Last Week in Event SPACE - Clariant, KBANK, Innox, Shun Tak

This week, is Clariant AG (CLN VX) the one being hunted?; Toshiba Corp (6502 JP)'s discombobulated relationship with Western Digital Corp (WDC US) endures; Kasikornbank Pcl (KBANK TB) (just) tests the water in Indonesia; Innox Corp (088390 KS) jumps on the holdco bandwagon, and is Shun Tak Holdings Ltd (242 HK) being shunned as casino stocks break out?

(Market cap and liquidity noted below are in US$. Liquidity is assessed on a 3-month average)

M&A

Clariant AG (CLN VX) (Mkt Cap: $8bn; Liquidity: $69.8mn)

• The minimal premium for Huntsman Corp (HUN US) from Clariant met with a cool reception, yet the deal spread has widened on the prospect of an interloper making a tilt for Clariant - a not unreasonable prospect given the rampant M&A in the chemicals space.
  • Roderick Manalo explores possible suitors including Evonik Industries AG (EVK GR) and BASF SE (BAS GR). The pushback on a gatecrasher emerging are considerable:
  • Evonik paid US$3.8bn for Air Products & Chemicals, Inc. (APD US) in Jan this year and is set to close on a US$630mn purchase of JM Huber (privately held). Evonik has been a stickler on maintaining its investment grade rating. Clariant shares are up (~30% since mid-April) in response to activism and the Huntmans deal. Any counter offer would have to come at a decent premium. And given the no-solicitation clause, a third party needs to do so without conducting due diligence.
  • BASF maybe and certainly has the financial clout to do so, but since taking on the CEO role, Kurt Bock has been “cautious and averse to overpaying". The exception was the $3.2bn acquisition of Chemetall last year.
  • Roderick concludes a disruption to the Clariant/Huntsman deal is unlikely.

(Link to the insight: Huntsman / Clariant: Is a Counterbid for Clariant Likely?)

Dunlop Sports Co Ltd (7825 JP) (Mkt Cap: $375mn; Liquidity: $0.7mn)

• Travis Lundy discussed the merger of Sumitomo Rubber Industries (5110 JP) and its 60.37% subsidiary Dunlop Sports Co Ltd (7825 JP).
  • It will not be difficult for SRI to get 66.7% with SRI, Togo Sangyo, and the Dunlop employees' Stockholding Plan owning 64%.
  • It’s a ”done deal”. And a short-dated one, with the merger expected to take place on 1st Jan 2018. Expect the deal spread to trade tight.

(Link to the insight: Dunlop Sports Merger with Parent Sumitomo Rubber)

Event

Kasikornbank Pcl (KBANK TB) (Mkt Cap: $14.7bn; Liquidity: $31mn)

• Athaporn Arayasantiparb, CFA discussed KBANK paying US$20mn - or 2.5x P/B - for a 10% stake in Indonesia’s Maspion bank.
  • Indonesia will be a more difficult market to crack compared to frontier (& underbanked) market like Cambodia, where BAY recently bought micro-lender.
  • But perhaps this exercise is all about KBANK getting a toehold in Indonesia and elevating its foreign banking expertise, a business in which KBANK has enjoyed only limited success in Yunnan (China). And Maspion’s NPLs accounting for < 1% of total assets is a good thing. Especially if it all goes wrong.
  • KBANK popped over Bt200 on the news (Bt204 at the close Friday), which Athaporn believes is unjustified on the back of this deal. For larger banks, he prefers Siam Commercial Bank Pub Co (SCB TB) given its better “risk-return trade off and profitability”. And Bank Of Ayudhya Pcl (BAY TB) & LH Bank for mid-tier banks as these two will be supported by strategic foreign investors (Mitsubishi-UFJ and China Trust Bank respectively), which can bring “capital, technology, and new financial products to their subsidiaries.”

(Link to the insight: Sathorn Series B: KBANK Goes to Indonesia)

LG Electronics Inc (066570 KS)(Mkt Cap: $12.2bn; Liquidity: $82mn)

• Investors are receptive to LG Electronics Inc (066570 KS)'s possible acquisition of Austria's vehicle headlamp maker ZKW . LGE hasn't officially denied or confirmed a deal, although various media sources indicate LG is the front-running bidder.
  • Reportedly Panasonic Corp (6752 JP) was in discussion last year with a price tag of US$885mn. LG has the funds to cover the current estimated asking price of $1.2bn.
  • Why ZKW? Sanghyun Park believes LGE is continually looking to refine/perfect its ADAS (Advanced Driver Assistance Systems), the jewel of LGE’s loss-making Vehicle Component division. “At the center of ADAS stands highly sophisticated cameras that can visually recognize what is going in front of a car. This is exactly why LGE has been shopping for vehicle headlamp makers around the world.”
  • It may be premature to draw conclusions, however, the market is highly receptive that “LGE may have finally found a suitable M&A target in many years.”

(Link to the insight: Summary of LG Electronics ZKW Acquisition)

Toshiba Corp (6502 JP) (Mkt Cap: $11.7bn; Liquidity: $183mn)

• Andrew Lu discussed the on again/off again negotiations between Toshiba and WDC over the US$17-18bn chip business.
  • Pivoting off a Reuters article, WDC's “financial participation in the deal is limited to 150 billion yen ($1.4 billion) through convertible bonds, and its stake will be no more than a third when those bonds are converted.”
  • Of interest is the Yen300bn to be funded by “other companies” with Andrew believes will be taken by some Japanese companies to provide financing for Toshiba to keep more TMC shares or by Toshiba supply-chain partners like Kingston and Phison Electronics Corp (8299 TT). Along with INCJ Inc. and Development Bank of Japan's JPY$300bn (16%) investment each, Andrew believes Toshiba is trying to secure more equity and debt financing from Japanese companies and banks to lock in big NAND flash profits for domestic vendors.
  • No deal was sealed by end-August and latest news from Reuters is that WDC's CEO Steve Milligan regrets the litigation and disputes with Toshiba. Milligan said WDC will also address Apple's concerns. Apple is a key customer of Toshiba's memory chops and is also understood to have joined Bain's consortium bidding for the chip unit.

(Link to the insight: Toshiba Memory Corp Sales: WD/KKR In, Bain/Hynix Out?)

Lotte Shopping Co (023530 KS) (Mkt Cap: $6.8bn; Liquidity: $22.6mn)

• Sang discussed the big EGM for the divestiture/merger plan.
  • All four EGMs passed with 82.2%, 88.6%, 87.9% and 96% of Lotte Shopping Co (023530 KS) , Lotte Chilsung Beverage Co (005300 KS), Lotte Confectionery Co Ltd (004990 KS) and Lotte Food Co Ltd (002270 KS)'s shareholders, respectively, approving the plan.

(Link to the insight: Lotte Group Restructuring Part 4 - Estimations on Voting Results at Aug 29 EGM)

Oi SA (OIBR4 BZ) (Mkt Cap: $1.1bn; Liquidity: $1.8mn)

• CTFN discusses Brazilian telco Oi, which has filed for in-court reorganisation. The company is facing R$64bn (US$20bn) in claims from 55,000 creditors, R$11bn (US$3.5bn) of which is owed to telecoms regulator, Anatel.
  • Anatel is hesitant to take any steps so as not be seen to be giving any preferential treatment. The word on the street is that “not only (is Oi) unable to repay the fines, but also that is not capable of generating enough returns to maintain its quality of service and sustain the business in the long term.”
  • Earlier in August, Oi announced a R$8bn (US$2.5bn) capital raising to shore up its balance sheet. A creditors meeting is expected in September, perhaps October. An alternative restructuring plan involving the conversion of a high percentage of debt into equity is now off the table.
  • In essence, Oi is seeking to stave off bankruptcy “in one way or another,” given that the "collapse of a former national champion would have devastating consequences for the Brazilian economy."
  • This is a thoughtful read, which my briefing cannot fully capture. I recommend reading the insight via the link below.

(Link to the insight: Oi Struggles with Restructuring Plans)

Stubs/Holdcos

Shun Tak Holdings Ltd (242 HK) (Mkt Cap: $1.3bn; Liquidity: $3.9mn)

• A breakout in many of the Macau names (August casino revs increased 20.4% yoy vs. consensus of 18.5%) places Shun Tak back in the spotlight. Shun Tak is down around 15% from its June peak, which occurred after a remarkable run up that month (44%) premised on possible restructuring or activism rumours. Pranav Rao discussed these narratives in Shun Tak Holdings: A Roll of the Dice.

• SJM Holdings Ltd (880 HK) has underperformed its peers - -8%, 15%, 38% vs. 5%, 26%, 63% - in the past month/6 months/year vs. the peer average. That peer outperformance has been largely driven by Galaxy Entertainment Group Limited (27 HK) and Melco International Development Ltd (200 HK)'s share price performance. Shun Tak has performed in line with gaming peers over the past 6 months and slightly under for the past month
• However, Shun Tak’s indirect 6.2% interest into SJM accounts for ~25% of its market cap and just 9% of its NAV. The bulk of Shun Tak’s NAV centres on development property (71%), which is not exclusively exposed to Macau – around 35% of our development property value relates to a project in Beijing. Pages 42-44 of the 2016 annual report provide a breakdown of the DP pipeline
• Shun Tak may get a sentiment boost as casino revs show signs of a potential recovery; however, there are other quantitative aspects of the NAV, specifically development property prospects, that need to be taken into account before concluding a bullish tilt.

Innox Corp (088390 KS) (Mkt Cap: $66.8mn; Liquidity: $16.1mn)

• Pre-empting the Moon administration before it introduces harsher holdco conversion rules, Sanghyun discussed Innox Corp (088390 KS) tender offer for Innox Advanced Materials Co.,Ltd. (272290 KS).
  • If successful, the tender will raise Innox’s take in IAM to 34.4%, exceeding the 20% threshold to qualify as a holdco. If the target shares aren’t met, all subscribed shares will be swapped. If exceeding the targeted shares, subscribed shares will be swapped on a pro-rata basis.
  • The offer mirrors that of Hyundai Robotics (267250 KS), but with less baggage, with just one target company while the holdco has immaterial operations.
  • The target shares equate to 24.37% of issued shares and the major shareholder, who is expected to tender, has 24.47%. It appears a slam dunk but Sanghyun cautions that given the way Robotics played out, there still could be surprises before the tender offer price is confirmed on 26 September. Sanghyun estimates a tentative price of ₩21,525 for Innox vs. its last close of ₩20,200.

(Link to the insight: Innox Corp’s Tender Offer Summary)