Last Week in Event SPACE – Asatsu, TVB, SK Telecom, Propertylink

This week, Bain’s offer for Asatsu DK Inc (9747 JP) doesn’t ad up for WPP PLC (WPP LN); Television Broadcasts Ltd (511 HK)'s gets the judicial nod on the waiver, but the Executive will have the final word; SK Telecom (017670 KS)'s split-up is a "done deal"; and Propertylink Group (PLG AU) is firmly in play after Warburg Pincus takes a material stake.

M&A

Asatsu DK Inc (9747 JP) (Mkt Cap: $1.4bn; Liquidity: $5.6mn)

A quintet of insights addressed Bain’s tender offer to purchase a minimum of 50.1% of Asatsu DK ("ADK"), or 20,785,200 shares, at ¥3,660/share; but up to 100% of shares outstanding. Both WPP (25% shareholder) and Silchester (17.2%) consider the offer to undervalue Asatsu.

• Pelham Smithers' initial salvo delved into ADK's history with WPP, the cross-ownership, assumed the offer will be rejected and projected a ¥4,000/shr handle may get WPP on board.
• Mio Kato, CFA similarly argued that Bain might be able to pay more, if applying a like-for-like EV/EBITDA calculation.
• Travis Lundy considered the offer premium to be more like 25%, not 15% as ADK’s financial assets do not deserve a premium. And his own calcs indicate the deal is not overly cheap to peers. Does Bain set a “precedent of being the first foreign PE firm with a recommended deal to bump a deal without a hostile counterbid? Because WPP wants more? Because Silchester thinks it wants more? I don't think so.”
• As both WPP and Silchester viewed the offer as un-generous, ADK needs 86+% of the remaining shares to tender. If another large holder decides not to tender, this doesn't go through. That's a risk. But Silchester doesn’t indicate what is a “fair value”, just talks about "assets, franchise, and future opportunities".
• WPP could launch a counter offer, but it would be a low ROI investment, according to Travis, if forking out ¥4,000/share. Alternatively, even if Bain works its PE magic, it will be challenging to extract a decent IRR at these levels. Travis believes above about ¥4,000-4,100/share would likely be a very good reward-to-risk opportunity to short.
• Pelham countered this ROI reasoning and provides superb context on Martin Sorrell's (WPP’s CEO) “reasonable threshold” investment approach. WPP has paid well in excess of 8-10x adjusted EV/EBITDA in the past – around where Bain has pitched its offer - and it's not unreasonable to expect Sorrell to make a counter. And the uniqueness of this opportunity to gain a decent chunk of the Japanese advertising market is not to be discounted. Perhaps, as Pelham continues, Sorrell “may simply be waiting to see whether ADK's unilateral termination of the agreement is legal or not before proceeding.”

links to insights:
Pelham: Asatsu (9747) - Bain Offers ¥3,660/Shr, WPP Objects.
Asatsu (9747) - Are Chances of a Counter Bid Being Underplayed?.
Mio: Asatsu DK: Chance of an Offer Hike Towards JPY4,000-4,100 Nearing 2006-2007 Highs.
Travis: Asatsu DK: Bain Capital Bids, WPP Complains, Arbitragers Bet on a Bump, But....
Bain’s Bid for ADK: Silchester and WPP Both Say “Undervalued” But Not Clear Why

Television Broadcasts Ltd (511 HK) (Mkt Cap: $1.5bn; Liquidity: $1.6mn)

As largely anticipated, the Court ruled the Takeover's Panel disregarded and attempted to circumvent the Broadcasting Ordinance's ("BO") scale-back provision.

• Either party – the Takeover’s Panel, the SFC, the Executive - can appeal the judgement within 28 calendar days. If no party appeals, the key section in the announcement is 79, “The question of whether to grant a whitewash waiver to TVB should be remitted back to the Executive”
• Although the Code always applies (specifically section 10 of the introduction, page 16 of the pdf), it would be exceptional for the Executive to refer the same line of query a second time to the Panel.
• As discussed at length in Form 86 and again in the High Court (for those present) – although not mentioned in the judgment – the Executive was not outwardly supportive of the Panel’s Ruling. At the time of the Panel's hearing, the Executive said it is not open to the Panel to disregard s19 of the BO, and that the Ruling may be challenged as it circumvents the legislative intent of the BO.
• Therefore, I would expect the Executive to uphold the general industry practice found in Note 1 on dispensations from Rule 26, which stipulates, "inter alia, that the Executive will normally waive the obligation to make a general offer if there is an independent vote”.
• On balance, the judgement is a positive outcome for TVB.

(link to insight: TVB – Substance and Reality)

Propertylink Group (PLG AU) (Mkt Cap: $471mn; Liquidity: $4.1mn)

Pranav Rao discussed the in-play Propertylink after Warburg Pincus (via ESR Ltd) announced an 18.06% stake. Back in September, PLG announced it had rejected an A$0.95/share offer from Centuria, who is currently on the register with 17%.

• Warburg Pincus' acquisition price of A$1.02/share gives an implied 1.17x P/NTA. Not cheap, but could be justified by PLG's strong post-listing performance. With Centuria's management announcing it is taking steps to deleverage its balance sheet, this metric is probably outside its comfort zone.

(link to insight: Is Propertylink In Play?)

Stubs/Holdcos

SK Telecom (017670 KS) (Mkt Cap: $17.9bn; Liquidity: $37mn)

Sanghyun Park believes SK Telecom (017670 KS)'s split-up is imminent.

• Via an equity spinoff, Sanghyun expects SK Telecom to be split into a holdco and opco, with the SKT holdco (rumoured to be named SK Tomorrow) owning the 98.1% stake in SK Planet and the 20.22% stake of Hynix.
• SKT holdco will then conduct a tender offer to SKT opco shareholders, including SK Holdings Co Ltd (034730 KS), to increase its SKT opco stake to more than 20%, but perhaps more likely 30%, in line with the recent holdco law amendment.
• Where will Hynix be parked? As previously discussed by Sanghyun, Hynix needs to be active in M&As. This means it'd be better be placed under SK holdco; which essentially, is the central objective for this entire restructuring.
• Assuming a 10x earning for SKT's core business, Sanghyun says “we may be looking at about 25% upside potential for SKT from the current price level.”

(link to insight: SKT Split-Up Is Really Imminent - Likely Scenario & Price Upside Analysis)

Lotte Shopping Co (023530 KS)(Mkt Cap: $6.8bn; Liquidity: $25.9mn)

In his most recent iteration of the Lotte Group restructuring discussion, Sanghyun discussed Lotte Holdco's estimated net asset value with some real-world discounts.

• Sanghyun’s upper-end NAV estimation (₩5.801tril) is pretty much in line with the total intrinsic value of ₩5.782tril appraised by the external appraisal firm. Assigning a 30-40% discount, Lotte Holdco's NAV lies somewhere between ₩4.5-5.0tril, which also appears to be what the market consensus is.
• Officially, Lotte isn't discussing the total cost of appraisal rights. Reportedly there is no 'significant' shareholder other than Shin Dong-ju exercising the rights.

(link to insight: Lotte Group Restructuring Part 8 - Lotte Holdco NAV Estimation)