Last Week in Event SPACE - Alpine, Kuroda, CNBM, Fuji Kiko, AVIC

Last week, Oasis agitates Alps Electric Co Ltd (6770 JP) to bump its offer for Alpine Electronics Inc (6816 JP); MBK's funky two-step for Kuroda Electric Co Ltd (7517 JP); China National Building Material Co Ltd (3323 HK) seizes China National Materials Company Limited (1893 HK)'s rump for free; JTEKT's ersatz offer for Fuji Kiko Co Ltd (7260 JP) is confirmed; and Avic International Holdings Ltd (161 HK) is probably still mispriced, despite a 57% increase in a little over a week.

M&A

Alpine Electronics Inc (6816 JP) (Mkt Cap: $1.6bn; Liquidity: $8.2mn)

I addressed the underwhelming offer from parent Alps Electric Co Ltd (6770 JP) for Alpine. The deal offered by Alps and agreed to by Alpine management is not fair. The processes were arguably not fair, and it is not clear how the DCF numbers were reached. For reasons unknown, this share exchange is a 17-month process, providing shareholders a long time to make their case known.

• Alps expects several billions of yen per year in synergies from the business integration. This is money which would not be saved if there were no business integration. Some of this is obviously due to Alpine shareholders but not reflected as part of the fair value of Alpine.
• Then on Monday, Oasis announced it had a 9.18% shareholding. On the same day, both Alpine and Alps reported 1H earnings, which beat their forecasts and have raised full-year estimates - in Alpine's case quite dramatically.
• Alpine has been trading through terms for the last 7 weeks. There is a reason for that. This needs to get bumped. Alpine’s 1H18 numbers only help those who would push for an improvement in terms. Oasis owns a large enough stake to lead the charge, but I expect other investors will need to get involved. I think activists have a very strong case here to agitate for ¥3200-4000/share in cash terms.

links to insights:
Alps Deal for Alpine Not Fair - Oasis Is Right
Alpine/Alps Earnings Revisions - Moooar Value for Alpine

Kuroda Electric Co Ltd (7517 JP) (Mkt Cap: $935mn; Liquidity: $2.4mn)

Travis examined MBK Partners and Kuroda Electric Co Ltd (7517 JP)'s multi-stage transaction to acquire a portion of the Murakami & associated entity shareholdings and take the company private.

• The two-step process is crafty: MBK Partners will launch a Tender Offer to purchase a minimum of 18,918,900 shares at ¥2,720/share. This is a decent 34.65% premium to the unaffected price. At a minimum, this would get MBK 50.3% of the shares outstanding. Or up to 100% of the non-Murakami-affiliated shares if all were tendered.
• The company itself will then conduct a Buyback Tender Offer (on its own shares) at ¥2,688/share (33.07% premium) for up to 11,160,800 shares. The Tender Offer & Buyback are made available given the differing tax treatments of selling shares.
• After the cancellation of the Buyback shares, MBK would own at least two-thirds of the shares outstanding. The stock would then be delisted sometime in spring and minorities would be squeezed out.
• Travis expects this trade gets done pretty easily. The Tender Offer commences November 2nd and goes until December 15th. The Buyback Tender Offer commences in December and does not close until January.

(link to insight: Funky Kuroda Electric Two-Stage Deal - MBK Takes Out Murakami)

Fuji Kiko Co Ltd (7260 JP)(Mkt Cap: $343mn; Liquidity: $1.5mn)

Travis discussed the launching of the tender offer, which despite the unchanged low-ball price, will probably go through now that the deal is confirmed.

• The entire process displayed weak valuation and bad governance. The lack of reconsideration of the price as the comps rallied 20%, earnings beat estimates, and forecasts were raised, adds insult to injury.
• JTEKT needs 4.616mm shares or 21% of the non JTEKT non-Tachi S-held shares. That is 8.7% of the shares outstanding. Based on the yukashoken hokokusho (Securities report; p23) from the end of March, other corporates own about 7.3% of shares outstanding and one individual owns another 1.5%. Assuming all tender, this is a done deal, irrespective of what foreigners or other economically-incented shareholders would wish.
• You could seek appraisal rights but that may be harder after the JCOM appeal.

(link to insight: Fuji Kiko Tender Launched - Unchanged TOB Price And Still Not Enough)

China National Materials Company Limited (1893 HK)(Mkt Cap: $2.4bn; Liquidity: $6.6mn)

Mark A. DeWeaver, PhD, CFA analysed Sinoma's 9M17 financials to identify the reasons for the strong quarter.

• Consolidated numbers from 24%-held Sinoma Science & Technology Co., Ltd (002080 CH), 35.49% of Xinjiang Tianshan Cement A (000877 CH), 39.70% of Sinoma International Engineering Co Ltd (600970 CH), and 47.56% of Ningxia Building Materials Group Co Ltd (600449 CH) account for 68% of Sinoma’s third-quarter pre-tax profit. They do not account for all of the growth, particularly in profits attributable to shareholders.
• Interpreting the above from another angle, while CNBM is acquiring Sinoma at a 19.9% premium (as per the initial announcement), it is, in fact, acquiring Sinoma’s holdings in these listed subsidiaries at a 48% discount to their combined market values, with the rest of Sinoma’s assets thrown in for free.

(link to insight: Sinoma’s Listed Subsidiaries a Bargain for CNBM)

Yusen Logistics Co Ltd (9370 JP) (Mkt Cap: $553mn; Liquidity: $1.5mn)

Travis discussed Nippon Yusen Kk (9101 JP)'s tilt for 59.5%-held Yusen Logistics Co Ltd (9370 JP), a domestic and international air freight forwarding, sea freight scheduling agency, trucking, logistics, warehousing, and brokerage clearing business for the group.

• The takeout price is around two-year-high levels, following which, EBITDA has fallen dramatically.
• Nippon Yusen needs only 2.98mm shares to get this done and 2.1mm shares are probably a quasi-lock. Therefore the parent needs to forage for about 0.9mm shares out of the remaining 14.9mm shares held by minorities. It is difficult to imagine they will not get those shares.
• The deal will in all likelihood get done and then there will be a squeezeout.

(link to insight: Yusen Logistics - Tender Offer By Parent)

Mg Unit Trust (MGC AU) (Mkt Cap: $328mn; Liquidity: $0.8mn)

I summarised Saputo’s long-dated agreement to acquire MGC’s assets. The agreement complications pivot off the ACCC and ASIC’s legal proceedings and the class action suit. Resolving these legal wranglings could take years.

• Pricing appears okay, although arguably opportunistic. Yet absent Saputo’s (or any of the other bidders previously in the mix) assistance, MGC may have sought administration. And as unitholders have neither voting rights at a general meeting nor the power to elect MGC shareholders, MGC should in turn trade at a discount to peers.
• Farmers will lose control of the cooperative – assuming the offer gets all the necessary approvals. But a step-up in the FMP, bringing prices in line with WCB, Fonterra Shareholders Fund (FSF NZ) and Bega Cheese Ltd (BGA AU)'s farmgate milk price of ~$5.50kg/MS, is an okay outcome.
• Trading slightly above the initial $0.75/unit distribution. There are various forward unknowns, many of which are long-dated. I'd enter below $0.75 - preferably low 70s.

(link to insight: Murray Goulburn - Saputo Steps Up)

Softbank's (9984 JP) (Mkt Cap: $98bn; Liquidity: $446mn)

Pelham Smithers back-pedaled on his earlier positive read on the Sprint Corp (S US) / T Mobile US (TMUS US) deal as apparent indecision, on Softbank's part, emerges. Referencing media reports, Son is allegedly wanting to give up fewer than 8 Sprint shares for one TMUS share; Softbank's (9984 JP) board is objecting to the sale; or Son has simply changed his mind. Perhaps it’s all three, although a change of heart might be the most pertinent.

• The issues are threefold i) Softbank’s muddled structure with its stake in Alibaba (BABA US) worth almost 50% more than the market cap of SoftBank. ii) the directionless operating company – is the focus wireless & wireless content, hardware assets, solar or VC?; and iii) the overlaying complex decisions making process – are future acquisitions for SoftBank the operating company, or for the fund, or for a bit of both? Sprint adds to that structural complexity. Investors in SoftBank would be pleased to see it removed from the stable.
• Not too surprising, that indecision is creeping into the Sprint deal.

(link to insight: SoftBank (9984) - Second Thoughts on Sprint (S) Sale)

Oki Electric Cable Co Ltd (5815 JP) Mkt Cap: $124mn; Liquidity: $0.9mn)

Travis wrote up Oki Electric Industry Co Ltd (6703 JP)'s Tender Offer to take out the minorities in its subsidiary Oki Electric Cable Co Ltd (5815 JP).

• Oku Electric Cable's business is somewhat uninspiring– it makes LOTS of wire for electronics applications (LAN cables, interface cables, wire harnesses, FCBs, LAN cables, and fixed part cables).
• But a premium of just 3% over last traded price is a tad offensive. And the parent only owns a third of the company now, so they may not have the clout to force this through, as they might if they owned 75%.
• Shares are nudging 5-year and 10-year highs, and the stock is illiquid.
• Travis believes on balance, this probably gets done. But his conviction level is low, and he would avoid the deal.

(link to insight: Odd OKI Electric Cable Offer (TOB))

Stubs

Orion Holdings Corp (001800 KS) (Mkt Cap: $499mn; Liquidity: $4.4mn)

I discussed Orion’s wide discount to NAV and the tender offer/rights issue, first referenced in Douglas Kim's extensive note.

• After the restructuring, Orion Corp will be a significantly larger portion of Holding's NAV - 74% vs. 48% currently. Ex-listcos, the NAV simply comprises (real estate investments) and some brand & rental income assets. Net cash comprises cash (₩112bn) and short-term investments (₩73bn).
• The post-transaction NAV discount of 30% appears extreme for a passive, simple single stock structure holdco, wherein the value of the listed sub exceeds the market cap of the parent by such a wide margin.
• As Douglas discussed, "because Lee Hwa-Kyung (Chairwoman of Orion Group) and her husband Dam Chul-Gon will shift most of their investment holdings into Orion Holdings, there is a strong case to be made for a potentially higher share price going forward for Orion Holdings relative to Orion Corp".

Avic International Holdings Ltd (161 HK) (Mkt Cap: $1.26bn; Liquidity: $1.9mn)

Shares have increased 45% this week, first in reaction to the CSRC approval for the Shenzhen-listing of 92.99%-held Shennan Circuit; with upbeat media reports a tamper catalyst.

• One media source indicated a market cap of RMB42bn for Shennan, or RMB30bn for AVIC’s portion, after listing. That backs out a punchy 70x FY19E earnings of RMB600mn. Shennan generated RMB251.8mn of profit in the 1H17. The listing will take place after Hong Kong’s SFC approves the spin-off.
• AVIC looks mispriced, and may well have further to run. The stock is not shortable nor is it a designated security under the Southbound Connect.

(link to insight: Set-Up & Unwind Extremes: Orion Holdings, AVIC)

Cuckoo Electronics Co Ltd (192400 KS) (Mkt Cap: $1.3bn; Liq: $2.4mn)

Cuckoo Electronics Co Ltd (192400 KS) shareholders approved the spinoff plans earlier this week and Sanghyun Park reacquainted readers with this two-step holdco conversion, along with helpful charts on the transformation process.

• There doesn’t appear to be a huge price upside for Cuckoo at current levels. It will enter a trade suspension period between Nov 29 – Jan 10.
• And it’s probably too early to predict which company will outperform after the spinoff; although the major shareholder "will be incentivized to boost Cuckoo Homesys share price as he needs to swap his Homesys shares with Holdings shares through a tender offer."
• Interestingly, the market favoured holding companies in recent conversions cases (Hyundai Heavy Group & Lotte Group) over the major shareholder’s motivation. As such, Sanghyun believes you can’t really go wrong backing Holding after the spinoff.

(link to insight: Update on Cuckoo Electronics’ Spinoff Based Holdco Conversion Process)