Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIA Engineering

Last Week in Event SPACE ...

• As expected, Chiyoda Corp (6366 JP) is out of the Nikkei. Unexpectedly, Bandai Namco Holdings (7832 JP) is the replacement.

• Unizo Holdings (3258 JP)'s unilateral and hostile Tender Offer to go from sub 5% to 45% promises to be interesting.

• The Ascott Residence Trust (ART SP) and Ascendas Hospitality Trust (ASCHT SP)'s merger was well telescoped - is Ascendas Real Estate Investment Trust (AREIT SP) next?
• Villa World Ltd (VLW AU)'s agreed Scheme with AVID looks clean; however, Ho Bee Land Ltd (HOBEE SP)'s recent stake increase is odd.

• International investors tend to like these kinds of properties but Health Management Intl (HMI SP) is small and relatively illiquid in the grand scheme of things. Nobody will really miss it.

• Natura's Offer for Avon Products (AVP US) is a beauty but there are Real risks

• If Telford Homes (TEF LN) has accepted its own demise by agreeing to sell itself to Cbre Group Inc A (CBG US) at GBP 3.50/share, someone else could go a little higher.
• Rumours circulate on Sia Engineering (SIE SP)'s privatisation by Singapore Airlines (SIA SP).
• Plus, other events, CCASS movements and Mood Spins.

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

Chiyoda Corp (6366 JP) (Mkt Cap: $729mn; Liquidity: $15mn)

Travis Lundy calculated the total shares to be sold at 48-50m accounting for 20% of outstanding and 30% of float in Chiyoda's upcoming removal from the Nikkei (and now confirmed - see Travis insight below) and Topix indexes, and referenced the exclusion trades resulted in Toshiba Corp (6502 JP) falling 24% and Sharp Corp (6753 JP) falling 31%. But Mio Kato, CFA feels that the company's situation could skew the timing compared to what would be "normal".

• Mio believes that it may be more interesting to look for a reversion trade in the event that the stock price declines significantly into the exclusion. He feels that the fall may not be quite as steep as that for Toshiba or Sharp. In both Toshiba and Sharp's cases there was still significant uncertainty surrounding the names as Toshiba had not completed or even announced its capital raise at the time and the sale of its memory subsidiary was still being hotly contested; while in Sharp's case Hon Hai was playing hardball on deal terms.
• In contrast, Chiyoda has already secured funding from a very stable and large partner and appears to have kitchen-sinked a lot of assumptions and faces a very bright operational outlook - its problems stem from poor risk management, which Mitsubishi is meant to solve, and not operations.
• In addition, due to Chiyoda's previous operational struggles and write-downs there is already a very significant short base. This could distort the usual timing of the fall in the stock price and the fact that the stock has recovered to just 3.5% below the level prior to more widespread reporting of the exclusion points to this eventuality. It does seem likely that the size of the required sell could push Chiyoda's price down at some point - Mio argues this could happen much closer to the actual event than usual. If borrow is difficult to come by, there could be money to be made on the other side around the turn of the month.

(link to Mio's insight: Chiyoda: Risks to the Index Kick-Out Trade and Potential Volatility at Earnings the Next Day)

Bandai Namco Holdings (7832 JP) (Mkt Cap: $12.6bn; Liquidity: $28mn)

The Nikkei Inc announced its "Changes to the Nikkei Indices" this week which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that Chiyoda Corp (6366 JP)'s yuho (Annual Securities Report) had the company at a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. The Announcement surprised people. As expected, Chiyoda is Out - but Bandai is In. Chiyoda closed down 2.6% on 2mm shares, and Bandai closed limit up +19.3% on 300k shares allocated at the limit on the close.

• There are still something like 50 million shares of Chiyoda to sell. The significant shorts - which are likely well in excess of the 23+ million shares shown and reported - are likely sourcing a lot of their borrow from the shareholders (passive funds) who have to sell. Those shareholders will have to recall their borrow. Earnings come out the day after the exclusion. I would not want to be short that earnings number. Plus read Mio's insight above.
• There should be 27mm shares to buy in Bandai which is about 20% of float. However, if only half the foreigners and only half the individual holders would be willing to sell on a large jump in price in the next few weeks, then the net available to sell is probably closer to 80mm shares and 27mm to buy would be one-third. It's a lot. Once it gets purchased by Nikkei 225 funds, it won't come out anytime soon. This stock is likely to get squeezed.
• Dmg Mori Co Ltd (6141 JP) was flagged by many as a good bet to replace Chiyoda. Since then, roughly 14 million shares of excess volume have traded. If half of that is a real displacement of holdings based on this event, 7mm shares would need to be sold. That is 3% of shares out and 4-5% of float. It is among the larger excess positioning situations in the last five years in the stock. DMG closed -10% on 7.3mm shares in response to the index changes.

(link to Travis's insight: Nikkei 225 - Bandai Namco IN, Chiyoda OUT)

Kcc Corp (002380 KS) (Mkt Cap: $2.2bn; Liquidity: $6mn)

KCC will split itself into two companies in the form of an equity spinoff with KCC the surviving company and KCG the new company. KCC will mainly comprise the B2B business (silicone, paint and varnish); KCG will get the B2C business such as glass and interior. An EGM will be held on Nov 13 and shareholder approval can be obtained with 2/3 of attending votes and 1/3 of shares out. Both companies will be listed - KCC on Jan 21 next year, but KCG's listing date hasn't been fixed.

• Typically, demergers serve to streamline a business. However, the major shareholder retains 40%, which Sanghyun Park considers to be weak. He believes the major shareholder intends to further solidify this controlling stake via a tender, possibly a month after the Jan 21 listing.

(link to Sanghyun's insight: KCC Corp Equity Spinoff: Summary & Mispricing Checkup)

R* Shares CPSE ETF (CPSEBE IN)

The ETF is based on the Nifty CPSE index and currently includes 11 listed Central Public Sector Enterprises, declining to 10 after Rural Electrification (RECL IN) was kicked out this past Friday. The sixth tranche of the ETF is expected to open on July 18 to anchor investors and on July 19 to non-anchor investors. The new units are expected to start trading on July 29. The discount on the ETF will be 3%, opening up arbitrage opportunities to investors.

• The CPSE ETF does not trade big volumes on a regular day. However, there is a huge volume surge following fund offerings as many investors look to flip their allocation back into the market and lock in a profit. The anchor portion was oversubscribed almost 6 times in the last tranche issued in March this year, though the number may be smaller this time with the tighter discount being offered.

• The ETF will need to buy around 63m shares of Indian Oil Corp (IOCL IN) in the market on July 19. Brian Freitas estimates this number since the Government of India can only sell around 64m shares to the ETF as this will take their stake in the company down to 51.5%, the lowest percentage for the stock to remain in the Nifty CPSE index. Given the stock trades around 13m shares a day on average, he sees 4x of excess volume and expect the stock to rally in the lead up to July 19 and see buying over the day on July 19.

links to Brian's insights:
The CPSE ETF Arb Is Back, but Tighter!
India - NIFTY CPSE Index Review.

Unizo Holdings (3258 JP) (Mkt Cap: $913mn; Liquidity: $4mn)

Japan's premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer (commencing this past Friday) to purchase a 40+% stake in real estate and hotel business Unizo to raise its stake from ~4.8% to 45.0%. The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high. But, this is a hostile tender.

• A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan, it is even rarer. This is, however, the second in six months - the first being Itochu Corp (8001 JP)'s tender offer for shares of Descente Ltd (8114 JP). HIS has decided to buy 40% of a company it hadn't talked to. At a 50+% premium. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal.
• Unizo has several possible responses it could give. The right thing to do would be to establish an independent committee immediately. A rights offering might kill the deal. But it would be fair to investors. A White Knight is not unthinkable. Travis expects the odds are pretty good that Unizo does not have a great defense here. That means the Tender likely goes through.
• Unless corporate and financial cross-holders tender, the pro-ration could end up being very high. If crossholders tender, pro-ration goes way down and one is better off just selling everything in the market for a small loss. Travis is bullish that the tender goes through and bullish the profit opportunity. He thinks for the astute arbitrageur, there is a lot of room to play around the ranges here.

(link to Travis's insight: HIS Hostile Tender for Unizo - Fun Ahead!)

Villa World Ltd (VLW AU) (Mkt Cap: $203mn; Liquidity: $1mn)

VLW and AVID have (finally) entered into a Scheme Implementation Agreement at A$2.345/share yesterday, which is a 17.8% premium to the unaffected price of $1.99 on 14 March, and an A$0.115 bump over the initial pitch in March. Any final or special dividend paid on or prior to the implementation of the Scheme will reduce the Offer Price. The key nagging issue is Ho Bee Land Ltd (HOBEE SP).

• Ho Bee, VLW's largest shareholder and JV partner, responded to AVID's proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$2.04/share - and a high of A$2.18/share - lifting its stake to 9.41% on the same day as the initial Offer. Ho Bee further bumped its stake to 10.45% on the 25 March at an average price of A$2.21; and finally, to 11.62% on the 15 April at an average of $2.17. Its overall average in-price is A$1.98/share.
• Would Ho Bee go to such extreme just to extract another 5% from the Offer? Maybe, but it is a little weird. Ho Bee did not buy over $2.23/share.
• On balance, this deal should get up. Pricing appears fair with respect to peers. Ho Bee receives a decent premium to its overall average position. This is also not a material holding for Ho Bee - the 11.62% stake is equivalent to ~2% of its market cap - while it remains directly invested in the Melbourne JV. With a late November/ early December completion, this is trading very tight to terms at 0.6% gross.

(link to my insight: Villa World Greenlights AVID's Offer)

Ascendas Hospitality Trust (ASCHT SP) (Mkt Cap: $844mn; Liquidity: $3mn)

On 3 July, Ascott Residence Trust (ART SP) and ASCHT jointly announced a proposed combination, which would result in the combined entity becoming the largest hospitality trust in the Asia Pacific region, one of the top ten globally, with an asset value of S$7.6bn. It would - using data from the end of June - become the 7th largest trust on the SGX.

• The deal is for Ascott to acquire ASCHT through a Scheme of Arrangement whereby ASCHT unitholders will receive what was - at the announcement - S$1.0868 per ASCHT Stapled Unit. The exact terms are S$0.0543 in cash and 0.7942 Ascott Reit-BT Stapled Units. That is a ratio of 0.836 but if you do the arithmetic, it comes out as a NAV-flat transaction. Neither ASCHT nor ART shareholders "overly benefit" at the expense of the other, but they both benefit from scale lowering future costs.
• The deal is another REIT consolidation to create a LARGER NewREIT. It was also totally obvious, after the Ascendas-Singbridge deal was signed earlier this year, that within the Capitaland group (which meant Temasek was going to own 51% of Capitaland when completed), this was going to happen (even though the deal meant there were no chained transactions for the REITs). It makes one wonder if there is a deal for Ascendas Real Estate Investment Trust (AREIT SP) to come.
• The deal (at the time of the insight) showed a 4.5% spread being long ASCHT and short Ascott, which is slightly wide for a deal of ~five months. However, there is some uncertainty in the distributions. If you own Ascott and are in a position to switch out of Ascott into AREIT, Travis would do so. If you own ASCHT and you like the risk of owning the REIT, you own the right one.

(link to Travis's insight: Ascott & Ascendas Hospitality Merger - Not Unexpected and Should Be Easy)

Dalian Port (Pda) Co Ltd H (2880 HK) (Mkt Cap: $3bn; Liquidity: $1mn)

Back on the 4 June, Dalian Port (Pda) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform. The shareholding structure is a spider's web and understanding the share transfers is probably best done by studying the diagrams in the document and the insight.

• The integration/consolidation process is complicated with local, provincial and central government holdings in port ownership. Further, local governments, which often trumpet their success in tandem with the performance of its port, may be less willing to forego such economic benefits by giving up absolute control.
• China Merchant Holdings already has effective control of Dalian Port (Pda) - (47.31%) direct and 21.05% via Team Able/China Merchants Port (144 HK). The equity transfers forming part of the restructuring are being hived out from one SASAC entity into another SASAC-controlled entity. This should all go through and the unconditional MGO will be triggered, and potentially wrap up in October, provided the ETA completes on the long stop date.
• Dalian Port (Pda) is trading in line with listed Hong Kong ports. You have a (likely) hard floor at $1.01, with expectations of further group restructuring, as the three Liaoning ports are integrated. However, HK port companies are down ~7.% in the past year, similar to Chinese-listed port companies. The sentiment is decidedly downbeat as the trade war creates a less profitable business environment.

(link to my insight: Dalian Port - Rearranging The Deck Chairs)

Health Management Intl (HMI SP) (Mkt Cap: $844mn; Liquidity: $3mn)

The previous Friday, listed regional (Singapore, Malaysia, Indonesia) private healthcare provider HMI announced an Implementation Agreement for a privatisation by way of Scheme of Arrangement whereby private equity fund EQT would acquire HMI for S$0.73/share in cash or one share of the Acquirer. That price is a 25-30% premium to the 1, 3, 6, and 12-month VWAPs prior to the announcement and a 14% premium to the last "undisturbed" trading day.

• It is not overly generous. The premium is small, and the forecast Next 12 Month EV/EBITDA multiple at 17+x is OK but compared to the other private hospital operators out there in Asia it is not overwhelmingly high-priced. It seems a bit of a stretch to see someone come over the top when this has been negotiated. However, if one asked me whether the likelihood of bump or deal failure is more likely, Travis would tilt towards bump, but it would be just a kiss.
• It takes 75% of the 39% not owned by NSI and "concert parties" to get this done, but the 2018 Annual Report showed that 89.75% of the shareholders (i.e. 83.2% or so of the possible Scheme Shareholders) owned more than 1,000,000 shares. The top 40 shareholders determine the outcome of this deal as long as the rest generally are split 51/49 or better. It is difficult to see this one getting knocked down.
• Travis expects the timeline of this deal is about 4 months plus perhaps a week. That means at S$0.72 the gross spread at 1.39% gets you an annualised spread of about 4.15%. At S$0.715, the gross spread is 2.10% (before comms, etc) so 4 months is 6+% annualised. The trade here is to get queue priority at S$0.715.

(link to Travis's insight: Health Management Int'l Privatisation - Easy Peasy)

Briefly ...

Harbin Electric Co Ltd H (1133 HK) this week announced there will be no further extension of its Offer which closes on the 19 July. By my estimate, tendered shares total 71.86%. The tendering condition is 90%.

Telford Homes (TEF LN) (Mkt Cap: $335mn; Liquidity: $1mn)

On July 3rd, US-based commercial real estate services company, CBRE Group Inc A (CBG US), announced that they had reached an agreement with the board of London-based residential real estate developer, Telford, to acquire 100% of its shares by way of a Scheme of Arrangement at a price of GBP3.50/ share. The offer values the target at a market cap of GBP 265mn.

• While the Offer Price translates to premia of 11.1%, 14.3%, and 21.3% to the undisturbed price, 1-month VWAP and 3-month VWAP respectively, it remains 3.4% lower than the 1-year VWAP of Telford shares. Furthermore, the offer price also translates to discounts of 28.8% and 38.8% to the stock's 1-year and 2-year highs respectively.
• The company appears to have confidence its current build-plan and will come through on budget and so after a couple of project delays at the end of this past year, earnings will rebound and march higher. The few analysts who cover the stock are less bullish this year, but it appears they expect the company to meet its 2020 targets a year or two later. 8x EPS and 1.0x book seem quite low. It is below the mean of the selected comps.
• If Travis had to bet right now, it's 50/50 it does not get done. Brexit worries could get this over the line but he expects there are some unhappy shareholders. He is not sure there is enough time to get a competitor in there to see the price lifted. The deal timeline is very short. The indicative timeline suggests the Target Scheme Meeting could be in just four weeks.
  

(link to Travis's insight: Telford Homes Takeout - A Disappointing End?)

Avon Products (AVP US) (Mkt Cap: $1.8bn; Liquidity: $41mn)

On May 22, 2019, Avon announced that it had entered into a merger agreement to be acquired in an all-stock transaction by Brazilian Holding Company Natura & Co (NATUR3 BZ). Natura will exchange 0.30 of its shares for each AVP share on a fixed exchange ratio basis, currently valuing AVP at ~US$2 bn. The merger agreement deadline is set for July 22, 2020. On completion of the merger, NATU3 shareholders will own 76% of the combination with AVP shareholders owning 24%. The transaction catapults NATU3 to becoming the world’s sixth largest consumer goods company.

• Natura is paying ~10x consensus 2019 EBITDA for standalone AVP which is reasonable in comparison to prevailing peer group multiples averaging 17x and compares with Natura’s own standalone valuation multiple of ~14x.
• The transaction could attract particular scrutiny from the antitrust authorities in Brazil, which represents the single largest market for both Natura and AVP. According to data from Euromonitor, Natura maintains a commanding lead in Brazil’s direct sales market for cosmetics with an estimated 31% market share followed by a ~ 16% share for AVP. That being said, the direct sales market is based around independent consultants/reps, many of whom already offer both Natura and Avon products in Brazil.
• The double-digits merger spread that prevails (14% at the time of the insight) could offer a lucrative opportunity for arbs. The complicating factor is that Natura is listed on the Brazilian Stock exchange (B3) and denominated in an historically volatile currency, the Brazilian Real, while AVP shares trade on the NYSE in US$. As some AVP shareholders may not want to own or are restricted from owning shares that trade on a non-US exchange, Natura will offer AVP shareholders the option to receive Natura shares in the form of Level-II ADRs to be traded on the NYSE or shares listed on B3. Natura does not currently have an ADR in issue.

(link to Robert Sassoon's insight: MergerTalk: Natura & Co/Avon Products -"Ding Dong, The Avon Spread Calling")

Singapore Airlines (SIA SP) / Sia Engineering (SIE SP)

SIE gained 15% the previous week, rekindling privatisation talks by SIA. Despite the share price increase, SIE trades around November 2009 levels. SIE is not aware of any reasons for the jump. The stub is not terribly exciting with SIE accounting for 18% and 22% of NAV and market cap, and barely makes the grade with SIE trading ~US$1mn/day.

• Last year's privatisation of HAECO (44 HK) at $72/share (63.2% premium to last close) by Swire Pacific Ltd Cl A (19 HK) - which held 74.9% prior to the Offer - is not lost on investors. The takeover PER was 35x vs. 19x currently for SIE. Peer comps trade at 24x. SIE only appears fairly valued on an EV/EBITDA metric on account of the earnings from associated companies and JVs.
• SIE is a maintenance, repair & overhaul company providing aircraft & component overhaul, fleet management and line maintenance services. The company also has material stakes in associated companies and JVs which contribute 71% of the Group's profits in FY19, up from 58% in FY18.
• The outcome, should an Offer be pitched, would cost SIA ~S$700mn to take out the shares it does not own. Not chump change, and it might have a slightly negative impact on SIA as it removes one layer of transparency. But given the stub weakness, the focus would be on the SIE arbitrage. I would not want to be short SIE here.

(link to my insight: StubWorld: Just Rumours (For Now) As SIA Engineering Pops)

My share class monitor provides a snapshot of the premium/discounts for 322 share classifications - ADRs, Korean prefs, dual class, Thai (F/L) & A/Hs - around the region.

• For liquid ADRs, Kt Corp Sp Adr (KT US), which trades $10m a day, is at a 1% premium which compares with its annual range of -1%/+13% and one-year average of 6%. For liquid Korean Prefs, Korean Air Lines (003490 KS), which trades $7m a day is at a 41% discount which compares with its annual range of -60%/+23%.
• Three A/H names trade at 100% of their 52-week range percentile including Maanshan Iron & Steel A (600808 CH), Sinopec Shanghai Petroche A (600688 CH) & Guotai Junan Securities (A) (601211 CH), with a further 11 names in the top decile. Both Shenzhen Expressway Company (600548 CH) and China Everbright Bank Co A (601818 CH) are trading in their lowest decile.

(link to my insight: Share Classifications: A Year In Review)

• The SGX has announced a change in the takeovers code. A Delisting Offer now requires 75% of independent shareholders voting for the resolution. The 10% block has been removed. The change takes immediate effect. This is a smart move.

• The AFR is reporting that Bravura Solutions (BVS AU) may reload on Gbst Holdings (GBT AU). That would raise this competitive bidding situation to 3 suitors. This looks like a buy here at $3.58.

• FNZ Group lobs an A$3.65/unit non-binding proposal for Gbst Holdings (GBT AU), above Ss&C Technologies (SSNC US)'s A$3.60/share proposal. GBST's board has resolved to continue to provide exclusive DD to SSNC. FNZ Group lodges an application with Australia's Takeovers Panel citing unacceptable circumstances, and seeks to halt SSNC's exclusive due diligence on GBST.

• Anta Sports Products (2020 HK) is down sharply as Muddy Waters publishes a short report.

• China Power New Energy Development Co (735 HK)'s shareholders approved all resolutions at the Scheme Meeting. The expected effective date is the 19 August.
• Gordan Tang has given an irrevocable undertaking for his 6.3% stake in Ascendas Hospitality Trust (ASCHT SP) for the merger with Ascott Residence Trust (ART SP).

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 - like Madison Holdings Group Ltd (8057 HK) on the 5 July. 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.