Last Week in Event SPACE: Danamon, Kidman, Melco, Naspers, Anadarko, Scout24, Doosan

Last Week in Event SPACE ...

• There was a potential for a short-term fall in Bank Danamon Indonesia (BDMN IJ) based on a sell-down of part of the original MSCI EM tracking position after it was deleted from the index and partly because MUFG needs to sell 1.6% to get to 7.5% float sooner rather than later. The share price fell. Then it fell some more, and MSCI sprung a surprise on us.
• Perhaps viewed independently, yet Wesfarmers Ltd (WES AU)'s tilt for Kidman Resources (KDR AU) does appear a replacement for Lynas Corp Ltd (LYC AU).
• Melco Resorts & Entertainment (MLCO US)'s buyback program may (but should not) account for Melco International Development (200 HK)'s multi-year low implied stub.

• Naspers Ltd (NPN SJ)'s discount to NAV appears to be priced appropriately in response to the proposed Euronext listing.

• Anadarko Petroleum (APC US)'s board needs to extract an improved offer from Chevron Corp (CVX US) to counter the higher competing offer from Occidental Petroleum (OXY US).

• The Offer for Scout24 AG (G24 GR) will probably still get up as Pulver digs its heels in and refuses to bump.

• A detailed overview of Doosan Corp (000150 KS)'s demerger which is scheduled to complete in October.

• 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)

Bank Danamon Indonesia (BDMN IJ) (Mkt Cap: $4.8bn; Liquidity: $2mn)

After a multi-month Merger/Takeover Process which was the culmination of an 18-month three step process for Mitsubishi Ufj Financial (8306 JP) to get to 40% in Danamon then OJK approval to go higher, the legal merger is now (May 1) complete. The completion of the merger triggers three new events in the very-near to medium-term of which investors should be aware.

• There was (or at the time was expected to be) a MSCI sell-down Friday May 3 of indeterminate size - it is not clear how much of the MSCI EM tracker community sold into the deal.
  • HOWEVER .. The NEW News is that MSCI is going to implement the results of its Corporate Events Methodology Consultation. The treatment now looks at limit up/down moves/breaches which suspend trading. If a stock is suspended at limit up/down on Event Day at noon (12:00pm) local time, MSCI will issue a message postponing the event. Do read Travis's insight - the second link below - which delves into what gaming may occur with respect to Danamon.
• There is an Exchange rule sell-down of 1.6+% of shares outstanding sometime in the next two years. Normally it would be expected relatively sooner but because the reduction in float was due to a Mandatory Take Over purchase, the grace period is 2 years by statute.
• There is a National Rule on Mandatory Takeover Residuals to stay listed which means a sell-down to get to 20% float within two years - or perhaps 5 years as one SK contributor mused (but the 5 years is unconfirmed by Travis). This will be like a new IPO or a placement will have to be made to partners.
• Lack of reliable liquidity in any direction, and likely lack of institutional interest to own the shares prior to the future required sell-down by MUFG may make this an unattractive trading bet. It is more of a fundamental bet that you wear because it is cheap.

link to Travis Lundy's insights:
Danamon Deal Done: Index Selling and MUFG Selldown To Come
Danamon Even Downer: MSCI Rule Change Makes For Interestinger Times

Kidman Resources (KDR AU) (Mkt Cap: $529mn; Liquidity: $2mn)

Wesfarmers Ltd (WES AU) has lobbed an indicative non-binding proposal to acquire 100% of Kidman for A$1.90/share (cash) by way of a Scheme of Arrangement. The price represents a 47.3% premium to last close and 44.4% over the 60-day VWAP. Kidman's board supports the proposal, as do 17% of shareholders and SQM. Wesfarmers will undertake exclusive due diligence - until 29 May - during which, the two parties will negotiate a Scheme Implementation Agreement.

• This is the second large-scale acquisition of a lithium project in Western Australia in the past six months following Albemarle Corp (ALB US) signing a US$1.15bn 50:50 JV with Mineral Resources (MIN AU) to own and operate the Wodgina lithium mine in the Pilbara. This should also place the spotlight firmly on other lithium project developers such as Pilbara Minerals (PLS AU).
• This appears a pretty clean deal. The premium is substantial, key parties (Kidman's board and SQM) are supportive, as are an initial percentage of shareholders. Certainly, Kidman is an easier transaction than Lynas and it is understandable if viewed as a replacement deal to Lynas.
• Nevertheless, a gross/annualised spread of 1.9%/6.2%, assuming late August completion, is punchy. Unless taking the view this fleshes out another suitor for Kidman, I'd be reluctant to chase this through terms. There appears no shortage of potential investments in this space. Lithium is abundant and there is a general lack of restrictions on production.
• Interestingly, Lynas Corp Ltd (LYC AU) has fallen as this deal has been announced, perhaps because it is seen as not imperative. So far the shares are down 7.4% from the first Lynas close after the Wesfarmers Ltd (WES AU) proposal in late March.

(link to my insight: Wesfarmers Gets Hooked On Kidman's Lithium)

Lafarge Malaysia (LMC MK) (Mkt Cap: $764mn; Liquidity: $1mn)

LafargeHolcim Ltd (LHN SW) announced that it had come to an agreement to sell its 51% stake in Lafarge Malaysia Berhad to YTL Cement Berhad and its 91% stake in unlisted Holcim Singapore to YTL Cement Singapore PTE. This triggers a Mandatory Tender Offer for the rest of the shares of Lafarge Malaysia Berhad at RM3.75, which is a 13.64% premium to last trade, a 32% premium to 1-month VWAP, and a 47% premium to 3-month VWAP up to the last trading day.

• As this is an unconditional offer, settlement is 10 days from acceptance, meaning you can likely get your cash a month from now. If you are an arbitrageur, at time of writing, Travis would have been a bidder on the May 3rd at RM3.72 and RM3.71 and indeed someone sold heavily at bid side at RM3.75 on Friday which means some arbitrageur got a good deal.
• If you are a Long-Only Investor, unless you are far more bullish than consensus, Travis would look to tender into this event. If you are bearish the market, wait. Don't do anything. You are earning 10+% a year for the next month at the (then) bid side and 8% at offer side.
• Long-only investors selling the shares at RM 3.71 were likely giving up an annualized 15.7% for the next month or so. In a case like this, that is only a good idea for a long-only investor if you are extraordinarily bullish.

(link to Travis' insight: Lafarge Malaysia Sold to YTL - Mandatory Offer Ensues)

Ying Li International Real Estate Ltd (YINGLI SP) (Mkt Cap: $270mn; Liquidity: <$1mn)

In early April China Everbright (165 HK) announced that it had purchased the 30% stake in Ying Li International Real Estate Ltd (YINGLI SP) from founder, chairman and CEO Mr. Fang Ming at S$0.14/share. Because that got them to 58.91%, that triggered a Mandatory General Offer. It was unconditional. It is also effectively final as regards price and closing date. When Travis Lundy wrote about the situation at the time, he said there was every chance the Independent Financial Advisor would deem the Offer to be "not fair and not reasonable."

• This week saw the dispatch of the Circular, and indeed the IFA found the deal to be not fair and not reasonable and advised the independent board members to recommend shareholders REJECT the deal. Board members followed that advice and recommended shareholders REJECT.
• The IFA said the Offer Price implied
  • a 7.1x PER
  • a Price/NAV of 0.33x and adjusted Price/NAV (adjusted for revaluation surplus on the properties) of 0.316x, so the Offer Price implied a 68.4% discount to fair, which was larger than the discount to NAV of any of the 14 comparable companies.
  • The Price/NAV was even further below the Price/NAV of the recent 8 transactions chosen as similar types of transactions.
• There isn't much to defend the price.
• Travis remains bullish as an arb because of the payout comes in seven days after Acceptance.
• He also remains bullish the stock because it would behoove Everbright to try to clean out minorities at a later date at a narrower discount. If done at 0.6x NAV in three years, that implies a 23.5% p.a. return (compounded, excluding dividend). P/NAV of 0.65x would give a 27.2% return annually. P/NAV of 0.7x would deliver a 30.4% return per annum. And even that would be good for Everbright.

(link to Travis' insight: )

Melco International Development (200 HK) / Melco Resorts & Entertainment (MLCO US)

I estimated Melco's discount to NAV at 43%, its widest in a year against a 12-month average of 31.8%. Taking a longer-term view, the implied stub is at its widest in the past seven years. News, liquidity, and momentum are with MLCO, with little to no catalyst at the Melco stub level. The stub operations are loss-making, albeit on a declining scale in recent years, but are not envisaged to turn a profit in the medium term.

• For all intents and purposes, Melco is largely a single-stock, passive holding company. This is a structurally wide discount where the listed holding accounts for >90% of GAV. The current implied stub is extreme on a long-term basis and previously rebounded off these levels.
• The bifurcation may be due to MCLO's new US$500mn share repurchase announced on the 8 November 2018, which followed the US$500mn program in March last year. Based on the buying under the new program discussed in the circular dispatched on the 25 April 2019, I estimated there was ~US$180mn still remaining of this latest repurchase program.
• A potential risk to the trade is that a new repurchase program is assembled in short order after this one completes; but given the daily buy-in, I don't believe this should be so disruptive, or should justify the NAV discount at (or beyond) the current level.

(link to my insight: StubWorld: Melco's Implied Stub At Multi-Year Low)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Curtis Lehnert discussed Naspers' proposed Euronext listing and considered the current discount to NAV to be priced appropriately. He also addressed the attraction of Euronext's dual class listing and that dividend WHT is 15% for resident corporations and only 5% for South African non-resident corporations - it is not yet known if the "NewCo" will be registered as a resident corporation or a South African non-resident corporation.

• A Dutch listed "NewCo" can help Naspers avoid paying capital gains tax on future Tencent stake sales. When Naspers sold the 2% stake of Tencent last year the company said they expect potential capital gains tax to be minimal because the shares were sold mostly to international investors. South Africa requires a 22% CGT to be paid on Tencent shares sold to SA investors.

(link to Curtis' insight: Naspers (NPN SJ) Restructuring: You Never Lose with Koos)

Doosan Corp (000150 KS) (Mkt Cap: $1.2bn; Liquidity: $7mn)

As per a 15 April announcement, Doosan Group's de facto holding company Doosan Corp is scheduled to undergo a 3-way demerger. Doosan Corp will be the surviving entity and will continue to act as an operating holding company. There are two new entities (opcos): Doosan Solus and Doosan Fuelcell. The split ratio is 90.60% for Doosan Corp and 3.34% and 6.06% for Doosan Solus and Doosan Fuelcell, respectively. The EGM is scheduled for Aug 13. Two requirements have to be met: two thirds of attending votes and one third of all voting votes. Upon shareholder approval, Doosan Corp shares will be suspended from Sep 27 to Oct 17. All of the three entities will be re-listed separately on the Oct 18.

(link to Sanghyun Park's insight: Doosan Corp Demerger Summary)

Hansol Technics (004710 KS) (Mkt Cap: $117mn; Liquidity: $1mn)

Hansol has offered 10mn new shares to its stockholders. At a preliminary offer price of ₩5,180, the issuer raises ₩51.8bn. Forfeited shares will be offered to the public. There is no cancellation risk. Hansol's capital increases by 45.23%. 20% is allocated to the firm's ESOP with the remaining 80% going to the stockholders at a 0.37353 to 1 ratio. The first round pricing is scheduled for May 8. The ex-rights date is May 10. Subscription rights will be traded on May 29~June 5. Pricing will be finalised on June 10 and the listing of new shares is scheduled for July 5.

(link to Sanghyun's insight: Hansol Technics Rights Offer Summary)

Anadarko Petroleum (APC US) (Mkt Cap: $36bn; Liquidity: $564mn)

While the combination of Anadarko with Chevron provides the better strategic rationale, according to Massimo Bellino, Anadarko’s shareholders will likely not be satisfied if the Board of Anadarko is not able to negotiate an improved offer from Chevron, in light of the much higher competing offer put on the table by Occidental Petroleum.

• The implied EV to EBITDA multiple of Chevron’s offer is at the lower end of the range of the multiples from the most recent comparable transactions. The offered premium to the target price one week prior to announcement date close of 40% does not look so generous if taking into consideration the oil price trend over the first quarter of 2019.
• If looking at the trend of the EV/Cash Flow multiples (debt adjusted) as traded by the oil majors and the US E&Ps over the last ten years, it becomes apparent that Chevron has chosen an opportune time to acquire a independent US E&P competitor.
• The bidding war for Anadarko could be signalling that while the mid-cap E&Ps will refrain from pursuing further M&A to focus on shareholder return and spending within the cash-flow, upcoming M&A activity in upstream oil and gas will involve more US large-cap E&Ps that have been significantly absent from high profile acquisitions during the oil price downturn.

(link to Massimo's insight: Competing Bids for Anadarko Finally Break the Calm in the Upstream Oil & Gas M&A Market)

Scout24 AG (G24 GR) (Mkt Cap: $5.4bn; Liquidity: $21mn)

So there. Pulver BidCo produced an update on the Offer saying that since the publication of the Offer, Scout24 AG shareholders have approached Pulver to request an increase in the Offer price. Pulver confirmed that it will not increase the Offer price. Travis thought the price was slightly light - 17x EV/EBITDA on 2019 expected EBITDA for a company with double digit revenue growth and 50+% EBITDA margins is not an overwhelming price. He said back in March he would be a buyer at €46.01/share for the optionality. There isn't much optionality left.

• Travis expects the deal to go through. If you disagree, you should sell now to someone who thinks it will. If you agree, there are a couple of choices.
• If you sell into the Offer, your money isn't coming for a while.
  • If you are bearish the market overall, you can hold and you have something which won't go down in price for a bit because there would be an Additional Acceptance Period which would allow you to "be invested" but have a cash-equivalent in the portfolio.
  • If you are a long-only investor and bullish the market overall, he'd sell and reallocate funds elsewhere.
• If you are an arbitrageur, you still have a free short-term put option if you think it is going through, but Travis is not sure the effective call option (of stock plus a put) is worth anything.

(link to Travis' insight: Scout24 Offer Final: Time To Unwind)

Independent News and Media Plc (INM LN) (Mkt Cap: $160mn; Liquidity: $1mm)

The Board of INM have unanimously recommended a €0.105/share cash offer, by way of a Scheme, from Mediahuis NV. The Offer price is a 44% premium to the undisturbed price of €0.0728 and 63% premium to the 30-day VWAP. The Offer values INM at ~€145.6m. Mediahuis received irrevocable undertakings from Denis O'Brien (29.88%) and Dermot Desmond (15%). Then subsequently bought 26% from these two shareholders, effectively blocking a rival offer. Mediahuis has the option of switching to a takeover offer which would require just 5% of shares out to secure majority control.

• INM had cash reserves of €81.7mn as at FY18, therefore Mediahuis is paying ~€64mn (net) to acquire INM or a trailing PER of 7x - well below its peer group average. Still, INM has recorded three consecutive years of negative growth, with 2018 net income down 28% yoy and 87% from FY15.
• INM's share price has also taken a beating in response to a government scandal and investigation, which has entangled its major shareholder (O'Brien). That negative overhang persists as court-appointed inspectors continue to investigate a 2014 data breach. Even with the removal of the investigation, there is no assurance of a turnaround in INM's financial fortunes, nor any obvious catalyst for expecting one.
• O’Brien will take home €43.5mn from the sale of his stake. It is estimated he paid ~€500mn accumulating his stake over a 13-year period. That's a non-negligible loss on investment, all but suggesting minorities should similarly cut their losses. INM's share price has tracked its earnings demise. Rightly, shareholders should have exited earlier. Now they should take the cash.

(link to my insight: Independent News & Media And The Survival Of Ink)

Sanghyun discussed Korea's actively trading ADRs, and specifically highlighted the LGD DR discount. It hit a new yearly low at -4.05% the previous Wednesday, Apr 24, which was more than a 4ppt drop from the 3-month mean. LGD shares are highly susceptible to currency fluctuation and he expects a high level of fluctuation in USD:KRW ER. This may pave the way for an even wider divergence in the short-term.

(link to Sanghyun's insight: Korea ADR List & Current Status Check: LG Display DR Situation Is Interesting)

For the month of April, 10 new deals were discussed on Smartkarma with an overall announced deal size of ~US$46bn. The does not include: Wynn Resorts (WYNN US)'s on/off again bid for Crown Resorts (CWN AU) which had an indicative offer size of US$7bn; and IPH Ltd (IPH AU)'s ~US$100mn offer for Xenith Ip (XIP AU) as it is an ongoing deal.

The average premium to last close for the new deals announced in April was 20% - bolstered by Anadarko and Ki Holdings (6747 JP) - while the average for the four months of 2019 is ~30%.

(link to my insight: Asia M&A: April 2019 Roundup)

• ISS is understood to have recommended shareholders vote for Harbin Electric Co Ltd H (1133 HK)'s scheme. 8.35% of shares out have now tendered. The H share meeting is to be held on the 7 May.

• According to The Australian newspaper, Aveo Group (AOG AU) was in talks with a bidder who may be prepared to make an offer valuing the company at A$2.50-A$2.70/share.

• Healthscope Ltd (HSO AU) announced that Australian Super, the holder of approximately
  15.86% of issued shares, said it intends to vote in favour of the Scheme, subject to there being no proposal that it considers superior before the vote.

• Acceptances into the acceptance facility (22.5%) plus Ap Eagers Ltd (APE AU)'s 28.85% holding indicates more than 50% of Automotive Holdings (AHG AU) shares support AP Eagers' Offer for AHG.

• The MGO for Hong Kong International Construction Investment Management Group Co., (687 HK) has closed with Blackstone holding 86.28%. Shares are suspended and Blackstone will take the necessary steps to restore the float.
• The scheme doc for China Power New Energy Development Co (735 HK) is now expected to be dispatched on or before the 21 June, out from 2 May previously.
• Earthport plc (EPO LN)'s Offer by VISA goes unconditional. Offer remains open until further notice.
• Superloop Ltd (SLC AU) receives a non-binding indicative proposal of $1.95/share from QIC.

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, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.