Last Week in Event SPACE: Alpine/Alps, Renault, Takeda, Trade Me, Holcim, Toshiba, GMO

Last Week in Event SPACE ...

• In the sordid and ongoing war for the hearts and minds of investors in Alpine Electronics (6816 JP), ISS says take the money and run.
• Because of the possibility of a near-term effort to rectify the "imbalance" in the relationship following this week's extraordinary events, expect Nissan Motor (7201 JP) to buy a large stake in Renault SA (RNO FP) in an off-market bid in short order.
• The delta trade is a better trade in Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN) drug deal.
• Trade Me (TME AU) puts itself up for auction.
• Semen Indonesia Persero Tbk (SMGR IJ) is expected to secure the necessary regulatory approval in its tilt for Holcim Indonesia (SMCB IJ), triggering a mandatory tender offer.
• Brute force or wily patience as Toshiba Corp (6502 JP) looks to buy shares on-market after its ToSTNeT-3 buybacks finished with a third of the entire program.
• Gmo Internet (9449 JP)'s exposure to cryptocurrencies is not borne out by its recent price action as crypto's tank.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

Alpine Electronics (6816 JP) (Mkt Cap: $1.1bn; Liquidity: $5.8mn)

Shareholder proxy advisory firm ISS has come out with its voting recommendations for the December 5th vote on the merger for Alpine shareholders after meeting with both Oasis and Alpine, and recommends to vote AGAINST management with regard to the merger proposal, and AGAINST the special dividend available conditional on the merger getting passed; and recommends to vote FOR the Dissident Shareholder Proposal - a ¥300/share special dividend.

• ISS' recommendation is a big deal. Passive ownership of Alpine is (as far as Travis Lundy can tell) about 9% of shares outstanding. Alps probably has 43-44% support (Alps, treasury shares which cannot vote, and other corporate holders). The other 56-57% is up for grabs. Activists ex-Elliott are likely to be ~30-33%.
• While Travis thinks Elliott is unlikely to vote FOR the merger despite their tendency to play their own game, but they might vote against the ¥300/share dividend proposal. If both merger and ¥300/share dividend proposal were blocked, this would put us back to pre-announcement territory, except that Alpine would be a lot more profitable now than before.
• Travis thinks the merger will get blocked, and expects Alps to figure out it needs to buy Alpine for cash (partial tender or full cash takeover) which would be good for Alps as they would be able to push through the synergies for the benefit of Alps. And if the merger does go through, expect Alps shares to rise for the same reason, though the capital efficiency would be delayed. If the merger does NOT go through and the ¥300 dividend special dividend is not voted through, Travis would want to go long Alpine at terms.

(link to Travis's insight: Alpine/Alps - ISS Says Take the Money and Run (From the Merger))

Trade Me (TME NZ) (Mkt Cap: $1.6bn; Liquidity: $1.6mn)

New Zealand online marketplace business Trade Me has received a non-binding, indicative proposal from Apax Partners to acquire 100% of the shares in TME at a cash price of NZ$6.40/share (a 25% premium to last close) in a ~US$1.7bn deal.

• The Offer, pitched at a lifetime high, appears reasonable for what is no longer a high growth stock. Due diligence has been granted which suggests the indicative proposal is close to full (or fair & reasonable) value.
• Due diligence should not be an issue if the company is content to hand back NZ$100mn in special dividends in the middle of the year. I would expect no specific pushback from major shareholders, all of whom are all well in the money. Additionally, OIO approval should be a non-issue, especially in regards to the "good character" assessment.
• Trading at a gross/annualised spread of 7.9%/19.8% assuming late April completion and no dividends. That looks okay for a deal facing minimal obstacles, and one that remains non-binding.

(link to my insight: Few Obstacles In Apax's Tilt For Trade Me)

Takeda Pharmaceutical (4502 JP) (Mkt Cap: $29.9bn; Liquidity: $230mn)

Takeda and Shire PLC (SHP LN) announced their respective EGM and Scheme Meeting will be held on the December 5th. The delay to the Effective Date to January 8th appears to be related to the Royal Jersey Court setting a long-delay until the Court Sanction Date. It is what it is. But the deal will be settled on December 5th.

• By all accounts, the TTBF (Thinking about Takeda's Bright Future) opposition group has not wowed investors with their arguments in their most recent meetings in London about two weeks ago. Their complaints and suits are no more than a nuisance as far as Travis can gather.

• Travis is bullish the risk arb trade, and bullish Takeda, but not bullish Shire should the deal break. He thinks the delta trade is a better trade than the risk arb trade. It may be a little early to play the outright long Takeda (Takeda vs market, Takeda vs TOPIX Pharma sector) trade as there is probably still more Takeda and Shire selling to be done before the EGM and if the deal goes through, afterwards.

(link to Travis' insight: Takeda/Shire IV: Making Drug Deals)

Holcim Indonesia (SMCB IJ) (Mkt Cap: $1bn; Liquidity: $1.9mn)

Last Tuesday, Semen Indonesia Persero Tbk (SMGR IJ) announced that it (via its 99%-owned subsidiary Semen Indonesia Industri Bangunan) had signed a conditional SPA to acquire 80.6% stake of Holcim. The M&A price is US$917mn (set in US$, not Rp). On a per share basis, this works out to be Rp2,166 (assuming Rp14,600/US$). SMCB's share price has doubled since the SMGR rumour first circulated in early Oct.

• The market share (MS) of both companies would be 55%. There is a strong push from the Indo government toward a nationalistic point of view when it comes to strategic assets/sectors. As SMGR is a state-owned company, the public outcry/objection over the deal, at least from the local media's perspective, may be limited. The press release conveniently omits MS, but focuses on the capacity share. As such, the anti-trust regulator, KPPU, could emphasise capacity share data over MS to justify approving the deal.
• Given that there would be a change in a controlling shareholder (commonly defined as ownership of minimum 50% + 1 share) at SMCB, a mandatory tender offer would be triggered, which according to Johannes Salim, CFA would also be at the M&A price. Assuming 12 months to complete, the gross/annualised spread is 9.9%.

(link to Johannes' insight: Semen Indo - Holcim Indo M&A: Real Regulatory Risk Much Lower Than Perceived)

Showa Shell Sekiyu Kk (5002 JP) (Mkt Cap: $5.5bn; Liquidity: $39mn)

After announcing the disappointing merger ratio of 0.41 on October 16th, sending both stocks tumbling, both companies announced that their respective shareholder meetings would be on the 18th of December (where if approved, the companies would merge April 1 2019). Also earlier this week, Showa Shell traded through terms on a cum-dividend basis for the first time.

• Since shares have fallen sharply, some investors expect there is a significant risk that investors on one side will decide to not vote for the deal, meaning that on deal break, Showa Shell would significantly outperform Idemitsu.
• But it could also mean someone is looking at this situation from an appraisal rights angle. If arbitrageurs had been long Showa Shell and short Idemitsu as of the record date, they would effectively hold an option to use their rights to execute a Share Purchase Demand granting appraisal rights to dissenting shareholders.
  • If shareholders held Showa Shell against Idemitsu on that day, if they were able to exit Showa Shell at the 1-month average as of October 15th, that would be up 38% from here - assuming you could also get out of your Idemitsu at the current market price. However, the appraisal rights procedures are technical and deserve careful consultation with one's legal advisors.

(link to Travis' insight: Three Reasons Showa/Idemitsu Should Trade Through Terms)

Stanmore Coal (SMR AU) (Mkt Cap: $184mn; Liquidity: $0.5mn)

Golden Investments (Australia) - a company jointly owned by Golden Energy & Resources (GER SP) ("GEAR") and Ascend Global Investment Fund - has made a takeover bid for Stanmore at A$0.95/share, a 14.5% premium to last close, in an A$201mn deal.

• Long-term shareholder (& Stanmore's largest) Sprint is exiting, selling a 19.9% to GEAR. Another long-term investor, 3rd Wave Investors, ceased to be a shareholder in September; while St Lucia (previously Stanmore's largest investor) has steadily been reducing its holding in recent years. But Regal Funds just went above 5%.

• Nevertheless, the premium to last close is not a knockout and the offer price backs out an inexpensive FY20E EV/EBITDA of ~2x. Stanmore is on the cusp of a significant uptick in output and margins - the lower cost, open-pit Isaac Plains East is expected to be more profitable than the existing Isaac Plains mine - and projects FY19 EBITDA between A$130-A$150mn, a threefold increase over FY18.

• Trading through terms at A$0.99. A floor is in place, short-term, while a decent bump is probably necessary to get Stanmore's Board over the line.

(link to my insight: Stanmore Should Hold Out For A Superior Offer)

Mitula (MUA AU) (Mkt Cap: $118mn; Liquidity: $0.1mn)

In May this year, leading Australia-listed digital classified group Mitula and leading Japan-based online classified company LIFULL (2120 JP) announced a friendly, but very complex deal, for Lifull to acquire Mitula. The deal has been trading wide as there appears to be some expectation that Mitula shareholders would not approve. Mitula announced this week that based on "feedback received from Mitula Shareholders", LIFULL has agreed to further amend the Scheme Implementation Deed to enable additional downside protection.

• This is an interesting additional factor. It adds an out of the money put spread on A$-denominated LIFULL shares for the next 6+% down (at the time of writing). But it should not matter that much. Mitula shares are illiquid, but this is still a good deal. This change in terms does not improve one's upside, but it adds about 6% of free downside to Mitula shares.

• Travis thinks this deal is a good deal for everyone, without the Cash Top Up Payment. There is growth here, and everyone involved should come out of this in decent shape a year from now. He remains bullish and would buy Mitula and would still be long LIFULL.

(link to Travis' insight: Mitula/Lifull: Push Came To Shove, Now More Push)

LG Corp (003550 KS) (Mkt Cap: $10.8bn; Liquidity: $12.5mn)

LG Corp is reportedly close to selling a controlling stake of its subsidiary ServeOne's MRO entity to the Affinity Equity Partners. LG Corp has a 100% stake in ServeOne, whose main business is in the Maintenance, Repair, and Operations (MRO) purchase outsourcing services for the LG Group. It is expected that the MRO operation will be spun out of ServeOne on December 1st, and it is this new spun-off entity that Affinity Equity Partners is investing in. Various local media have estimated that the potential acquisition price could be about ₩700bn to ₩1tn for a 50-70% stake.

• Douglas Kim believes that the probability of LG Corp selling the MRO business to either Affinity Equity Partners or MBK Partners is rather high. The new Chairman Koo Kwang-mo needs the cash to pay an estimated $630mn in inheritance taxes.
• The cash inflow to LG Corp could be more than ₩500bn, which is likely to be used to increase dividend payouts. In short, this would be positive for LG Corp.

(link to Douglas' insight: Korea M&A Highlight: Affinity Equity Partners Is Close to Acquiring ServeOne's MRO Unit from LG Corp)

Briefly ...

Reportedly SoftBank Group Corp.’s Vision Fund will invest US$2bn in Coupang (Korea). This would represent nearly 3.3x P/S (using 2017 sales) and 5.1x P/gross profit (using 2017 gross profit), and place a value of the company at US$9bn. Softbank previously invested US$1bn in 2015. As a result of this investment by Softbank, the smaller competitors are now in dire straits, especially TicketMonster and Wemakeprice, which are private companies that compete in the social commerce sector; unless they also receive significant capital investments.

(link to Douglas' insight: Softbank Plans to Invest $2 Billion in Coupang: Impact on the Korean E-Commerce Market)

Crucialtec (114120 KS)'s subscription rights trade began on Friday. The spread now stands at 1.33% as subscription rights are currently trading at ₩154. The price is down ~24% since the preliminary pricing date. Given the company's liquidity situation, the cancellation risk seems small. This is a microcap stock. If borrow isn't an issue, Sanghyun Park would arb-trade this now.

(link to Sanghyun's insight: Crucialtec Rights Offer: Arb Trading Status)

Toshiba Corp (6502 JP) (Mkt Cap: $19bn; Liquidity: $93mn)

Toshiba conducted its third ToSTNeT-3 buyback in just over a week, and in two weeks since the announcement of the program has bought back more than a third of the entire program (64.5mm shares), or almost 10% of shares outstanding. The near-term game-changer in terms of market dynamics - as noted in a recent announcement (only in Japanese) - is that if the buyback were not completed after the first three ToSTNeT-3 buybacks, the company would start to buy back shares on-market.

• Given the remaining ¥457bn to buy would be ~120mm shares (at the time of Travis' insight), and average daily volume is 1.5mm shares or 2.1-2.2mm shares in a good period, this likely means perhaps 150-250k shares a day to be purchased. At the current price, the company could buy 30-60mm shares on-market in a year.
• Investors will have to make their own decision to execute OR will have to make it clear to Toshiba they would sell in a ToSTNeT-3 around such-and-such a price if one were launched. The question large investors should ask themselves is 1) "At what absolute price, relative price, and in what time frame would I want to sell everything?" Then 2) who would buy it from you if Toshiba were not the main expected marginal buyer?
• Though not outright bearish on Toshiba, Travis thinks the reward/risk is substantially lower than it has been for the past year.

(link to Travis' insight: Toshiba ToSTNeT-3 Buyback Means 1/3 Done. Off To Buy In The Market Now!)

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Travis Lundy has been closely watching the fun and games in the Nissan/Renault/Mitsubishi alliance. Following the remarkable turn of events this week, and with Renault now trading at its widest NAV discount inside a year, Travis expects Nissan may buy a large stake in Renault in an off-market bid in short order. He expects 10% at a minimum but 15% or more is not out of the question, at a cost of ¥260-420bn.

• Because of the significant possibility of a dramatic effort by Nissan to buy Renault shares from the public in the next 10-20 days, he would want to be Long Renault NOW. The reward/risk is good given the hit taken by Renault shares recently. Renault may get upset about Nissan buying more shares, but there is not much they can do about it.
• Ghosn and Kelly have now been removed from their Chairman and Representative roles. They are still board members though are not voting because of their particular circumstances. Because Saikawa-san has come out publicly and has assumed their guilt before official government/police proof of wrongdoing, there may be recriminations at the Nissan executive level for lack of governance, and there will be issues regarding lack of oversight to date in any case.
• If the entire Alliance blows up badly, meaning Alliance synergies currently running at €5bn/year would dissipate and scale would be lost, that would be the worst strategic mistake made by an automaker in decades. The alliance may still be saved, but if Ghosn was the driving force behind it, those efforts will be slowed.

(link to Travis' insight: Nissan/Renault: French Fireworks Ahead?)

Gmo Internet (9449 JP) / Gmo Payment Gateway (3769 JP)

GMO's discount to NAV has widened out to 60%, compared to the one-year average of ~38%. Cryptocurrencies are tanking, and GMO is falling in tandem. Running the ruler over GMO's financials indicates this knock-on effect is unwarranted and has clearly overshot fundamentals.

• GMO Internet entered the crypto-currency market in May of this year via a crypto-currency exchange (GMO Coin) and bitcoin mining (via the purchase of tens of thousands of mining machines). Caught up in the cryptocurrency euphoria, GMO's NAV discount narrowed to ~12% following these developments. As cryptocurrency prices persistently trended lower, GMO's NAV discount is now materially wider than prior to the investor enthusiasm after the company's foray into the crypto market.
• In 3Q18, the cryptocurrency segment comprised 5.7% and 1.9% of the top and bottom line. From a stub viewpoint, deconsolidating out the listcos, the cryptocurrency segment (by my estimates) accounts for ~7% of profit in the 3Q18. This is not a meaningful percentage which could arguably justify GMO's underperformance when viewed from the parent's operations.

(link to my insight: StubWorld: Buy Renault; GMO Falters, But Crypto Exposure Is Immaterial)

Mitsui Engineer & Shipbuild (7003 JP)

Mitsui E&S is trading at a steep 56% discount to NAV by Curtis Lehnert's calculations. The ongoing losses at the engineering and shipbuilding segments, along with the high debt levels contribute to this depressed valuation. The listed holdings in Modec Inc (6269 JP) and Showa Aircraft Industry (7404 JP) alone account for 133% of Mitsui E&S' market cap. At current valuations, you are getting the EPC, machinery and shipbuilding business at a negative valuation.

• While the shipbuilding and engineering businesses doesn't have a clear future, in a move to exit or at least minimize operations in perennially loss-making units, rather than continue to compete with rivals driving down costs, Mitsui is now instead cooperating via the like of the Yangzijiang JV in China. This development should (could) be seen as a positive sign, together with their announcement to unwind their commercial shipbuilding operation, while focusing on naval ships for the Ministry of Defense and patrol ships for the Japanese Coast Guard.
• To isolate the stub business, Curtis composed a NAV-weighted hedge on MODEC. Still, it might also be tempting to simply go long the stub given the catalyst is the restructuring of the domestic shipbuilding industry/consolidation which is likely to benefit Kawasaki Heavy Industries (7012 JP) and Sumitomo Heavy Industries (6302 JP) as well.

(link to Curtis' insight: TRADE IDEA: Mitsui E&S (7003 JP) Stub - Every Dog Has Its Day)

• Spring Real Estate Investment Trust (1426 HK). Shares popped 10.7% on Wednesday. Such a move upwards would suggest an increased chance of the deal completing. However, with what looks like three consecutive days of no tendering prior to this move - therefore around 10% of shares out are still needed to be tendered for this deal to complete - the move was surprising. Since that price spike, only 112k shares have tendered.
• Healthscope Ltd (HSO AU). The CEO of newly opened Northern Beach Hospital (operated by Healthscope) has resigned amidst various issues. Shares rolled over 3.4% on the news. Also, an AFR article discussed possible funding challenges for Brookfield for the off-market takeover should the scheme vote fail.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.

Often these moves can easily be explained - the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.