Last Week in Event SPACE: FamilyMart, Hyundai Motor Prefs, Renault/Nissan, Fortis Health, Korea Zinc

Last Week in Event SPACE ...

• FamilyMart UNY Holdings Co Ltd (8028 JP) has been in the sweet spot for post-merger synergies, however once Itochu Corp (8001 JP) completes its small partial tender to give majority ownership, they are probably done buying for a while.
• The dislocation spread between Hyundai Motor Co (005385 KS)'s Class B-2 Pref and Pref appears flawed.
• The political considerations of a Renault SA (RNO FP) / Nissan Motor Co Ltd (7201 JP) merger are a long way from being solved.
• A rumoured hostile bid by IHH Healthcare Bhd (IHH MK) for Fortis Healthcare Ltd (FORH IN) faces unchartered waters.
• With the operations of both companies sensitive to zinc prices, a case for mean reversion as Young Poong Corporation (000670 KS)'s holding in Korea Zinc Co Ltd (010130 KS) as a % of its market cap, touches a 52-week high.

FamilyMart UNY Holdings Co Ltd (8028 JP) (Mkt Cap: $11.8bn; Liquidity: $66.3mn)

The new news is that Itochu Corp (8001 JP) announced it would launch a Partial Tender Offer, spending up to ¥120.4bn to purchase up to 10,939,800 shares (8.65% of shares out) to bring its holding to 50.10%, giving Itochu majority ownership and control of the company. The Tender is likely to commence in August after requisite anti-trust approvals have been received.

• The Tender Offer Price is expected at ¥11,000/share - a lifetime high price - and because of what Itochu owns already, the purchase would mean a minimum pro-ration of 14.8%. It's a small partial tender. The shares will stay listed. There will be no squeezeout.

• Travis Lundy believes FamilyMart is not cheap, so a priori one wouldn't mind tilting short. After Itochu buys the shares here, they are probably done buying for a while. And it is tough to imagine new longs wanting to buy here for fundamental reasons.
• Unless the Nikkei changes the Nikkei 225 methodology to allow the BOJ to continue buying Nikkei 225 ETFs, the BOJ will still be buying, and it would be 15-40% of the then-remaining float in FamilyMart in the next 12 months. But if the Nikkei changes the method, then you want to be short the back end.
• Travis said that if he were a long-only investor holding FamilyMart shares, he recommended selling the long position into Friday's pop - which was a bang-on call - or step into shorts above ¥10,600-10,700/share. Other trade ideas, arb grids and Pooh's reappearance in this detailed insight.

(link to Travis' insight: Itochu Tender For FamilyMart - Winnie Sees a Hunny Pot But Greedy Bears Get Stuck)

Hyundai Motor Co (005385 KS) (Mkt Cap: $2.2bn; Liquidity: $5.8mn)

The dividend yield spread between HMC's Class B-2 Pref and HMC's Pref, relative to the Common and based on the FY17 year-end dividend, is now at a historical high.

• The spread is unlikely premised on a possible pref structure change as there is no precedent for singling out specific pref shares; plus there is undoubtedly legal ramifications in favouring one group of shareholders over another. There is also no clear correlation between the discount spread and the trade volume difference.
• Sanghyun Park recommends going with the HMC Pref on the expectation of a closure in the spread. Moreover, as the company has historically always paid a ₩50 over the Common div for 1P and 3P and ₩W100 for 2P, a possible dividend hike event should only serve to reduce this discount spread.

(link to Sanghyun's insight: Hyundai Motor Co Pref - Correction on Situational Assessment)

Renault SA (RNO FP)(Mkt Cap: $34.2bn; Liquidity: $122mn)

Travis also discussed a Nikkei article containing an interview with Carlos Ghosn in which he said he is looking at the possibility of closer capital integration of the two companies and wants to "find solutions" by 2022; which coincidentally, is the end of his scheduled tenure as his mandate was renewed for four years in February.

• Takeaways from that interview caution the French government to get their house in order and a subtle word to Nissan and the Japanese that Ghosn is not "against" them in terms of letting Nissan and the Japanese government have full decision-making efforts on their part.
• A defining issue in the integration of the Alliance, is the French government's 15% stake in Renault. The Nikkei article mentioned - and previously discussed by Travis - if Nissan bought 10% of Renault to bring its stake to 25%, it would, under the Japanese Companies Act, nullify Renault's voting rights on its 43.4% stake in Nissan.

• The pro-forma NEWCO is really very cheap against peers once the cross-holdings are cancelled out, and the generically, low pro-forma combination EV/EBITDA valuations and ample cash flow should weather all but a super down cycle. And Nissan eventually buying the French state's stake would reduce the pro-forma share count by 10%. Travis believes to get all this done cleanly, it may require the exit of both the French State AND Carlos Ghosn. There are trust issues on both sides.

(link to Travis' insight: Renault/Nissan - More Noise, Less Certainty, More Path Risk)

Fortis Healthcare Ltd (FORH IN) (Mkt Cap: $1.2bn; Liquidity: $60mn)

Kemp Dolliver, CFA discussed the bidding war for Fortis Healthcare which impacts the proposed privatization of RHT Health Trust (RHT SP), and discussed how a potential "hostile" bid by IHH Healthcare Bhd (IHH MK) would face uncharted waters.

• Hostile offers are pretty thin on ground in India and the legal system surrounding such a process is relatively indeterminate. IHH could make a compelling offer (higher price and waive due diligence). They may threaten an open offer, but buying control of a company without reviewing the books appears overly optimistic.
• Fortis have formed an independent panel, chaired by former Chairman and CEO of PWC, to evaluate all options and an outcome is expected by April 26. This may allow more punters to enter. Pranav Rao has previously speculated (and surprised that there have been no) bids from the Middle-East yet.

(link to Kemp's insight: A User's Guide To "Hostility")

Shire PLC (SHP LN) (Mkt Cap: $48.9bn; Liquidity: $171mn)

Shire released the details of three proposed (and rejected) bids from the Japanese pharmaceutical firm, Takeda Pharmaceutical Co Ltd (4502 JP). Allergan Plc (AGN US) is also now evaluating a potential offer for Shire.

• Takeda’s bids for Shire have all been a combination of new Takeda shares and cash, with a total value between GBP 44/share to GBP 46.50/share. The most recent bid would give Shire shareholders 51% ownership of Takeda.
• Morningstar is maintaining its GBX 4,890 per share/$205 per ADR valuation for Shire. It believes shares remain undervalued on account of the firm’s growing plasma business and steady rare-disease portfolio contribution.

(link to Morningstar's insight: Shire Remains Undervalued as Takeda Weighs Higher Bid and Allergan Enters the Picture)

Very, very briefly ...

• Media reports that Seven West Media Ltd (SWM AU) and Fairfax Media Ltd (FXJ AU) are back to the merger table after rumored talks last year.
• The independent expert and Board have opined that the offer is fair and reasonable for Marketech International Corp. (6196 TT). The expert's fair value range was TWD 49.7 - 59.6. The filings can be found here.
• ESR-REIT (EREIT SP) and Viva Industrial Trust (VIT SP) posted a monthly update to state they are still in exclusive discussions regarding a transaction.
• An article in the FT cites ChemChina and Mercuria Energy Group in discussions over a deal involving ChemChina taking a larger stake in Mercuria, while Mercuria secures an interest in refining assets in China. Such a deal would not be beneficial to a FIRB review of a deal for Santos Ltd (STO AU).
• The Australian reports that a few minority shareholders are unhappy with the OZ Minerals Ltd (OZL AU) offer for Avanco Resources Ltd (AVB AU). Part of their claims seem justified, according to Pranav since an independent expert report was not commissioned for the Target Statement, and the minority shareholders cite an "independent report" with a fair value of A$0.22. He does not think this really changes much in terms of the offer, except that it might make compulsory acquisition difficult.
• Micro-cap Food Wise Holdings Ltd (1632 HK) said its controlling shareholders with 75% are in negotiations to sell their stakes. This will happen as the chairman (Wong Che Kin) shares (63.75%) moved into CCASS (BOCI) on the 30 November. There is no need to bring those shares in otherwise.

Young Poong Corporation (000670 KS) / Korea Zinc Co Ltd (010130 KS)

Young Poon's holding in Korea Zinc accounts for ~140% of its market cap - around a 52-week extreme - yet benchmark processing terms have stalled, while zinc's bullish run may have run out of puff.

• Because of legacy issues and the fact the Group was jointly developed by two families, both entities operate smelters - just that Korea Zinc is significantly larger. Ex-Korea Zinc (70% of NAV), Young Poong's zinc ops account for around 24% of NAV. Therefore there is little to differentiate both entities in terms of zinc macro factors and refining margins thereon.
• With both operating in a similar space, there exists an argument for mean reversion between two companies which are materially connected at the hip. Yet in the face of passive flows, a catalyst - such as another leg-up in zinc prices - is likely needed to close this extreme bifurcation.

(link to my insight: StubWorld - Young Poong, Yue Yuen)