Last Week in Event SPACE: Alps/Alpine, Don Quijote, MYOB, Guoco, Lotte Holdings, Melco

Last Week in Event SPACE ...

• You can buy, but you can no longer vote what you buy in the ongoing Alps Electric (6770 JP) /Alpine Electronics (6816 JP) saga, as Elliott lifts its stakes in both sides.
• Don Quijote Holdings (7532 JP) could get squeezitudinosity during or after the Tender Offer from Familymart Uny Holdings (8028 JP).
• The Offer for MYOB Group Ltd (MYO AU) is indicative, but KKR is unlikely to want to stay at 19.9% of a listed company.
• A retracement in the market value of its listco portfolio (known and unknown) suggest the privatisation Offer price for Guoco Group Ltd (53 HK) is fair.
• Lotte Holdings (004990 KS) dolls out a swag of early Xmas goodies.
• Melco Resorts & Entertainment (MLCO US)'s Studio City spin-off injects another layer between Melco International Development (200 HK) and key Macau operations.

(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: $1.3bn; Liquidity: $7.5mn)

October 10th was the last day to purchase shares in Alpine to vote in the upcoming shareholder meeting on the proposed merger of Alpine with parent Alps Electric (6770 JP). The same day, Elliott reported they had bought another 3.928mm shares in Alps on the 5th and the 9th, lifting their stake to 11.22%. They also reported they had increased their stake in Alpine from 7.33% to 9.78% (when it was trading several percent through terms).

• It's a pretty binary situation.
  • If you hold Alpine and you expect the vote to go against the merger, and you expect Alps and Alpine to remedy the situation by Alps launching a TOB (either before the vote to pre-empt a failed vote, or after to make sure they get to buy Alpine), you should think about whether you want to buy more.
  • And if you want the merger to go through but you think it will not, then you have to think about why you owned Alpine 10% through terms for the last many months, unless you thought Alpine would spike higher on a failed shareholder vote, and would suddenly get religion on minority shareholder treatment.
• For Elliott, the declared activist position in Alpine is almost 60% of what is required to block the merger in votes at the Alpine EGM. And at under 10% of Alpine, Elliott could theoretically ensure Alps gets to 50% in Alpine. Elliott could be the sole investor tendering into a Tender Offer which Alps could launch at a price suitable to Elliott, which would ensure that Alps could obtain a position in Alpine over 50%.

• Also, with Elliott now over 10% of Alps, they have made themselves liable to disgorge incremental profits on "short swing trading". This implies Elliott will not be looking to take profits within 6 months and it signals to Alps that Elliott is not going away and are a force with which to be reckoned.

links to Travis Lundy's insights:
Alpine Endgame = ALPS Launchpad?
Alps & Alpine: Bigger, Better, Faster, Stronger

Don Quijote Holdings (7532 JP) (Mkt Cap: $9.7bn; Liquidity: $37mn)

Familymart Uny Holdings (8028 JP) announced a Tender Offer for 20% of Don Quijote. The Tender Offer would be launched at ¥6600 - a 9.09% premium to the undisturbed price. The Tender Offer is scheduled to commence in early November 2018 and would go for 20-30 days. There is expected to be no minimum so all shares would be accepted unless more than 32,108,700 shares are tendered, in which case only 32,108,700 shares would be purchased, and they would be purchased from all holders on a pro-rata basis.

• The deal here for Familymart to take a 20% stake in Don Quijote is part of a new deal whereby Familymart will sell the other 60% of UNY to Don Quijote. This will reduce Familymart's gross assets, net and gross debt, and increases ROE. It likely lowers EBITDA but gets access to future improvement of UNY earnings through the stake in Don Quijote which will come in as equity affiliate earnings.
• Less than 2% of shares are held by individuals. This is shockingly low for a well-known retail name of this market cap. Foreign and domestic active ownership is very high, all things considered. This changes the dynamics for the Tender vs a normal tender. It means that long-term active-management foreign (and some domestic) holders need to make a decision to sell a winning position in a growth stock because someone else wants to buy it. Expect the pro-ration to be relatively high.
• Travis thought there would be every chance this stock gets squeezy during or after the Tender Offer, and would not want to be short at the Tender Offer price for any length of time near-term. The fact that Don Quijote traded through terms on Day 1, which happened to be the worst day for Asian markets in quite a while, tells you that the perception is that long-only funds will not be eager to sell.

links to Travis' insights:
Familymart Tilts at Don Quijote I : Squeezitudinosity
Familymart Tilts at Don Quijote II: The Arb Grids

MYOB Group Ltd (MYO AU) (Mkt Cap: $1.5bn; Liquidity: $6.7mn)

Accounting software and services provider MYOB announced that largest shareholder Bain had sold a stake of approximately 17.6% of the shares in the company to KKR at A$3.15/share, leaving Bain with 6.1% and KKR 19.9%. MYOB also announced the receipt of an unsolicited conditional proposal at A$3.70/share (a 24% premium to the close) from KKR.

• KKR, as a private equity firm, is unlikely to make deals to own 19.9% of a listed company - a blocking stake - unless they were quite confident that either a) they could get the deal done, or b) by jumping in, they could get someone else to do a deal to take them out of their risk.
• It's not a bad price. But Travis doubts it is enough and is not the right forward PER and possibly a bit low on EV/adjusted EBITDA. He expects that MYOB and the IFA would want a bit of a kiss to this price. Perhaps up to A$4.10, which would coincidentally be higher than the highest price ever paid for the stock since IPO. However, there is a possibility KKR is unwilling to pay up to a level whether the MYOB board could see themselves recommending the deal.
• Arun George believes the proposal fairly values MYOB. While a higher price could be argued based on the potential ROI of its current investment program, it will take years for the investment to bear results. He also notes MYOB and Xero Ltd (XRO AU) capitalise R&D while Sage Group (SGE LN) and Intuit Inc (INTU US) fully expense R&D. A meaningful peer comparison is FY19 EV/Sales vs three-year revenue CAGR and the KKR offer is at the fair value for MYOB's forecasted three-year revenue CAGR.

links to:
Travis' insight: MYOB: KKR Launches a Proposal. Lightish?
Arun's insight: MYOB (MYO AU): A Fairly-Priced Takeover Bid from KKR

Guoco Group Ltd (53 HK) (Mkt Cap: $5.5bn; Liquidity: $1mn)

The circular for the proposed privatisation of Guoco by way of a scheme has been dispatched. On a market price-related value, as at the latest practicable date (5 October), Somerley (IFA) calculates a value of $178.70/share. That equates to a discount to NAV of 24%. In prior insights, I've considered a proposal with a 20-25% discount range to the market-based value to be more representative. In the 2013 privatisation attempt, the market-based value of $167.80 implied a discount of 40%.

• While I still view the Offer to be light given the composition of Guoco's NAV is relatively straightforward and not subjective, as it primarily comprises listed securities and cash; the recent decline in the valuation of the publicly known listed holdings, and the implied decline in the remaining AFSs, would suggest the discount to the market-based value to be within a range I consider fair. Elliott giving an irrevocable to vote its 9.72% stake in favour of the Scheme will likely tilt undecided voters in favour of the Scheme.

(link to my insight: Adverse Mark-To-Market Valuations Support Guoco's Scheme)

Briefly ...

The Energy Regulatory Commission has not given its approval for the Glow Energy Pcl (GLOW TB) /Global Power Synergy Company Ltd (GPSC TB) transaction. Details on the rejection are still forthcoming. There was always risk to the deal this may occur but I thought the competition concerns were overstated. Trading at Bt83.75.

Earnings for Showa Shell Sekiyu Kk (5002 JP) and Idemitsu Kosan (5019 JP) come on the 14th of November, but "a definitive Share Exchange Agreement" is due this month. The 1-year Price ratio is >2.6x. The stock price ratio is currently 2.44x. This suggests that the odds are that Idemitsu could get something a little better than spot ratio, but in the end it will be based on some kind of "decision" by the two management teams. Travis thinks it is a good tilt to be long Idemitsu, short Showa here. On a net basis, he would prefer to tilt slightly net short, but thinks that long-short pair does that to a small extent.
(link to Travis' insight: Last Chance For Your Idemitsu/Showa Bet)

A-REIT Australian Unity Office Fund (AOF AU) announced an unsolicited, indicative non-binding offer of $2.95 cash per unit from Starwood Capital Group. This is Starwood's fourth attempt and AOF is warm to this proposal by opening up its data room. Provided there is no DD issue, this is priced to complete.
(link to my insight: Australian Unity Warm to Starwood's Fourth Attempt)

Nextdc Ltd (NXT AU) announced it will buy the remaining 70.8% interest in Asia Pacific Data Centre (AJD AU) it does not own, via an unconditional on-market cash offer of A$2.00/security. The Offer closes the chapter on an 18-month tug-of-war between NXT, the founder of AJD, and 360 Capital, which secured its 67.3% stake in AJD after a competitive bidding situation with NXT last year. Still, it's almost as though 360 tried to play bully and then lost, and is now giving up, with just a 3% gain in a year. This deal is all sewn up. Citibank will stand in the market at the Offer Price until the close of trading on the 26 November.
(link to my insight: NEXTDC's Done Deal for Asia Pacific Data Centre)

Delong Holdings (DLNG SP)'s low-ball offer falls foul of Singapore's Takeover Code. Insufficient funds to meet the required revised higher price lead to the withdrawal of the offer. Disappointing the Offer is not proceeding, but at least it's not going ahead at an unreasonable price. (link to my insight: Delong's Low-Ball Offer)

Tendering into PAG's Offer for Spring Real Estate Investment Trust (1426 HK) is currently 2.69%. 35.2% needs to be tendered by the 15 October for the Offer to be declared free of the Huizhou acquisition condition. Of note, there was a 262k shares shorted in the morning session on the 8 October. The highest full-day shorts of 419k occurred in March 2015. Shares closed Friday at $3.89, the lowest level since PAG's Offer was announced.

TOPIX FFW Changes for October 2018

The TSE announced the changes to the revisions to the constituents of the TOPIX New Index Series (i.e. the sub-series of TOPIX (Core 30, Large 70, TOPIX 100, Mid 400, etc). The trade takes place at the close of October 30th for an index change at the open of October 31st.

• The big BUY names (Japan Post Holdings (6178 JP), Asahi Intecc (7747 JP), Marubeni Corp (8002 JP), and Yakult Honsha (2267 JP)) are pretty much as one would have expected, with a couple of small differences.
• One BIG miss is the lack of change on Yahoo Japan (4689 JP). This, to Travis, is a very big miss on the part of the TSE. Float has doubled, and they did not see fit to make the ad-hoc adjustment despite making adjustments on other recent changes.
• The interesting thing about the large dollar value SELLs (the top 20 dollar values represent about two-thirds of the total sell) is that they are almost all one single notch of FFW (a decline of 0.05) which because of the nature of the changes, could mean that a calculated FFW falls from 0.655 to 0.645 and therefore calls in assessed FFW from 0.65 to 0.60. This creates a fair bit of movement over what may be relatively small movements.
• The sell of ~1mm shares on Familymart Uny Holdings (8028 JP) is as expected. The float is a LOT smaller than the trading volume shows it.

(link to Travis' insight: TOPIX FFW Changes for October 2018)

Lotte Holdings (004990 KS) (Mkt Cap: $5.1bn; Liquidity: $8mn)

Less than a week after Lotte Group Chairman Shin Dong-Bin's release from jail, Lotte Holdings announced today after market close that it acquired a 23.2% stake in Lotte Chemical (011170 KS) for ₩2.2tn, from Hotel Lotte (900281 KS) and Lotte Co. (which is controlled by Hotel). Lotte Holdings also announced it would cancel 11.65mn treasury shares (~25% of treasury shares) worth ₩687bn.

• The cancellation will elevate the shareholding stake of Shin Dong-Bin and family members to 42.6% from 38.3%.
• Lotte Holdings also announced that it plans to transfer ₩4.5tn worth of capital surplus into retained earnings category, a likely precursor for the company to pay out higher dividends.
• Short-term wise, both Sanghyun Park and Douglas Kim recommend Holdings to buy and hold onto. Those looking for a hedge, possibly a Holdings/Shopping pair trade with Shopping as short. Chemical will also see/enjoy a very favourable sentiment, but unlikely Chemical will outperform Holdings in the short-term. This is clearly a Holdings restructuring issue and carries no business fundamental change.

links to:
Douglas' insight: Lotte Holdings Buys a 23.2% Stake in Lotte Chemical & A Massive Treasury Shares Cancellation
Sanghyun's insights: Lotte Holdings: Details/Implications of 6 Regulatory Filings & Trade Approach & Lotte Holdings NAV: Technically No Change but Unquantifiable Alphas Are There.

Briefly ...

Sanghyun recommends a Long Hyundai Dept Store Co (069960 KS), short Hyundai Greenfood (005440 KS), after Hyundai Home Shopping Network (057050 KS) finally reached a deal for Hanwha L&C.
(link to Sanghyun's insight: Hyundai HS Buying Hanwha L&C Creates Group Split Sentiment: LONG Dept Store & SHORT Greenfood)

SK Telecom (017670 KS) is reportedly close to acquiring a 100% stake of SK Infosec from Sk Holdings (034730 KS) in a scrip deal. At the current price of ₩278,500, 1.08mn SK Telecom shares (~11% of its treasury shares) would be worth about ₩300bn. SK Holdings already has a 25.22% stake (20.36mn shares) of SK Telecom. Completion of this deal would elevate its stake to 26.55%. SK Telecom is expected to merge the three security companies (ADT Caps, SK Infosec, and NSOK) into one company - likely to be called SK ADT Caps.
(link to Douglas' insight: Korea M&A Spotlight: SK Telecom Plans to Buy SK Infosec from SK Holdings)

Melco International Development (200 HK) / Melco Resorts & Entertainment (MLCO US)

Studio City, a spin-off by MLCO, publicly filed a Revised Registration Statement, which establishes an IPO price range of US$10.0-US$12.5/ADS (1 ADS represents 4 class A ordinary shares). What does all this mean for Melco? Not a lot. In fact, it simply injects another layer into the holding company structure, potentially resulting in discounts on discounts from the parent's viewpoint.

• Melco will conduct an in-specie distribution of Studio City ADSs to its shareholders. Details of the in-specie have not yet been finalised. Melco proposes to distribute around 1.5% of the gross proceeds of the Studio City offering or between HK$35.33mn-HK$42.04mn. Not a lot of money for a company this size and should have minimal impact.
• The discount to NAV recently bounced off its 12- month low of 41%. With all the action unfolding directly under MLCO - not just Studio City, but the potential privatisation of Melco Resorts and Entertainment (Philippines) (MRP PM) (Melco Philippines' Delisting Offer Update) - there appears no immediate benefit to owning Melco at these levels; while the spin-off injects additional complexity into the Holdco structure.

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

PCCW's discount to NAV has widened out to 38%, a 12-month low. On a simple ratio (PCCW/HKT), it has never been lower, surpassing the prior low in November 2012, around the time PCCW was bidding for the Premier League.

• HK telcos are benefitting from recent price hikes after a period of flat pricing. Of interest, there have been no noticeable changes in FY19E guidance for HKT. According to Bloomberg, those forecasts are down 2.9% in the past 3 months vs. -2% for PCCW. With HKT accounting for 82% of PCCW's GAV, and no new negative stub news to justify the recent underperformance, PCCW should similarly benefit from any perceived earnings uptick from HKT hiking prices.
• The flipside is whether these price hikes indicate competition has indeed abated. Arguably the trend globally is for continued competition and (where possible) consolidation. I would look to set-up the stub trade here going Long PCCW and Short HKT.

(link to my insight: StubWorld: Additional Complexity For Melco, PCCW's All Time Low, Swire Secures HAECO)

My ongoing series flags large moves in CCASS holdings over the past week or so (~10%), 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.