Last Week in Event SPACE ...
- Ascendas Real Estate Investment Trust (AREIT SP)'s rights issue is a very well-structured deal. It offers existing shareholders the option to buy units at a discounted price and to monetize the value of that option should they decide not to take it up.
- Unizo Holdings (3258 JP) and belabouring a deceased equine. Any really serious upside from this price pivots off a dramatic change in tax law on real estate, a new boom in Tokyo real estate, or a completely hostile bid. The first two are unlikely, and none of the bidders so far, nor either of the two large public holders, are actors who could realistically sponsor an attempt at the third.
- Minimal pushback is expected in CITIC's reloaded Offer for Citic Envirotech (CEL SP).
- CK Hutchison Holdings (1 HK) is back to levels last seen before political disruptions began in Hong Kong, and remains attractively priced here with the potential for incremental earnings via the restructuring of its telco ops, and a possible prelude to spin-offs.
- Indofood Sukses Makmur Tbk P (INDF IJ)'s NAV narrows as 80.5%-held Indofood CBP Sukses (ICBP IJ) underperforms; yet INDF remains a cheap(er) proxy into ICBP.
- From a statistical standpoint, expect Oversea Chinese Banking Corp. (OCBC SP) to outperform United Overseas Bank (UOB SP) over the near to medium term.
- Plus, other events, CCASS movements (including IPO lockups) and Mood Spins.
(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)
On 1 November, AREIT announced an S$1.3bn Renounceable Underwritten Rights Issue, issuing 16 rights for every 100 shares held as of Record Date 11 November 2019. The Rights Issue goes to finance the proposed S$1.66bn acquisition of 30 business parks - 28 in the United States and 2 in Singapore. The Rights give rightsholders the option to purchase new AREIT shares at S$2.63/share against S$3.17 at the time of issue. This is a 15% discount to the TERP of S$3.0955.
- Shareholders who had purchased shares before the close of trading on 7 November will receive rights. The shares traded ex-rights (and down sharply) on 8 November. The rights will be listed, and will trade on the market, from November 14 through November 22. The last day for Acceptance of Rights Entitlements is 28 November. Units delivered through Rights Entitlements are expected to be credited and tradeable on 6 December.
- At a 17% discount to then-current trading terms and a 15% discount to Announcement Date TERP for an accretive acquisition in terms of NAV, DPU/Yield, and earnings, this struck Travis Lundy as a no-brainer. When looked at against its large S-REIT peers, it is also a no-brainer. It has above-average liquidity, above-average yield, and a top-notch sponsor. Among S-REITs, it deserves a big piece of anyone's portfolio of large REITs.
- Travis expected AREIT units to trade down slightly into the ex-date of the Rights units on 8 Nov; and expects the Rights to trade expensive to theoretical after the open of trading on 14th November as those who are short AREIT units have to buy back the rights to deliver them to the lenders of their units who would wish to exercise. He expected the rights to trade slightly cheap after this initial flurry of short-covering. If you are an arb, Travis would look to own the borrow starting Nov 8th and then you know what to do.
Unizo Holdings (3258 JP) (Mkt Cap: $1.6bn; Liquidity: $22mn)
After 23 days of discussing what was already on the table and had been on the table for three weeks, and had been rejected for two-plus weeks, Blackstone and UNIZO have not been able to find common ground on Blackstone buying asset-rich UNIZO at a 150% premium to undisturbed (a premium to where the board has agreed a fair DCF value is) and continuing to maintain and sustain and incentivize full employment at UNIZO. So they will 'negotiate' some more.
- It seems reasonably clear UNIZO does not want to be taken over. It also would be difficult for UNIZO to back down from its newly adopted "Basic Policy" just several weeks after having implemented it at management, employee, board, and independent committee level.
- How does a company commit to that loudly and clearly in front of someone who has committed over US$1.3bn and another who has committed $1.5bn, rejecting both approaches, and then back down and say "Actually... that 'mechanism' nobody will agree to and which we insisted on in breaking our agreement with Fortress, and rejecting Blackstone, and then rejecting someone else, is, strictly speaking, not really necessary. Our bad." The short answer is it does not.
- The problem here is that it would require someone else to go hostile to oust the board, then oust management, get new management in, and new management would have to entertain a right-sizing and restructuring - most likely at the expense of employees and possibly at the slight inconvenience of tenants. If you think the most likely, if not best, path is a straight line across at JPY 5,000, then when it gets to where it did this week, sell some.
(link to Travis' insight: UNIZO: Belaboring a Deceased Equine)
Citic Envirotech (CEL SP) (Mkt Cap: $1bn; Liquidity: $1mn)
CITIC Group announced a pre-conditional
Exit Offer at S$0.55/share, a 48.6% premium to last close and a 61.9% premium to the one-month VWAP. Those pre-conditions include approvals from NDRC, SAFE and Ministry of Commerce. The Offeror is CITIC - these approvals are a foregone conclusion. The same approvals were sought and received in the
2014/2015 Offer. CEL's presentation indicates these pre-approvals by the week of 23 December and a possible close of the Exit Offer by mid-Jan. The Offer has not been declared final.
- The Exit Offer is conditional on approved by a majority of at least 75% of CEL's shares out. CITIC and concert parties (namely CRF Envirotech with 22.1%) holding 79.1% in CEL must abstain from voting on the Delisting Resolution. I estimate the % of shares out that can vote will be 20.88%, although the announcement doesn't explicitly mention the %.
- As CITIC and concert parties have more than 50% of shares out, the Exit Offer will not be conditional upon a minimum number of acceptances.
- Assuming a payment on the 9 January 2020, this backs out a gross/annualised spread of 2.8%/18% as at the close on Friday. That still looks attractive.
(link to my insight: CITIC Envirotech's Privatisation Offer)
Sotsu Co Ltd (3711 JP) (Mkt Cap: $0.4bn; Liquidity: $1mn)
Travis expected an "easy" Tender Offer in Bandai Namco Holdings (7832 JP)'s "cleanup" of Gundam merchandising IP licensee/owner Sotsu founder Nasu Yuji's 49.2% stake, which then leads to Bandai Namco owning more than two-thirds, which allows Bandai Namco to squeeze out minorities. While not a knock-out price, given the founder is selling out his 49.2%, it was unlikely anyone would come out against it vocally; but RMB Capital, an independent investment advisory firm based in Chicago, has thrown a spanner in the works, and issued a press release voicing its opposition.
- RMB brings up several points. Most of them are to do with the lack of independence and improper procedures to ensure fairness. They have a point here. RMB point out that they think the price is wrong. It probably is. But it has been trading far too cheaply for ten years plus - but a 66% premium, and the fact that the founder's agreement was all that was needed to get the deal done and the stock delisted, the combination of these things made it seemed like one of those deals which just gets done in Japan because it is tough to fight against it.
- The simple truth of the matter is if founder Nasu Yuji decides to tender, this gets done. And Bandai Namco can squeeze out minorities. The more complicated truth here is that the parties involved did not ensure sufficient independence and now are stuck with the independent committees and board having made decisions which were hastily or ill-thought-out. That makes them more liable to get a bad result in an Appraisal Rights case.
- THE TRADE: On margin, Travis was a buyer at ¥3240, however briefly it was there. Now at just over terms, he would be more of a buyer. It would behoove Bandai and Sotsu to get the IC to conduct an accelerated valuation and get a legal opinion done by a new lawyer, address the conflict issues, and then come out with a 10% higher Tender Offer Price so Bandai Namco can show the world it has done its penance. If they do not, they run the risk that someone takes them to the cleaners and their name gets dragged through the mud. The extra money is small in the grand scheme of things.
- THE COUNTER: It is not cheap to run an appraisal rights case.
(link to Travis' insight: Gundam Gets Jiggy - A Voice Cries "Chotto Matte")
Panoramic Resources (PAN AU) (Mkt Cap: $0.2bn; Liquidity: $1mn)
After a "number of unsuccessful attempts" to engage PAN's board in talks on a change of control, Independence Group Nl (IGO AU) has gone hostile with an off-market scrip bid. IGOs Offer of 1 IGO share for every 13 PAN shares held implied an Offer price of A$0.476/share for each Panoramic share, a 42% premium to the closing price of PAN shares on Nov 1, and an equity value of about A$312mn. The Offer is subject to operational due diligence. IGO holds 24.9mn shares, or about 3.8% of PAN. This is not a 'done deal' because as to date there has been no official engagement with the PAN board, and the deal requires operational due diligence, permission for which may not be forthcoming
- PAN, and its key asset, the Savannah nickel-copper-cobalt mine in the Kimberley region of Western Australia, is an attractive bolt-on to IGO as it asserts its dominance in the Australian nickel market and in global nickel sulphide production. And PAN shareholders are afforded the option of rolling over their shares into an enlarged dominant player. IGO have a proven track record as a mine operator - that mining expertise is highlighted by the development of the Nova deposit in Western Australia through to commercial production within five years of discovery
- PAN has struggled with the Savannah re-start which has been dilutive to investors. That slower than previous forecast ramp-up has recently seen Board and Management changes - the non-executive chairman, managing director and CFO all recently resigned - suggesting PAN is vulnerable to a takeover.
- Regardless, Zeta has taken up its entitlements twice this year, and the appointment of Sullivan as PAN's Chairman - and who currently serves as Zeta's non-executive chairman - suggests it is unlikely IGO will get to 100% under the current terms. But IGO will be happy to emerge as the controlling shareholder (>50%).
- UPDATE: Zeta has announced it does not intend to accept IGO's "highly conditional" Offer for PAN.
(link to my insight: Independence's Hostile Offer For Panoramic)
ZOZO Inc (3092 JP) (Mkt Cap: $7.1bn; Liquidity: $140mn)
The Partial Tender Offer announcement at ¥2620/share, where Z Holdings (4689 JP) was going to try and buy 50.1% of ZOZO, with founder and former CEO Yusaku Maezawa agreeing to tender 92,726,600 shares to get them most of the way to a minimum of 101,968,591 shares, on their way to the goal of 152,952,900 shares (50.1%) was made when the shares were trading at ¥2166. Since then, TOPIX has done well. The TOPIX Retail Sector Index has done well. Internet and "newer" retailing names have done less well.
- As the market price continues to rise closer to the Tender Offer Price, expect-able pro-ration rates decline. As people who paid up for borrow early are desperate to monetize it, they look at the remaining 2+% spread and the lack of volatility on the name and the market and increase their long. That increases their gross risk and the risk of residual risk size vs remaining float.
- It is not clear how much arbs have bought to tender. Travis would suggest it is in the 40-60mm share range based on traded volume, available borrow and increase in borrowings, an estimate of recall risk, release of guaranteed take-no-action borrow, and expect-able pro-ration ranges. As we get closer, as gross risk goes up and gross residual risk vs future float goes up, the risk of actives changing their decision does too. This increases the potential volatility of pro-ration expectations.
- RISKS: If would-be short-tenderers decide not to play in this because they got squeezed on FamilyMart last year, and Descente this year, and watched Don Quijote move beyond the tender price and not get done, and still outperform the sector by 40% over the next 6+mos, and long-only active investors decide they will take their chances with Yahoo Japan/Z-led restructuring and expansion efforts, pro-ration could be very high.
- Travis is bearish the risk-reward of putting on new positions at the time of his insight (JPY 2565), even with borrow. Non-guaranteed borrow is easier if someone has returned some. One is taking a lot of recall risk on non-guaranteed borrow, and the edge you have of using Guaranteed Take-No-Action borrow bought at ¥80 is not great when the spread is only ¥60. Such is the nature of being short gamma, but that is why we trade these as if we are long gamma.
(link to Travis' insight: ZOZO: Approaching the Horns of a Risk Dilemma)
Springland International Holdings (1700 HK) (Mkt Cap: $0.5bn; Liquidity: $1mn)
PRC department stores and supermarket operator Springland has received a privatization Offer by way of a Scheme at $2.30, a 63.1% premium to last close. The Offeror is Chen Jiangqiuang, founder and executive director of Springland, holding 73.22%. Netting off 1.18% held by concert parties, the total number of Scheme Shares held by the Independent Shareholders is 25.59%, or a blocking stake at the Scheme Meeting is 2.559%. The headcount test is in force as Springland is incorporated in Cayman Islands. The Cancellation Price is final.
- There has been no shortage of takeovers in this space in recent years, although not all were successful, including the recent (failed) Offer for New World Dept Store China (825 HK)in 2017. The dynamics of the industry have changed dramatically in recent years, leading to a steady decline in the takeover metrics. I recommend reading Pranav Rao's insight NWDS China: Retail Takeout for an overview of those market dynamics and the key players.
- Two shareholders (IVA and Fidelity) each have sufficient shares to vote down the Scheme. I doubt this will occur. IVA has been steadily decreasing its position over the last year; and Fidelity has not materially added or changed its holding since 2Q17.
- Given a four-year high Offer price - optically, the high watermark for where shares traded in May last year - together with a punchy premium, this deal looks geared to complete. Currently trading a gross/annualised return of 7.4%/27.0%. I'd take those odds.
Sanyo Chemical Industries (4471 JP) / Nippon Shokubai (4114 JP)
On the 29 May, when SanyoChem and Shokubai announced an intention to merge, the SanyoChem ratio at the time was about 0.8313 and it immediately jumped, reaching 0.862 within a week. The ratio has climbed back to 0.7856 as of 1 November (when SanyoChem announced earnings). That ratio is slightly lower than at announcement date, but slightly in excess of the average of announcement date, 1mo average, and 3mo average as of announcement date, but the fundamentals favour SanyoChem both on a historical run-rate and on March 2020 forecasts.
- Based on a 5-year average EBITDA, against current adjusted EV/EBITDA, the SanyoChem/Nippon Shokubai ratio should favour SanyoChem by a further 24%. On a March 2020 EV/EBITDA basis, 36%. On a March 2020 PER basis, 22%.
- The potential downside to a ratio might be the average of at-announcement, 1mo, and 3mo averages as of announcement, which would have been 0.776 or a bit more than 1% below the current ratio. The Risk/Reward here seems to skew upward.
- The original announcement suggested an announcement by end-December. That would suggest an announcement will not be forthcoming with Shokubai earnings on 13 Nov. Travis thinks SanyoChem has upside vs Shokubai from here when the two companies set their ratio. He thinks Nippon Shokubai needs this deal more than Sanyo Chem does (for now) and they have spoken of this deal in terms of "equals."
- Subsequent to the insight, Nippon Shokubai came out with earnings below the lowest estimate for Q2. Not a good look there and this suggests the ratio has perhaps even a little more upside.
(link to Travis' insight: Sanyo Chem & Nippon Shokubai - Fundamentals Still Favor SanyoChem)
Briefly ...
Brian Freitas discussed 4 buybacks this week - Nikon Corp (7731 JP)'s is for up to 36mm shares (9.2% of shares outstanding excluding Treasury shares) and up to ¥30bn to be conducted between 8 November 2019 and 24 March 2020. The stock will need to fall substantially for the company to buy back the 36m shares. And Kirin Holdings (2503 JP) announced a buyback for up to 60mm shares (6.8% of shares outstanding excluding Treasury shares) and up to ¥100bn to be conducted between 8 November 2019 and 7 November 2020. At the then-current price, the company will be able to buy back around 43.5m shares (4.95% of shares outstanding excluding Treasury shares).
links to Brian's insight:
Nikon (7731 JP) Buyback - BIG, but Smaller Than The Headline.
Kirin Holdings (2503 JP) - Kanpai to the Buyback
Haimarrow Food Service Co Ltd (220630 KS) signed an MOU contract to sell 54.78mn common shares and 1.58mn convertible bond shares of the company to a local Korean private equity firm called KLN Partners for ₩197bn or ₩3,500/share. The current price of Haimarrow Food Service is ₩2,775 a 26.1% premium to the undisturbed price. In Douglas Kim's view, he believes there is a good chance that this M&A deal gets closed in the next few weeks and should have a positive impact on Haimarrow's stock price. (link to Douglas' insight: Korea M&A Spotlight: A Buyout of Haimarrow Food Service)
CK Hutchison Holdings (1 HK) / CK Infrastructure Holdings (1038 HK)
CKH is back to levels last seen before political disruptions began in Hong Kong. I estimated the discount to NAV at 40%, bang in line with its 12-month average. There is always the sentiment wild card, however, Hong Kong accounts for ~3%/1% of CKH's EBITDA/EBIT. For Brexit concerns, ~22% of EBITDA in 1H19 was sourced from the UK, the bulk of which is from regulated asset investments, with the remainder from steady, less-cyclical segments such as telcos.
- CKH announced in its interim results the consolidation of all its European and HK/Macau telco assets - to be called CK Hutchison Group Telecom Holdings (CKHT) - with a view to improving efficiency and reducing financing cost. Separately, CK Hutchison Networks (CKHN) will be set up to house 28,500 tower assets across Europe, making it the fourth-largest telco tower company in Europe. Vodafone's shares gained 10% in late July after it announced plans to spin-off its European tower business.
- Of note, I have booked the telco assets at ~6x EV/EBITDA in my NAV, whereas European tower peers trade 15x+, providing considerable scope for an up-rating should CKHN be listed.
- CKH looks attractively priced at 7.3x forward PE and a 40% discount to NAV. Consolidating its European and HK/Macau telco ops should boost operational efficiency together with a reduction in financing costs. And although there are no immediate plans to list CKHT or CKHN, management guided these structures provide flexibility for various options.
(link to my insight: StubWorld: CK Hutchison Recovering. More To Come)
Indofood Sukses Makmur Tbk P (INDF IJ) / Indofood CBP Sukses (ICBP IJ)
I estimated the discount to NAV at 35% against a one-year average of ~38%, with the spread having narrowed on ICBP's recent underperformance. Arguably 35% is wide for what is largely a single stock Holdco. ICBP, the consumer-branded-products-arm of INDF, accounts for 52% and 62% of INDF's revenue and profit; and as viewed in my NAV above, 90% of its gross asset value.
- INDF has not only bounced off a 12-month NAV discount low, which occurred in early October, but it has also bounced off its long-term (10+ years) implied stub per share lows.
- The Trade? With INDF trading at 14x PER - against a long-term average of 18x, and almost half that of ICBP's, INDF provides an inexpensive exposure to ICBP growth prospects.
- The consensus target price for INDF has increased by 8.6% since the beginning of the year versus 21% of ICBP. I'd recommend a long/short on a dollar-neutral basis. Potentially investors are making the switch to the INDF; however, I don't see any noticeable shift in shareholder stakes or material changes in daily volume. The pushback? Forward guidance indicates net profit for the stub ops will continue its sequential downward trend, and is estimated to turn negative in FY19.
(link to my insight: StubWorld: Switching Into Indofood Sukses?)
Briefly ...
Sanghyun Park flagged the Hankook Technology Group (000240 KS) stub, where the NAV discount is touching a one-year low. Hankook Tire Stub: Price Ratio Nearing 1Y Low, Ripe for Stub Trade.
Following a month of market speculation, Fitbit and Alphabet Inc Cl C (GOOG US) announced they had reached a definitive agreement for Google to acquire all the shares of Fitbit in an all-cash deal that valued the company at a fully diluted equity value of approximately US$2.1bn. The Offer Price is double the undisturbed closing price of US$3.67 on September 19th, the day before the first Reuters report appeared on a possible sale of Fitbit. The Deal has been approved by the Target Board and is conditional on receiving Target shareholder approval and antitrust approvals. The transaction is expected to close in 2020.
- Google, whose presence in the fast-growing wearables market has so far been limited to providing their operating system Wear OS to other watch makers, has long been interested in entering the smartwatch business to expand its gadget ecosystem to keep up with rivals. Having not launched a pixel-branded smartwatch yet, Google will be able to make a more straightforward entry into the wearables market with a proven brand name who already holds a sizeable market share. Fitbit needs scale. Google needs product.
- All executive officers and directors of the group collectively hold 65.7% of Fitbit's total voting power and as a result - obtaining the requisite majority of shareholder votes for this deal will be fairly straightforward. The Offer price is far below Fitbit's 2015 IPO price of US$20.00 and all-time high of US$51.64. The EV/Revenue multiple implied by the Offer Price is also below the estimated mean for its peers.
- Janaghan Jeyakumar, CFA expects the deal to complete unless it gets blocked by antitrust authorities - it may encounter hurdles due to concerns over the transfer of Fitbit's sensitive user health data to Google - in which case Fitbit shareholders will receive a decent compensation. On the other hand, if there is an overbid, there will be a larger gain for Fitbit shareholders.
(link to Janaghan's insight: Google-Fitbit Deal to Face Significant Antitrust Scrutiny)
Xerox Corp (XRX US) (Mkt Cap: $15bn; Liquidity: $249mn)
Xerox, one of the largest sellers of photocopiers, is in talks to buy Hewlett Packard Co (HPQ US), one of the largest makers of printers. Xerox has a market capitalisation of USD8.2bn compared to HP's USD28.7bn. According to CNBC, Xerox’s offer to buy HP comes in at US$22/share, consisting of 77% cash and 23% stock in a US$33bn deal. Xerox will have to fund about US$22bn through debt financing. Shifara Samsudeen's cashflow and balance sheet analysis on the combined entity reveals that it will take c. 5.5 years to pay off the debt (existing loans plus the new borrowings to fund the deal) using the free cashflows of both HP and Xerox. At US$22/share, the deal implies a PE of about 7.7x for HP (based on TTM EPS).
- HP has been struggling with declining demand for its printing business which is the core profit generator for the company due to digitisation. At the same time, Xerox has been facing the same fate too for its copy machines and the company’s revenues and profits have been declining over the past couple of years. What lies ahead for the two companies is not yet known and how the two companies will collectively respond to the declining demand for their core products is yet to be announced by the two companies.
(link to Shifara's insight: Xerox to Acquire HP Inc: Two Fading Stars to Unite)
UOB has outperformed OCBC by 12%, at the time of Brian's insight over the last year. The price ratio of the stocks is now trading at a five-year high, as is the difference in the Price to Book Value for the stocks.
- From a statistical standpoint, Brian expects OCBC to outperform UOB over the near to medium term. A 6% outperformance would ensure that both stocks trade at the same Price to Book multiple while a 10% outperformance would take the Price to Book ratio back to the mean.
(link to Brian's insight: UOB Vs OCBC - Time for a Reversal?)
MSCI announced the results of the November 2019 Semi-Annual Index Review on Friday. The constituent changes will be effective from 27 November and the rebalancing trades will need to be done at the close on 26 November.
OTHER M&A AND EVENT UPDATES
- Erm Power Ltd (EPW AU)'s shareholders overwhelmingly voted in favour of the Scheme. The Scheme is expected to be implemented on the 29 November.
- Pacific Energy (PEA AU)'s shareholders overwhelmingly voted in favour of the Scheme. The Scheme is expected to be implemented on the 2 December.
Aveo Group (AOG AU)'s securityholders overwhelmingly have voted in favour of the Scheme. The implementation date is expected to be the 29 November.
Hume has added to its stake in Australian Unity Office Fund (AOF AU) and is now at 9.55%. Hume paid-up A$3.03. No word as to their course of action. AOF wobbles and was down 1.3% on Friday. AOF has received judicial advice from the Supreme Court of Victoria confirming the adjournment of the Scheme Meeting to the 18 November - or such later date.
- Dah Chong Hong (1828 HK) delays the Scheme Document to the 3 December from the 10 November.
- Allianz Global Investors, which had been the #2 shareholder of OSRAM Licht AG (OSR GR) behind ams AG (AMS SW) announced that it had reduced its position in Osram from 9.36% to 5.01%. At the €35 Offer Price of Bain and Carlyle, they were "uninclined to sell". Now we know where they might be more so inclined. Separately, Bafin has approved a new ams deal for Osram.
- Humbly, I was wrong on both fronts - the Offer for SVI Pcl (SVI TB) did get up (26.83% tendered, above the 19.29% acceptance condition); but more importantly, shares popped 7.4% on the 4 Nov, then a further 6% on the 7 Nov. Short-covering? I'm not sure. Shares closed the week at Bt5.20, still ~7.2% above the Offer Price of Bt4.85.
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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.