Last Week in Event SPACE:  Intouch, Toshiba, Orocobre/Galaxy, Tilt, Primewest/Centuria, Huarong

• According to official estimates, the transaction could result in earnings accretion of +19% and +4%, respectively, to PWG and CNI security holders on a per security basis. The announcement also claims that the merged group is "expected to be well placed for ASX/S&P 200 index inclusion with an estimated pro forma market capitalization of A$2.2bn".
• The Offer consideration of A$1.51 (Official Estimate based on undisturbed prices) translates to a weak premium of 3.1% to the undisturbed price. However, as discussed in the peer comps section below, the Deal has come at a time when PWG's premium to CNI in terms of PER(NTM) is almost at its widest, and the accretion is expected to be strong for PWG holders.
• Avoid at these levels (20 April). Considering the very high acceptance rate required to satisfy the minimum acceptance condition and the cash-and-scrip nature of the Deal, zero is not an attractive spread. While the Index Inclusion potential is interesting, this would be a slightly long-dated bet and both CNI and PWG are trading at a premium to their peer groups from a fundamental angle. Revisit if both shares fall or the spread widens.

After entering a trading halt early last Friday, Tilt announced it has amended the terms of the Scheme Implementation Agreement (SIA), such that PowAR/Mercury will now pay NZ$8.10/share. In addition to the increased price, the SIA has been amended to remove provisions allowing Tilt to evaluate any “competing proposal giving greater certainty to all parties and Tilt shareholders that the transaction will complete by August." AGL also said Tilt had received a competing proposal from a third party. Reportedly Canadian pension fund CDPQ made a bid of NZ$8/share Offer, and that Tilt tapped the consortium to match or beat that proposal. Infratil has consented to the amendments and supports the revised Offer.

• The unique structure of the proposal, whereby the assets remain in the hands of the domestic acquirers - acquirers that are seen to be closely affiliated or aligned with key regulatory bodies - greatly diminish the prospect of a third party. On the 8 December, AustralianSuper, Australia's largest superannuation fund, made a NZ$7.43/share Offer for Infratil. This was discussed in Infratil (IFT NZ): Big Super's Infrastructure Grab. That proposal illustrated clear interest in Tilt, and presumably, that interest is still present. CDPQ was also one of several suitors that put in a non-binding bid to acquire Tilt back in February. Reportedly APA Group (APA AU) and Infrastructure Group are also on the sidelines.
• Trading tight at a 1.8%/6.0% gross/annualised spread (19 April) assuming five months to complete from the initial announcement or mid-August. You could buy here for the spread, and the outside chance a superior Offer does indeed emerge.

Invesco Office J Reit (3298 JP) (Mkt Cap: $1.7bn; Liquidity: $15mn)

On 5 April, Starwood Capital Group announced a hostile (no prior consultation) Tender Offer on Invesco Office J-REIT - the first hostile tender offer for full control of a REIT in Japan. Invesco Office J-REIT has now announced that Starwood Capital Group had rejected the request to extend the Tender Offer Period. This changes things somewhat. For both investors and for the players involved.

• That sounds like a slimy move by the buyer, but honestly, most people will not ever take up their appraisal rights, and most people who would do so, would not spend the money in this case. If this is the wrong price for a takeover, it is probably 5-10% off, not 50%. But this is a game of chicken. And if Starwood does not pay up, then this falls back. All told, the upside to this is not huge. At 2-4% through, this is probably a sell. At 0.5% through, it is a buy.
• Nota Bene: There is a dividend next week. Monday and Tuesday the REIT trades with dividend. The REIT should go ex-dividend on 28 April. At the moment, Travis reckons the most likely outcome is a slight bump in terms, but this he expects will not come until mid-May (tender ends 24 May). There may be an attempt by Invesco to block the bid legally. That will come before a bump he expect. If that happens and there is no counter-bid or proposal by another REIT, then the REIT shares could fall on the legal wrangling.
• The issue unitholders and speculators need to contend with is there is no clean put here. If existing unitholders don't want to tender 60.7%, this tender ends unsuccessful. Travis believes there to be a non-negligible chance this tender offer ends without success for Starwood.
• UPDATE: Invesco Office J-REIT has filed a petition for injunction to halt the Tender Offer. From a layman's perspective (albeit one who has read both the FIEA and the ITA) the legal angles appear to have some merit.

(link to Travis' insight: Starwood Rejection of Extension Means Full Hostile Tender)

Vitalharvest Freehold Trust (VTH AU) (Mkt Cap: $0.2bn; Liquidity: $1mn)

The entry of Roc Private Equity on the 26 February has lead to a two-month competitive bidding situation, culminating in an Offer of A$1.24/share from MAFM. That Offer is up 25.5% (including the dividend) since MAFM's first Offer. Or around a A$49mn increase in the deal size.

• Concurrent with the revised Scheme price, MAFM's tilt also includes a proposal to buy VTH’s assets for $342.55mn if unitholders vote against the Scheme proposal. The A$0.025/unit 1H21 distribution would also be added. The dual proposal plus the add-on dividend has been consistent for both competing offers.
• Roc is a fraction of the size of MAFM, but by no means a light-weight with >A$7bn of funds under management. I'd get involved, as I recommended to do so in mid-March.
  MAFM's latest Offer is just 14.5% above Roc's initial Offer, or ~A$29mn. I don't see Roc backing down at this stage. And MAFM has the benefit of matching rights should Roc reload.

(link to my insight: Vitalharvest (VTH AU): Bumpity Bumpity Berry Bidding)

• In China Huarong Asset Management (2799 HK): This Is Manageable, I reckoned a systematic restructuring process was a more likely outcome here as opposed to a less-than-optimal major debt restructuring. Reportedly the central bank is now considering taking on RMB100bn of assets from Huarong, towards refocusing the company on distressed debt. Under "recently departed" Lai Xiaomin, Huarong expanded well beyond its original mandate of managing distressed debt.
• Beijing has signaled in the past it will tolerate defaults on some SOE bonds to curtail the notion all SOE debt carries an implicit government guarantee. Yet the outcome for Huarong should not be in doubt. One can talk about the adherence to market-based principles and best practices such that investors bear the brunt of any fallout. Yet future investment in China could (would) be jeopardised by burdening investors in such a way.
• Chinese regulators are expected to step in and reduce the risk of market contagion. However, this situation remains fluid and there is as yet no official word on how the problem will be addressed. The PBOC buying assets does not guarantee they buy them at "par". As Shuli Ren at Bloomberg pointed out in an Opinion piece, when the PBOC's fund Chengfang Huida bought assets from the Bank of Jinzhou when it ran into problems, it paid 30 cents on the dollar.
• Huarong bonds have pared back losses in recent days, rebounding from record lows. However, prices remain well below last months’ levels. I would get involved with the bonds on any material downward move from here. Even these levels look reasonable.

In what is the fourth update by Sawada regarding the back and forth between the company and the Mongolian Central Bank since my last insight Sawada (8699 JP) Stuck Between Mongolian Central Bank Idealism and Reality, the company confirmed that the Mongolian Central Bank had approved i) the idea that "Qualifying Shareholders" could sell the required number of shares of Sawada Holdings (in order to lose the designation of Qualifying Shareholder) to be sold down to meet the CB's requirements by doing so in the market, and... ii) the selldown by the Qualifying Shareholder in question. This result suggests a number of things are possible. But the rules also suggest limits to what is possible.

• Expect a sale of 2.51mm shares or even a bit more. That is JPY 2bn or US$18mm at last trade. Expect this to come in the market near-term. Volume will pop. After this overhang is out of the way, that may be it for a while. If you want more shares, that will be the time to buy them. The issue of how Sawada sells down Khan Bank shares is still up in the air.
• Other issues may also still up in the air. There is, practically-speaking, almost no way for Sawada to identify every single one of its own shareholders or ultimate beneficiaries. Japan does not have rules which require that information. This is an issue and the Mongolian Central Bank is going to have to find a way around it, or Sawada is going to have to sell down sooner rather than later.
• Given the quality of Khan Bank, Travis thinks getting book value for the 40% is not out of the question. Getting more should be possible. There is still no indication what happens to Sawada after everything in Mongolia is resolved. In the end, this is still probably better split up and taken private.