Last Week in Event SPACE - CJ Cheiljedang, Japan Display, Westfield, Nissan

Last week, CJ Cheiljedang Corp (097950 KS) unloads its healthcare ops to Korea Kolmar Co Ltd (161890 KS) et al in Korea's largest M&A YTD; the rumoured end of negotiations to shore up capital for Japan Display Inc (6740 JP)'s OLED tech may not be such a bad thing; Westfield Corp (WFD AU) withholding 2018 guidance runs counter to shoring up shareholder support, but Unibail-Rodamco SE (UL FP) may still rejig its offer; and a Nissan Motor Co Ltd (7201 JP)/ Mitsubishi Motors Corp (7211 JP) merger is one avenue towards Nissan exercising its voting rights in Renault SA (RNO FP). Plus CCASS movements.

CJ Cheiljedang Corp (097950 KS) (Mkt Cap: $4.3bn; Liquidity: $17.7mn)

A consortium led by Korea Kolmar Co Ltd (161890 KS) (including Mirae Asset PE, H&Q Korea, and STIC Investment) has been named the preferred bidder to acquire a 100% stake in CJ Healthcare for ₩1.3tn (US$1.2bn) in an all-cash transaction. This deal is expected to be completed on April 6th, 2018.

• Douglas Kim, who previously wrote about the sale back in early November, considers the acquisition price of 2.5x P/S and a P/E of 28x using 2016 financials, to be relatively fair. Certainly, the market embraced the sale with Kolmar up 26.8% intraday before settling 6.5% up on the day of news and closed the week up 3%. CJ Cheiljedang was up 10% for the week.

(link to Douglas’ insight: Korea Kolmar Consortium Named Preferred Bidder for CJ Healthcare - Biggest M&A Deal in Korea YTD)

SK Discovery Co Ltd (006120 KS) (Mkt Cap: $482mn; Liquidity: $6.5mn)

As expected SK Discovery announced it will do a tender offer to SK Chemicals shareholders to swap their SK Chemicals shares with the Holdco shares. The end-game is for owner Chey Chang-won to increase his shareholding from 18.47% (22.43% if including affiliates) currently to as high as 44.53%.

• The swap price for SK Chemicals is final at ₩110,701. SK Discovery targets a total of 3,500,000 SK Chemicals shares. SK Discovery's price per share is tentatively set at ₩49,316 and will be finalized on March 21. Based on the closing prices for both stocks on Friday, I calculate the actual yield from the swap of 4.79%.
• Typically the major shareholders want weaker prices for SK Discovery (Holdco) and stronger prices for SK Chemicals (target entity) so that they can get more favourable swap ratios, according to Sanghyun Park. However, as witnessed in several key demerger/Holdco stocks over the last two years in Korea, things don’t always pan out this way.

(link to Sanghyun’s insight: SK Discovery & SK Chemicals Tender Offer Summary)

Japan Display Inc (6740 JP) (Mkt Cap: $1.3bn; Liquidity: $22.6mn)

The poor performance of Apple's iPhone X has allegedly torpedoed the Chinese partners' appetite to utilise JDI's promising OLED manufacturing technology after a Kyodo article suggested that negotiations to secure capital are likely to end without any resolution.

• JDI is now apparently contemplating a third party placement to raise ¥50-100bn in capital from a variety of funds. With a market cap of ¥130bn, this is a significant (40-85%) dilution. However, such a dilution has been well telegraphed. And a shift away from OLED and back towards JDI's strength - LTPS LCD panels - is viewed as positive by Mio Kato.
• Overall, Mio views the no-resolution news to be slightly negative, but believes a large fall in the share price (5-10%) as a buying opportunity.

(link to Mio’s insight: JDI: Equity Finance and Dilution Incoming?)

Hyundai Heavy Industries (009540 KS) (Mkt Cap: $7.1bn; Liquidity: $31.5mn)

Heavy's subscription rights commenced trading on Feb 21, and have held relatively firm while Heavy's actual share price is struggling. Not great for early phase short seller as the higher the subscription rights purchase costs are, the smaller their margins.

• But arb traders were given a lifeline after Heavy said in a regulatory filing earlier this week that its Jan sales were down 36.62% YoY at ₩551.6bn, substantially lower than market expectations.
• As Sanghyun puts it: "The investment sentiments are again quickly changing on this name ... it'd not be too unrealistic for arbitrage hunters to expect a real chance for over subscription, and this explains exactly why we are having this irony that the subscription right price is holding very firm while the actual share price is struggling."

(link to Sanghyun’s insight: Hyundai Heavy Rights Offering - New Arb Trades on First Sub Rights Trade Day)

Westfield Corp (WFD AU) (Mkt Cap: $14.2bn; Liquidity: $84mn)

The significant retracement in the price of Unibail-Rodamco SE (UL FP) since mid-December from €224 to €192 makes the takeover proposal far less compelling and less likely to be approved, as proposed, according to Morningstar. (The offer terms are 0.01844 Unibail-Rodamco shares + plus US$2.67 in cash for each Westfield security). As such Morningstar has reverted to its modeled fair value estimate of A$8.80, suggesting Westfield, which last traded at A8.74, is fairly valued.

• Westfield’s board also garnered no favours earlier this week by opting out of its 2018 guidance, presumably a tactic to shore up support for the expected mid-year vote on the board-endorsed offer from Unibail-Rodamco SE (UL FP). Such a manoeuvre may backfire if investors feel there is something to hide.
• But Unibail's offer is by no means final, with a press release stating its reserves the right to change the terms of the offer.

(link to Morningstar's insight: Unibail’s Takeover Offer Far Less Compelling for Westfield. FVE Falls to AUD 8.80)

Lee Metal Group Ltd (LEE SP) (Mkt Cap: $147mn; Liquidity: $0.2mn)

Subject to the waiver or fulfillment of pre-conditions, Brc Asia Ltd (BRC SP) will make a voluntary conditional offer of S$0.42/share for Lee, around Lee's all-time share price. The VGO carries a minimum acceptance condition of 50% and irrevocables totaling 48.06% have been received.

• The key risk to the deal the Competition Commission of Singapore approval. Both BRC and Lee are predominantly focused on fabrication and manufacturing and my back of the napkin suggest the combined entity may be a significant player in Singapore. Yet with both companies generating multi-year low earnings, consolidation appears necessary.
• Once officially launched, this transaction will be rudimentary, and should comfortably outstrip the 50% acceptance hurdle. It may even reach the 90% compulsory acquisition threshold. I would be a buyer at $0.40-0.41/share.

(link to my insight: Lee Metal: Priced to Steel)

Kansai Urban Banking Corp (8545 JP) (Mkt Cap: $984mn; Liquidity: $0.9mn)

Minato Bank Ltd/The (8543 JP) and Kansai Urban Banking Corp (8545 JP) announced the results of the Partial Tender Offers whereby Resona Holdings Inc (8308 JP) purchased stakes of just over 15% of each bank. The next event on MIAW (most interesting arb in the world), is the delisting of Minato and Kansai Urban at the end of March, and the new listing of Kansai Mirai Financial Group (KMFG) on April 1st.

• What to do? A market cap of ¥330bn (at current prices) will appear on the radar of investors who are not invested. FTSE inclusion would also give it a boost. And there’s the potential for the new bank to get analyst coverage.
• Management guide a doubling of business profit in the next five years and considerable synergies exacted. The bank is not overly expensive from a PER standpoint. In the medium-term, Travis Lundy would probably want to own some and buy some on the dips against a peer basket. Stay thirsty.

(link to Travis' insight: Kansai Mirai: Post Tender - Where To From Here?)

LifeHealthcare Group Ltd (LHC AU) (Mkt Cap: $128mn; Liquidity: $0.9mn)

Pacific Equity Partners announced a A$3.785/shareoffer for LHC by way of a scheme, an all-time high price for the company since its 2013 listing, and a 46% premium to the undisturbed price.

• This transaction looks pretty straightforward. A$3.75/share places LHC roughly in synch with peer Paragon Care. Substantial shareholders have been selling down their stakes which suggests reduced scheme vote risk. FIRB doesn’t appear an issue. Pranav Rao would be willing to pay up to AUD 3.65 for a net annualized return of 8.4%.

(link to Pranav's insight: LifeHealthcare Group: PEP Privatizes)

Tox Free Solutions Ltd (TOX AU) (Mkt Cap: $525mn; Liquidity: $3mn)

Morningstar raised its fair value to A$3.50 to reflect the A$3.45 per share all-cash offer from Cleanaway Waste Management Limited (CWY AU), plus the A$0.05 fully franked dividend payable March 16. Tox will also pay an unspecified offer-reducing special dividend prior to transaction close in May, a payment designed to distribute accumulated franking credits estimated at ~A$37mn. Do check your tax situation as to the value of those credits.

(link to Morningstar's insight: Raising FVE of No-Moat Tox Free Solutions to AUD 3.50 Based on Value of Cash Offer)

Renault SA (RNO FP) / Nissan Motor Co Ltd (7201 JP)

There is a clear case for Nissan to sell its stake in Renault if it cannot exercise voting rights. But such action would run counter to the Renault/Nissan/ Mitsubishi Motors Corp (7211 JP)'s Alliance/integration. Renault doesn’t have the cash to go hostile and Japan would not agree to a closer relationship if the French government remained a shareholder. A Renault selldown in Nissan below 40% is one avenue, and there is adequate support for doing so as the Franch govt has recouped its stake in Renault via dividends.

• Alternatively, Nissan and Mitsubishi merge at their last traded prices, diluting Renault below 40%, enabling Nissan's shares in Renault to become votable.
• A full-scale Renault/Nissan merger appears unworkable. A merger between Nissan and Mitsubishi Motors makes more sense, with MitCorp getting a bigger stake in the combined entity, before a deal between Renault and Nissan takes place. To this, with Renault trading at a 42% discount to NAV against a 12-month average of 45%, you could tilt bullish on the Japanese legs of the three-way Alliance.

links to:
Travis’ insight: Renault/Nissan/Mitsubishi - A Thinkpiece
My abridged wrap of Travis' insight: StubWorld - Set-Up & Unwind Extremes: Renault/Nissan

RENOVA Inc (9519 JP) (Mkt Cap: $323mn; Liquidity: $2.7mn)

The TSE1 inclusion has been well-flagged so there is considerable expectation baked into the recent move and share price. It is not cheap at a May 2018 EV/sales ratio of 6x and 45x PER vs. its only near competitor (Erex Co Ltd (9517 JP)) which trades at 1.1x EV/Sales (Mar 18) and 13x PER.

• However, the inclusion is probably >15% of the existing float. In the very short-term, Travis is bullish the stock. Medium-term, less so. Once TOPIX funds buy, there will be stock borrow and it could get shorted because of its elevated price.

(link to Travis’ insight: Renova (9519 JP) - TOPIX Inclusion Is Well-Flagged. Stock Is Expensive. But May Be Squeezy)

Willplus Holdings Corp (3538 JP)(Mkt Cap: $107mn; Liquidity: $0.5mn)

Willplus is an imported car dealership chain which listed on JASDAQ in March 2016, and TSE2 in September 2017. The inclusion event is around 3% of shares out, but 15% of the float – perhaps more depending on whether Daiwa Asset Management is ever a seller.

• The stock is not overly expensive at <6x EV/EBITDA on a high teens ROE and low teens PER. Niche foreign brand auto sales are a growing segment of overall foreign car sales which are increasing market share in Japan. Overall Travis considers this a decent microcap inclusion event.

(link to Travis’ insight: Willplus (3538 JP) TSE1 Promotion and TOPIX Inclusion)

Avant Corp (3836 JP) (Mkt Cap: $163mn; Liquidity: $0.3mn)

Avant, an accounting/planning/management software purveyor, announced a secondary offering, which including the greenshoe, brings the total deal to 2.25mm shares. That's around 12% of shares outstanding but is an increase in float of about 37%. Avant will also be reassigned to TSE1, triggering an inclusion in the TOPIX index. The inclusion will be at the close of trading April 26, 2018.

• The Offering is quite significant in size - twice the size of the inclusion, however, if it is well-placed, the overhang will be quite limited. If well-placed, the inclusion event could get squeezy.

• It is unlikely that the company will see analyst coverage, but the company has shown itself interested in promoting itself.
• Avant is inexpensive vs its sector despite being smaller. Longer-term, Travis believes it could be acquired - the president still has a large position to sell.

link to Travis’ insights:
Avant (3836 JP) II: TSE1 Promotion and TOPIX Inclusion
Avant in the Offering