Last Week In Event SPACE: ESR/Sabana REITs, Vedanta, Leyou, Alpha, Metlifecare, Melco, Neles

ESR-REIT (EREIT SP) / Sabana Shari’ah Compliant REIT (SSREIT SP)

The respective managers o ESR-REIT and Sabana REIT have jointly announced the proposed merger of the two companies. If the Scheme becomes effective, each Sabana Unitholder will receive 94 Consideration Units (new units in ESR-REIT) for every 100 Sabana Units held. Upon completion of the Merger, the Sponsor and its related corporations are expected to hold, directly and indirectly, approximately 12.2% of the total issued units in the enlarged ESR-REIT. The merger is DPU accretive to all so the transaction probably should get past unitholders easily enough.

• Back on the 14 November 2019, Quartz Capital Management, one of Sabana-REITs' top 5 unitholders (at the time), presciently proposed a merger by way of a Trust Scheme between ESR and Sabana REITs. In that letter, after ESR purchased a substantial stake in Sabana at S$0.48/unit as well as the controlling stake in the REIT’s manager, Quartz said it "unfortunately created substantial overlapping investment mandates of the 2 REITs. ... The cross-ownership of its managers can potentially result in corporate governance concerns especially relating to divestments and acquisitions of properties."
• The enlarged REIT will become the would be the 5th largest industrial S-REIT by total asset size, and fourth-largest player in terms of Singaporean industrial GFA market share. The enlarged REIT will have a market cap of ~S$1.82bn and a free float of ~S$1.26bn. These attributes may facilitate the enlarged REIT's inclusion in key indices. The proposed merger is expected to be DPU accretive on a pro forma basis for ESR-Reit unitholders by 3.5% and 12.9% for Sabana unitholders. Quartz had previously flagged that Sabana-REIT has substantial debt headroom to make DPU accretive acquisitions.
• The conditions to the deal getting done are of limited difficulty. Potentially Sabana's 50% headcount at the Scheme Meeting is a minor risk, as there is a significant number of small shareholders. But as seen in recent deals (not just REIT mergers), this is not unusual in Singapore. The major selling points for Sabana REIT shareholders is scale, DPU accretion, portfolio diversification, and reduced tenancy concentration.
• THE TRADE: The looks like a done deal - expect the two REITs to trade quite tight to terms. But there is probably not a lot to do here, and the basis for this insight being bearish. You're getting a slightly more diversified portfolio with low funding costs, but little to no pro-forma value uplift. This appears a long overdue merger, so kudos to Quartz. But do expect continued mergers in the space to get scale. Separately, Sumeet Singh notes this is being down at well below Sabana's book value.

link to:
my insight: ESR-REIT/Sabana-REIT Merger
Sumeet's ESR-REIT/Sabana Merger - Buying Well Below Book

Vedanta Ltd (VEDL IN) (Mkt Cap: $5.4bn; Liquidity: $39mn)

There appears to be no shortage of interest in online game operator Leyou. After going into a trading halt before the start of the previous Friday's trading session, Leyou announced major shareholder Yuk Kwok Cheung Charles had entered into a privatisation exclusivity agreement with Tencent Holdings (700 HK). AS in the discussions with iDreamsky Technology Limited (1119 HK) and Zhejiang Century Huatong A (002602 CH), no price is mentioned. Yuk's exclusivity agreement with Tencent is for three months. That effectively blocks Sony (& any other suitor) from entering privatisation transaction talks with Yuk.

• And Sony? Ahead of the launch of PlayStation 5 later this year, Sony has sought to secure intellectual property. Sony launched the China Hero Project in mid-2016, an initiative to promote and invest in PlayStation 4 games funded by Chinese developers. For Sony to consolidate and improve upon its market share, it needs local game content - this is where Leyou may comes into play in its future strategies.
• Yuk holds no formal management or board role in Leyou. This is purely an investment to make money since he took control of the company in June 2017. He wants out, ostensibly to park his money elsewhere. Perhaps the VCredit Holdings Ltd (2003 HK) deal will resurface.
• Tencent has been interested in Leyou, indirectly, for 10 months, and now has directly entered into an exclusivity agreement. This looks like the end game unfolding, perhaps spurred on by Sony's alleged interest. The rumoured CVC/iDreamsky Offer price of ~$3.11/share, is 7.6% up from Friday's close. With Sony circling, I'd buy at the open. This will clear $3/share, perhaps up to iDreamsky's indicative price quickly.

On the 6 July, ahead of the 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/AVPG pitched a non-binding indicative offer to acquire all Met shares for NZ$6.00/share (vs. the initial Offer of NZ$7/share) under a Scheme of Arrangement. The July meeting was subsequently deferred. So it was no surprise four days later that MET entered into a new Scheme Implementation Agreement.

• The new SIA required a majority of MET directors – not all – recommend that shareholders vote in favour of the scheme. The directors unanimously agreed the scheme should be put to shareholders. But Chairman Kim Ellis stopped short of recommending shareholders vote in favour of the revised Scheme. Nevertheless, the majority was secured. The consideration price is within the NZ$5.80 to NZ$6.90 per share valuation range contained in the independent adviser report, which was finalised on 5 June 2020. A new independent adviser’s report will be required under the new SIA.
• The Board said it had canvassed MET investors and had received strong investor support for the scheme. A number of shareholders indicated they preferred the alternative of a Scheme at NZ$6.00 over the uncertainty of prolonged litigation. Moreover, the Guardians of the New Zealand Superannuation Fund, has entered a voting deed with APVG under which it has agreed to vote its 19.9% interest in Metlifecare in favour of the scheme.
• Trading tight at a gross/annualised return of 1.7%/6% assuming this gets wrapped up late October.

(link to my insight: Metlifecare/EQT: The Retirement Solution)

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

The provincial government of Guangdong has agreed that travelers returning from Macau would no longer be subject to a mandatory 14-day quarantine, effective 6am tomorrow. The two-week healthcare seclusion policy was implemented earlier this year as COVID-19 took hold. Following the announcement, gaming plays bounced - MLCO was up 16.21%, Wynn Resorts (WYNN US) 9.62%, and Las Vegas Sands (LVS US) 6.15%. Subsequent to Melco's reactive gain, I saw the discount to NAV at 27% (at the time of the insight), bang in line with the 12-month average.

TSE Mothers-listed Witz announced (J-only) after market-close today it had received approval to move to TSE1 as of 31st July 2020. In conjunction they also launched a tachiaigai bunbai (equity offering) in order to satisfy some of the requirements for a TSE1 move. Janaghan Jeyakumar estimates the Inclusion Size to be in the range of ¥0.43-0.53bn and the Impact of the Inclusion to be around 3-4 days of Volume going by 3-month ADV. This TOPIX Inclusion Event would fall in the "Small Size Small Impact" (RED) category in Quiddity's TOPIX Inclusion Framework. This type of TOPIX Inclusion Event, on average, has historically had the worst signal-to-noise ratio and the worst TOPIX-relative performance of the four categories of the Framework.

• Fundamentals do not seem very convincing either A slowdown in demand from major customers, and COVID-19 disruptions are expected to result in an 11.3% YoY decline net profits in FY2020E. The company's LTM earnings translate to EV/Revenue, EV/EBITDA, and PER of 3.5x, 27.3x, and 36.3x. These do not seem inexpensive when considering the negative profit growth expected for the current fiscal year and the fact that revenue is not up since 2017.
• THE TRADE: Janaghan recommends avoiding this TOPIX Inclusion Event. Furthermore, due to the poor signal-to-noise ratio of such "Small Size Small Impact" category cases, I would also avoid short-selling this stock until the TOPIX Inclusion Event is complete. TSE1 reassignment triggers inclusion into the TOPIX Index and I expect the Inclusion Event to be at the close of trading 28th August 2020.

Nikkei announced that Japan Exchange Group (8697 JP) would replace Sony Financial Holdings (8729 JP) in the Nikkei 225 (NKY INDEX) with effect from the open of trading on 29 July. This is in line with the 'Changes to the Constituents Selection Rules of the Nikkei Stock Average' that were published by Nikkei on 15 June. As discussed by Brian Freitas in Nikkei 225 Index Rebalance - Japan Exchange Replaces Sony Financial the impact on Sony Financial should be minimal from the selling across the Nikkei 225, MSCI and FTSE trackers with arbitrageurs buying the stock to tender in the offer.

• Separately, in Nikkei 225 - JPX IN, Sony Financial OUT, Travis reckons that given the gains in the JPX share price since the announcement, if there was a pop on the open of 16 July, some of those who pre-positioned may choose to sell. If the shares come off based on a "sell the news" move at the open of the 16th, I would want to buy some for the event, but I would want to trade nimbly, and I would watch excess volume. When cumulative excess volume gets to 15-20mm shares, this trade could be near done.
• UPDATE: Something of a damp squib in terms of MSCI and FTSE kick out for Sony Financial.
  2mm shares on the print at the close. 3.6mm shares on the day. That is about 2.5-3% of old float. That suggests a lot of shares might have crossed off-market. Those may not show up on Bloomberg QR function because both buyers and sellers may be offshore, meaning crosses can be done OTC. For TOPIX and Nikkei, such crosses would most likely end up being printed, HOWEVER, because some of them are going to be big (greater than JPY 5bn), that would mean a bunch of them won't get crossed until the next day, and those extra-large crosses crossed the next day are best viewed via QUICK not Bloomberg. Might have to ask your friendly neighborhood local broker for that.

MSCI is scheduled to announce the results of the August 2020 Quarterly Index Review (QIR) on 12 August. The changes will be implemented as the close on 31 August and will be effective 1 September. In MSCI Taiwan August 2020 Index Rebalance Preview - Asmedia Should Make It, Oneness Is Volatile, Brian expects Oneness Biotech (4743 TT) and Asmedia Technology (5269 TT) to migrate up from the small cap index to the Standard index due to the stellar stock price performance over the last few months. However, we need to keep a close eye on Oneness Biotech (4743 TT)'s stock performance over the next couple of weeks given the high volatility in the name.

This update is the latest in a series dating back to Legend's Conversion of Domestic Shares in June 2018, with the most recent addition CPPCC And Full Circulation Of H-Shares speculating the 2020 National People's Congress and Chinese People's Political Consultative may provide guidance on the "full circulation of H shares", which would allow the conversion of domestic shares into H shares, which would then be eligible to be listed and traded on Hong Kong's stock exchange. Since that insight, another 6 companies have been given the green light to convert and/or have submitted applications to covert. There has also been one noticeable movement in one of the initial pilot companies (Shandong Weigao Group Medical Polymer Co (1066 HK) to have converted domestic shares.