Last Week in Event SPACE: Keppel, Maanshan, ZOZO, United Engineers, Unisys, Jardines, Just Eat

Singapore wealth fund Temasek announced a Pre-Conditional Partial Offer to purchase up to 30.55% of the shares outstanding of Keppel Corp which would take it from just over 20% to 51% on a fully-diluted basis through the purchase of up to 554,936,636 shares. The Partial Offer Price is S$7.35/share, which is a 26% premium to undisturbed and a 21% premium to 3-month VWAP. If everyone in the minority tenders, it will result in 38.91% of your shares being purchased. Pre-conditions are regulatory approvals, 50+% of non-affiliated shareholders voting for the Offer, and Temasek reaching 51.0% as a result of the Offer.

• Keppel is not a very high volatility stock. This is at a 26% premium, but it is well under the 2-year high. There will be shareholders who are disappointed. They do not have to tender. It is remotely possible that the deal does not get done because it is not quite generous enough. It is long-dated enough that macroeconomic variables could play a role either up or down.
• Because this is a very long-dated pre-conditional offer situation, Travis Lundy would expect the shares to trade somewhat cheap early on, then trade more expensively as the Offer is officially announced. Borrow will become available. Traders must decide how much is likely to come.
• This is a big deal, on a relatively liquid stock, which will garner much attention, locally and internationally. It will entice very large arbitrageurs to play in large size. In order to do the arb, they will need to own the shares. Period.
• Travis expects this - like many partial tenders - will present opportunities to get in, get out, get in again, and get out. It is a range trade. The borrow will come later. It will look like taking risk for not much gain, but this is an arb.

On 11 September 2019, Z Holdings (4689 JP) announced it would buy a stake in ZOZO of a minimum of 101.97mm shares (33.4%) up to 152.95mm shares (50.1%) for ¥2620/share. This is a big deal at ¥400bn at the top end. Founder and chairman Maezawa agreed to subscribe to the Tender Offer for the bulk of his shares - 92.77mm shares, which means it needs little to get over the hurdle. TOPIX is up about 3.4% since the announcement (dividend included, through 18 Oct), and a range of peers in the apparel retailing business have seen their shares up and down in the interim. ZOZO reports on 31 October - two weeks before the end of the Tender Offer on 13 Nov.

• ZOZO shares have risen recently as the market has been healthy-ish and borrow has become available for arbitrageurs to tighten the spread. Travis thinks gradually these arbitrageurs have lifted their pro-ration expectations as well, which means more delta required per borrowed share. Assuming the back end is being priced at the TOPIX-performance-adjusted undisturbed price, the market is pricing a pro-ration slightly above 75%. This seems aggressive so he believes the price probably has ¥35-40 of "borrow is available so I gotta buy the stock" impact in it.
• Travis thinks the pro-ration could easily get to 75% - although he is in the 66-71% Camp - if the front-end price is at the current level. Given that if the stock rises and long-only foreign active portfolio investors decide not to tender, the pro-ration goes up, this would allow arbitrageurs to buy, but borrow enough to tender and get short the Offer Price. Once the tender offer is over, it is not clear where the long-only "new demand" for the shares is. Historically, over the past ten years, the stock price movement on Q2 earnings is negative at -2.0%.

• The vast majority of the variability in pro-ration actuals vs estimates is in the level of participation by foreign active investors. Active foreign holdings are 10x that of active domestic holdings. What matters is the foreign active investor reaction to Q2 earnings. Given how close the market price is to the target price, Travis expects the downside has more impact than upside. Lots of foreign investors bailed earlier this year, and lots of others replaced them. Those investors who bought are all in the money. Furthermore, whatever upside there is from "business synergies" or investment directed or encouraged by new ownership at Z Holdings will likely not be announced or forthcoming at the earnings presentation.

(link to Travis' insight: ZOZO: From Here to Tender Close)

United Engineers (UEM SP) (Mkt Cap: $1.2bn; Liquidity: $1mn)

Back in July 2017, Yanlord Perennial Investment (Singapore) Pte. Ltd (YPI), an SPV comprising Perennial Real Estate Holdings Limited (PREH SP) (45%), Yanlord Land Group Ltd (YLLG SP) (49%) and Heng Yue (6%), announced the purchase of Oversea Chinese Banking Corp. Limited (OCBC SP) / Great Eastern Holdings Ltd (GE SP)'s 33.4% stake in UEM, triggering a mandatory Offer for the company at $2.60. The offer was conditional on the Offerors getting to 50% of the voting rights of UEM. The Offer lapsed largely as a result of aggressive buying (above terms) by Oxley Holdings (OHL SP).

(link to my insight: United Engineers: Yanlord Takes a Bigger Slice, But Nothing Changes)

Infosys Ltd (INFO IN) (Mkt Cap: $38bn; Liquidity: $117mn)

On the 21st of October, Infosys announced one board member had received two anonymous whistleblower reports from a group of employees calling themselves "Ethical Employees" on 30 September - one titled “Disturbing unethical practices” and one titled “Whistleblower Complaint” according to local press reports. In what may be a coincidence, but seems relevant now, the previous week the Times of India reported that Deputy CFO and EVP Jayesh Sanghrajka quit the company after 14 years.

• This development comes almost three years after a whistleblower report in February 2017 alleging wrongdoing by Infosys and some of its officials in the US$200mm acquisition of Israeli automated tech firm Panaya in 2015. Last time it took a little over four months from the Whistleblower Reports becoming public and the public announcement of clearance.
• This time Infosys has the problem that the allegations appear to deal with the accounting treatment of the most recent quarter, for which an Interim Report was filed 11 October. Scandals about 2-year old minor acquisitions are one thing. Scandals about improper accounting to hide material weakness are another. And if there is a "tone at the top" problem with both the CEO and the CFO, that will affect others.
• Historically, local traders "known" that when Infosys falls sharply, once it gets past 10% in 2-3 days, you want to buy the dip because it rebounds somewhat. Travis wouldn't buy this dip yet. The company will not be updating investors until the investigation is complete. The 2017 investigation took 4+ months. This may not take as long, but he sees no need to rush in yet. There is not much clarity, and if there are indeed real numbers behind this, it would be bad.

(link to Travis' insight: INFOSYS Whistleblower Report - Too Early To Dip One's Toes In The Water)

Other insights on Infosys this week are from Mark Artherton, CFA with Infosys - A Buyers Perspective Post Whistle Blowing, from LightStream Research with Infosys - The Grim Numbers on H-1B Rejection Rates, Employee Costs and Unbilled Revenues and from Pranav Bhavsar with Infosys Whistleblower Report | A Channel Check Narrative.

DCH was suspended on the morning of the 15 October "pending the issue of an announcement of inside information relating to a possible privatization proposal". Shares in the PRC BMW-distributor had mysteriously gained 16% in the past month on higher-than-average daily volume. A firm Offer, by way of a Scheme, has now been announced, at $3.70/share (final offer price).

• PRC dealerships are facing long-term challenges including a market slowdown, evolving customer preferences, increasingly sophisticated competition, and potentially disruptive technologies. Luxury automobiles did achieve a double-digit growth in the first half of the year, yet competition within this segment remains fierce, notably for BMW brands.
• DCH's net profit was down 31.6% in the first six months of 2019 compared to an average decline of 23.6% for its peer group. Only Zhongsheng Group (881 HK) recorded a profit increase (8.7%) during the same period via strong growth in Lexus and Toyota sales. FY17 earnings were the recent high watermark for DCH, with shares trading above $4 in the 1H18, up to a high of $4.49. Forecast earnings are not expected to match or exceed those earnings until FY21E.
• This is a straightforward Scheme. Recent operating conditions have not been kind to PRC dealership. I expect the deal to get up and recommended taking the odds at $3.45 shortly after the announcement. DCH closed the week at $3.58 and a gross/annualised spread of 3.4%/13.4%.

• The obvious play here is to be long (or still be long) Toshiba Tec (6588 JP) and possibly Toshiba Plant Systems & Services (1983 JP). Both are trading cheaply vs the parent. Toshiba Plant is part and parcel of the way that Toshiba sees itself going forward. Toshiba Tec is a bit different. It could be split out, or it could be better run inside Toshiba. Travis believes it is eminently sellable at a much higher multiple than the one at which it is currently trading. Selling it would provide a lot of capital to Toshiba. If he had to buy one or the other, it would be Toshiba Tec.
• The trade? Be long Toshiba Tec. Be long Toshiba Plant. Be longer Toshiba Tec than Plant. If Toshiba does not announce a specific deal, or a specific pathway to a deal when they disclose earnings on November 13th, buy any resulting big dip on Toshiba Tec.

The Composite Document for China Merchants Group Limited's (CMG) Offer for Dalian Port was dispatched on the 5th October. The Offer closes on the 28 October. By my reckoning, the 25% free float has now been breached. This is not cause for concern, nor even if the float dips below 15%. But the mechanics of what can transpire are worth noting.

• CMG intends to maintain Dalian Port's listing and will take appropriate steps to ensure that sufficient public float exists. Below 25% and above 15%, shares will continue to trade. But what happens if the float dips below 15% and shares are suspended?
• Presumably, CMG will be able to place out shares to restore the float. But the introduction of the new delisting rule last August means suspended companies have a finite window in which to restore the float.
  • UPDATE: The latest CCASS movements indicate the float is now at 19.7%. This may get suspended at the close of trading tomorrow.

Fuji Xerox has entered into Scheme of Arrangement with CSG and an Offer price of A$0.31/share, a 31.9% premium to last close. CSG was up 34% YTD ahead of the Offer. CSG's Board recommends CSG shareholders vote in favour of the Scheme in the absence of a superior Offer. Major shareholder Caledonia, with 29.1%, has given an irrevocable to vote in favour of the Scheme. The proposed Scheme is expected to be completed by mid-February 2020.

• Apart from obtaining CSG shareholder approval, the Scheme is subject to approvals from the respective regulatory authorities in New Zealand and Australia, neither of which should raise deal-risk concerns, as the market for printing-related goods and services is highly competitive with a major national and multinational competitors in the mix.

• Both Wentworth (8.5% shareholder) and Forager (5.4%) became substantial shareholders in February 2018, after CSG's shares rolled over after revising downward FY18 guidance. I estimate Forager's average in-price is likely north of A$0.33/share. Wentworth's average price is less clear, but would appear to be above the Scheme consideration.
• CSG has overhauled its sales and marketing, as well as its IT systems. The benefits from this strategy have been minimal to date, but may yield double-digit percentage EBITDA growth in FY20, if executed smoothly. Wentworth/Forager may dig their heels in on this possibility. This is not a big deal for Fuji, and it may need to bump to appease that 14% on the register.

(link to my insight: Fuji Xerox Finds A Solution In CSG)

JM buybacks are relatively rare beasts. When JM resumed after an eight-year hiatus, it's worth a second look. JM has now bought >US$100mn since 19 September 2019. But don't expect JM to announce the size of the buyback - after JM (and the rest of the Jardines group of companies) controversially transferred from a premium listing to a standard listing on London's Main Market in 2014, it is under no obligation to make such an announcement, nor seek shareholder approval for buybacks.

• A scrip offer for Mandarin Oriental Intl (MAND SP)? This is doing the rounds again. MAND owning an office block in its hotel property portfolio is not ideal. It is no longer a clean hotel play. But it's not clear minority shareholders would be keen to swap their holdings into JS shares. And JS shares appear inexpensive at 48% discount to NAV and one wonders if this is a viable option to issue discounted shares to privatise an 82%-held consolidated company.

• Collapsing the circular structure? I see no urgency. The family can continue to chip away at minority ownership in order to capture the discount for insiders and lower the ultimate restructuring cost. JM received US$2.2bn from its sale of Jardine Lloyd Thompson Group P (JLT LN) last year, providing ample room for further repurchases of JM.

• JM appears an outright long. A long JM short JS is also available, however, the simple ratio is towards the higher end (1.85x vs. 1.71x long-term), and JS is trading cheap.

Prosus (PRX NA) has made an offer for Just Eat at 710p per share or ~20% premium to last close and in line with the price implied by the Takeaway.com bid. Prosus' bid is hostile. Currently, the spread is trading 6.7% though the terms, implying a further bump from Prosus or Takeaway.com NV (TKWY NA), or a counterbid from a third party. Note that once Just Eat is taken over then entry into the UK (and other Just Eat’s markets) will be very difficult in the future. So there is a good reason to think that other players are looking at a further bid.

• In July 2019, the CMA issued an enforcement order that would halt the progress of Amazon’s attempt to buy 20% in Deliveroo. CMA’s move seems to imply that any transaction involving a player that is already present in the UK, even in an adjacent market, will face a very high bar for CMA approval. However, CMA’s exact motivation is unclear.
• Patryk Basiewicz cannot see any credible new bidders. The most likely ones are Uber and Facebook, but they are both long-shots. Uber due to antitrust concerns and Facebook due to seeming deflation of strategic interest in food delivery. Softbank is also a long-shot, as Just Eat does not quite fit Softbank's history of investments. in the sector Current media speculations that Softbank is pursuing Spain's Glovo is credible, as Glovo fits Softbank's strategy quite well.
• Lack of a credible buyer does not mean that Just Eat should not be trading through terms, as a higher bid from Prosus and/or Takeaway.com is likely.

On October 14th, US PE firm Thoma Bravo made an Offer to acquire UK-based cybersecurity company Sophos via a Scheme of Arrangement in an all-cash deal that valued the company at a market cap of US$3.8Bn. The offer price is fixed at US$7.40 (GBP5.83/share) or a premia of 37% to the undisturbed price. The deal is conditional on the receipt of antitrust approvals and Sophos shareholder approval and is expected to close in 1Q 2020.

• This is a friendly deal at a significant premium. The board intends to unanimously recommend the Offer and the acquirer has procured irrevocable commitments from the directors and shareholders who collectively hold 27.2% of Sophos. This includes top shareholder Pentagon Lock (backed by Apax Partners) and founders Peter Lammer and Jan Hruska.

• Given that the global cybersecurity market is highly fragmented, Janaghan Jeyakumar does not expect antitrust approvals to be a challenge in this deal.

• At a 1.5% spread, at the time of Janaghan's insight, for about 5-6 months of wait, this offers a slightly higher annualized spread than most recent friendly deals in the UK, cross-border or otherwise.

(link to Janaghan's insight: Thoma Bravo Scoops Up Sophos)