Last Week in Event SPACE (6 August 2017)

Vexing redux on the M&A front as both United Engineers Ltd (UEM SP) and New World Dept Store China (825 HK) comfortably trade through terms; Mandarin Oriental Intl Ltd (MAND SP) is a deep value name with a high potential to monetise a significant asset; an offer for Astro Japan Property Group (AJA AU) looks priced to complete; while Toshiba Corp (6502 JP) / Western Digital Corp (WDC US)'s relationship further degenerates.

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

M&A World

New World Dept Store China (825 HK) (Mkt Cap: $459mn; Liquidity: $1.6mn)

• With a 50% premium to the undisturbed price, the challenge for the deal always centred on achieving 90% of disinterested shareholders. The stock closed at $2.13 on Friday (up 5.45% on the day), compared to the offer price of $2.00. What the?
  • NWDC's offer was extended for a second time on the 1^st August after NWD only reached 82.25% of disinterested shares. The next closing date is the 15 August, and the last date to be declared unconditional is the 28 August. The offer is final.
  • NWD can’t buy any more shares and tender. The 45.5mn shares purchased on-market was permissible under the SFC Takeovers Code. That purchase elevated NWD's stake to 75%, the maximum limit before breaching the 25% public float rule in Hong Kong.
  • It gets interesting knowing that “acceptor of the Offer shall be entitled to withdraw his acceptance after twenty-one (21) days from the first Closing Date (being Tuesday, 8 August 2017) if the Offer has not by then become unconditional as to acceptances” (page 64 of the offer doc PDF).
  • The deal break price is almost half where it is now. You can’t short NWDC. CCB has been an active buyer (34.4 mn shares; CCASS' data is T+2) in the past week. Those shares bought are not being tendered. I’m intrigued what the angle is for these investors.

United Engineers Ltd (UEM SP) (Mkt Cap: $1.28n; Liquidity: $4.2mn)

• The $2.60 (final) offer price, a 4% discount to the last close, was never going to be a slam-dunk as discussed by Pranav Rao. UEM closed Friday at $2.74, 5.4% above the offer price.
  • This week, Oxley Holdings Ltd (OHL SP) announced it now holds a 7.11% stake in UEM but will not be making a competing offer for the company.
  • We also fielded questions that UEM may pay a dividend (an interim one no less - historically UEM has only paid final divis) which could be added to the offer price.
  • The announcement is pretty B&W: "If any dividend, right or other distribution or return of capital is announced, declared, paid or made by UEL in respect of UEL Ordinary Shares on or after the Offer Announcement Date, the Offeror reserves the right to reduce the Ordinary Share Offer Price by an amount equivalent to such dividend, right, other distribution or return of capital."
  • Pranav also spoke with the advisors who indicated any dividend declared would reduce the offer. If added to the offer price, that would constitute a bump, an entitlement only permitted in a competitive bidding situation. Section 20.2 of the Code provides further clarification.
  • The offer is now open, with the independent directors and IFA to provide their opinion by 15 August. The first close is the 29 August.

Pocket Card Co Ltd (8519 JP) (Mkt Cap: $625mn; Liquidity: $0.6mn)

• Travis Lundy discussed Itochu Corp (8001 JP), equity affiliate FamilyMart UNY Holdings Co Ltd (8028 JP) and Sumitomo Mitsui Financial Group (8316 JP), collectively holdings a super majority (76.5% of shares), launching a tender offer for Pocket Card at ¥1,072/share - a 48% premium to the undisturbed price.
  • Will it get done? Is it fair? Yes and yes. There is no minimum, therefore, the deal cannot fail. The Offer is roughly 1.4x Feb-end BVPS, near where Aiful Corp (8515 JP) and Aeon Financial Service Co Lt (8570 JP) trade. The consortium already own a super-majority. They could squeeze you out without doing a tender offer. The offer is effectively in place to make you less likely to take them to court.
  • This will trade reasonably tight but it is a 5-month deal. "Getting out at 1.4x book where ROE is just over 4% seems like a good result to me".

Astro Japan Property Group (AJA AU) (Mkt Cap: $343mn; Liquidity: $0.8mn)

• Pranav discussed Blackstone’s A$7.18/share offer for Astro. It’s a deal resembling features of Galileo Japan Trust (GJT AU)'s property sale last year, and Blackstone's tilt for Croesus Retail Trust (CRT SP) earlier this year.
  • The deal requires shareholders approving four ordinary resolutions. Astro's board is supportive and the Independent export assigned a fair & reasonable opinion. Pranav does not see any obstacles in reaching these voting thresholds.
  • Pranav is a buyer at $7.12, after hedging out the FX risk, with a view to receiving the ~A$0.14 dividend on top, expected in December 2017.

EVENTS

Mandarin Oriental Intl Ltd (MAND SP) (Mkt Cap: $2.6bn; Liquidity: $1.4mn)

• I addressed MAND’s decision to potentially sell its Excelsior Hotel. The press has projected some lofty selling price numbers, at or exceeding MAND’s market cap.
  • MAND has received approval to convert the hotel into a commercial property. Doing so in-house is not in keeping with MAND’s hotel investment and strategy; neither does maintaining the Excelsior brand gel with the Mandarin Oriental brand focus. A sale, at the right price, makes sense, and suitors, both foreign and domestic would be interested in this unique, prominent frontage site.
  • My inquiries indicate the current height restrictions for the site may(with emphasis) be negotiated. I’d be long MAND. The revalued NAV is $3.13 as per the interim results. Incorporating the sale of Excelsior boosts my fair value to ~$3.60/share.

Lotte Confectionery Co Ltd (004990 KS) (Mkt Cap: $2.5bn; Liquidity: $2.9mn)

• Sanghyun Parkaddressed the revised merger ratios for the Lotte Group restructuring.
  • Shareholders can oppose this divestiture/merger plan from Aug 14 to 28. Or exercise your appraisal rights from Aug 29 to Sep 19.
  • However, at the current prices, "it seems not many shareholders would be incentivized to exercise their appraisal rights at this point even though all of the four companies have "relatively" struggled in Korea's stock market in the past three months."

Toshiba Corp (6502 JP) (Mkt Cap: $9.8n; Liquidity: $234mn)

• Andrew Ludiscussed the chip-unit sale saga. Mindful of the ongoing variables in that sale, Andrew believes the recent strong NAND flash market recovery could help Toshiba accelerate the sale process and gain stronger bargaining power.
  • However, the fractious relationship between Western Digital Corp (WDC US) and Toshiba continues.
  • Toshiba's latest salvo states it is "dismayed by Western Digital’s pattern of exaggerating SanDisk’s rights under the relevant agreements ... Toshiba is therefore moving forward with our investment in Fab 6 without Western Digital/SanDisk’s participation. ... SanDisk will not receive any capacity from Fab 6."
  • WDC countered: "The JV operations are governed by agreements entered into by both partners. The agreements give our subsidiary SanDisk priority to participate in expansions and conversions of JV capacity, including for the latest generation of 96-layer BiCS flash memory products, through joint investments in Fab 6 equipment, and that is exactly what we intend to do."
  • WDC was down ~4% on Friday.

Hyundai Robotics (267250 KS) (Mkt Cap: $5.2bn; Liquidity: $50.8mn)

• Sanghyun discussed the results of the Hyundai Robotics tender. As projected, not many shareholders of the three target companies, Hyundai Heavy Industries (009540 KS), Hyundai Electric & Energy (267260 KS) and Hyundai Construction Equipment Corporation (267270 KS), opted to tender.
  • Which of Robotics or Heavy should we want to hold from now on? What looks certain is that Chung Mong-jun appears to have achieved his objective with almost all of his shares in the three target companies to be converted into Robotics shares. This would suggest there shouldn't be "much drama left in Hyundai Heavy siblings' stock prices in the short-term

Stubs

Barito Pacific Tbk Pt (BRPT IJ) / Chandra Asri Petrochemical (TPIA IJ)

• I briefly mentioned this stub last month subsequent to Andrew Stotz'sinsight. 45%-held TPIA accounts for ~150% of BRPT's market cap.
• BRPT touched an all-time high this week, while the pair ratio is similarly at extreme levels. There still may be more to run in BRPT.