to be derived from the in-specie would likely be recycled back up to Wheelock, and hence the Woo family. And investor interest in Rump-Wharf would pale in comparison to Wharf REIC's.
  • Wheelock’s discount to NAV has narrowed a little to 16%, having touched a high of 7% in April. Wharf is down 8.5% and Wheelock 6%, after the initial market flurry.
  • I'll update parent net debt and stub valuations after Wheelock's interim results due out after the close of trading on Monday. I’d still be positioned in Wheelock over Wharf.

(link to insight: Wharf - Cui Bono?)

PCCW Ltd (8 HK) (Mkt Cap: $4.4bn; Liquidity: $4.7mn)

• Toh Zhen Zhouelaborated on interim results for PCCW and HKT Ltd (6823 HK), and also the announcement that Temasek, Hony Capital, and Foxconn Ventures will acquire an 18% stake in PCCW's OTT business for US$100mn. That backs out an implied value for this segment of HK$3.9bn.
  • Zhen Zhou rightfully points out investor fade on PCCW's stub ops, which have registered -ve EBITDA for years, with 1H17's (HK$219mn) the highest 6-month loss tally since I've been keeping tabs.
  • My discount to NAV is 32.8% (vs. 12-mth average of 31%, and a low of 34%), narrower than Zhen Shou's 43.3%, to factor in the unrelenting losses from Other Businesses and Eliminations. Disappointingly, the sale of the UK broadband ops in May this year only accounted for $49mn of the $304mn EBITDA losses for Other business. Solutions recorded low-single digit growth in EBITDA, although margins remained static.
  • It's not a lot of money, however, this injection and support from industry heavy weights into the media ops may be the panacea for the stub ops.

(link to insight: PCCW - Investment by Temasek, Hony, and Foxconn into OTT Business May Turn Stub Sentiment Positive)

Event

JPX Nikkei 400 rebalance

• Travis went deep on the flawed JPX Nikkei 400, which has a tendency to offload constituent at their lows, and embrace inclusions at their highs. But it's still an index, and it rebalances, so Travis delved into the recent annual rebalance announcement where 31 names are to be added and 28 removed.
  • Overall the generic trade is to sell the inclusions and buy the names to be removed. "As a punt, I might buy the names to be deleted as a basket vs Index."
  • Advantest Corp (6857 JP) (Mkt Cap: $3.4bn; Liquidity: $57mn) is interesting given its low float count and substantial Nikkei 225 holding. Travis backs out the 8mn shares to buy is around 15-16% of the current "float".
  • But the real trade is to buy what will get included in 2018. Watch this space - Travis will have a follow-up piece on this.

(link to insight: JPX Nikkei 400 Rebalance Announced)

Thai Beverage Pcl (THBEV SP)(Mkt Cap: $17.2bn; Liquidity: $15.4mn)

• Athaporn Arayasantiparb, CFAdiscussedYum! Brands Inc (YUM US) selling 240 KFC managed-stores to Thai Beverage. These stores account for just 2% of Yum’s emerging market sales, and Thailand is understood to be the only region where Yum saw a SSS decline
  • In addition to Yum, the other KFC operators include Central Plaza Hotel Pcl (CENTEL TB), part of the Central Group, running 219 stores; and private equity fund ASEAN Industrial Growth Fund.
  • Athaporn sees this as a big loss for CENTEL as it was viewed as a front-line bidder (along with ASEAN) for Yum's stores. Although all three players use the KFC brand, CENTEL will have to compete with Thai Bev’s marketing machine.

(link to insight: KFC Thailand: Thai Bev Puts CENTEL Down for the Count)

Kanamic Network (3939 JP) (Mkt Cap: $154mn; Liquidity: $0.8mn)

• Travis touched on this small, expensive, illiquid company, but argues it could get ramped ahead of its TOPIX inclusion.
  • He sees a likely liquidity event this coming week and another in autumn to reach the 35% tradeable share level. This may involve around 800k shares to be distributed. So this is one to watch out for interesting supply/demand dynamics in the near term.

(link to insight: Kanamic (3939 JP) - Tachiaigai Bunbai Aiming at TOPIX Inclusion)

Yancoal Australia Ltd (YAL AU) (Mkt Cap: $124mn; Liquidity: $0.0mn)

• Both Senrigan and Noble Group Ltd (NOBL SP) sought an order from Australia's Takeover Panel preventing Yancoal's proposed renounceable entitlement offer to raise up to $2.35bn. Those orders are here and here.
  • Yancoal will use the funds - as announced - to acquire Rio Tinto Ltd (RIO AU)’s Aussie coal assets. Yancoal's parent, Yanzhou Coal Mining Co H (1171 HK) will fund ~40% of the rights.
  • Senrigan considered the renounceable rights price of A$0.10/share vs. the prior close of A$0.24/share to be "unnecessarily highly dilutive and value shifting."
  • In addition, as two groups associated with Yanzhou would underwrite the offer, Yanzhou's voting in Yancoal would increase to 89.15% from 79%.
  • As an aside, both Noble and Senrigan successfully shot down Yancoal’s rights issue in 2014.
  • Yancoal is down ~44% from its initial announcement.