Last Week in Event SPACE: Naspers/Prosus, Bellamy, Unizo, LSE/HKEx, Bitauto, China Biologic, Artgo

Last Week in Event SPACE ...

• The combination of Prosus (PRX NA) and Naspers (NPN SJ) is now below its pre-spin off level, with a look-through discount for Naspers of 36% vs. ~33% prior to the spin-off.
• FIRB pushback has been overhyped in China Mengniu Dairy Co (2319 HK)'s bid for Bellamy's Australia (BAL AU).
• Elliott may try to block the Fortress Unizo Holdings (3258 JP) deal AND will likely try to encourage the company to do something to improve value for all shareholders, not just those who launch a tender offer.
• Everyone has a price, and HKEX (388 HK)'s Offer for London Stock Exchange (LSE LN) is generous, even with the majority scrip component. But it will need a lot of support before the UK government intervenes.
• Tencent Holdings (700 HK)'s unsolicited Offer for Bitauto Holdings Ltd Adr (BITA US) looks a lock with 48.5% of the register on board plus Tencent's 7.8% stake.
• Third time's a charm for China Biologic Products (CBPO US) as a consortium comprising 58% of shares out, including Temasek, tables an okay non-binding Offer.
• Plus, other events, CCASS movements (including IPO lockups) and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

Naspers (NPN SJ) / Prosus (PRX NA) (or Prosus NV (PRX SJ) / Tencent Holdings (700 HK)

Heading into an expected bigly index-related sell-off in Prosus this past Friday, the combination of Prosus and Naspers was (& remains) below its pre-spin level. Naspers Monday announced the results of the election with 16,254,001 shares of Naspers (~3.7% of shares out) choosing to receive Naspers N shares in place of Prosus. This means there will be 422,402,058 shares of Prosus outstanding in all its forms (EuroNext listing, JSE listing, and ADS). Therefore, Naspers will hold 74% of Prosus N shares, leaving 26% in public hands. If including Prosus A shares, the float will be 26.16%, although the As are not really float.

• Street estimates of the net sell this past Friday vary from being a slight net buy to a small net sell (of ~US$1bn). Travis Lundy believed it was a much larger net sell because of the GEPF position evidently tracking indices which would see a big downweight. He estimated a bare minimum of about 25-33mm shares (or about $2.5-3.0bn) including $2.0-2.5bn net to be sold by locally-domiciled FTSE/JSE funds and another US$500mn from net selling by FTSE EM selling and FTSE All-World buying.
• That was on a "benchmark basis" - that is how much should be sold. Whether it gets sold is up to the holder's predilection for following their benchmark weights.
• There are a lot of large funds which have a 10% benchmark weight and actually run a 13-15% portfolio weight, meaning they would sell ~25-30+% of the Prosus they get. But it was worthwhile getting because it adds to NAV, keeps their investors happy to sell higher than Naspers, and the gain is not taxable until the investor sells the unit trust units.
• Some of the index event would be crossed internally (especially those who had both FTSE EM and FTSE World portfolios) and the FTSE/JSE index-related activity on the sell side was able to be pre-placed/crossed.
• In the end, PRX SJ saw a significant lack of volume on the event - even less than suggested by the volume on other JTOP40 stocks - and PRX NA jumped after the JSE close as there had been no major selldown. Even more strangely, the PRX NA close saw significant volume print despite the FTSE World inclusion taking place on JSE pricing.
• On to the next trade.

links to:
Travis insight: Naspers Elections - What It Means for Prosus Index Events
my insight: StubWorld: Naspers' Discount Below Look-Through Pre-Spinoff Level)

Bellamy's Australia (BAL AU) (Mkt Cap: $1bn; Liquidity: $12mn)

China Mengniu Dairy Co (2319 HK), 31.43% owned by SOE COFCO, has announced a proposed acquisition of Bellamy by way of a Scheme at A$13.25/share, inclusive of a $0.60 share fully franked special dividend, for a total consideration of A$1.6bn or ~US$1bn. The Offer, which has the unanimous backing from Bellamy's board, is a 59% premium to last close. A key condition to the Scheme is the approval from Australia's FIRB.

• Bellamy is ostensibly a manufacturing and marketing company. It sources raw materials, such as milk powder from farmers domestically and abroad (such as New Zealand). Bellamy does not own the upstream supply chain - no farms, not even any cows. No asset that could be deemed "critical infrastructure". There is no national security risk to Mengniu taking over Bellamy, and it does not have a monopoly on infant formula products in Australia
• The vexing issue is that Bellamy's share price decline is the result of regulatorily imposed restrictions on infant formula products into China, issues that, some might conclude, could go away if this SOE-backed takeover completes. Without appropriate registrations to sell its products in China, Bellamy objectives are stymied. Bellamy's medium-term target of A$500mn remains, but it has deferred that target beyond FY21 given the SAMR registration process.
• I believe the regulatory barriers currently faced by Bellamy in China will largely be removed should the Offer complete. That's not a great situation. Nevertheless, I'm not entirely convinced the Morrison government should single out this transaction and further stoke tensions between Beijing and Canberra.

(link to my insight: Bellamy Cowed Into Mengniu's Offer?)

UNIZO Holdings (3258 JP) (Mkt Cap: $1.3bn; Liquidity: $26mn)

UNIZO has traded above Fortress' bid terms of ¥4000/share since the 16th of August when the Nikkei noted the deal. After the close, the bid was announced at that price and the stock fell briefly before rising the next day to ¥4300. Elliott International - which had last reported their position on the 14th of August (well before Fortress announced its official bid) - announced it had lifted its stake across its two funds to 10.95%. The immediate reaction by some will be to note the short-swing profit disgorgment liability Elliott just took on. That is not the right way to think about this.

• Elliott and Ichigo are on the same side in that they will say they want the best for all shareholders - not just Fortress and management. But principally, they want what is best for them. And they now own ~17.6%. Elliott may buy more in the coming days. The likelihood of Fortress raising their bid to ¥4300 or slightly higher has increased significantly.
  • UPDATE: Elliott has upped its stake to 11.98% as per an announcement on Friday. So far, they have bought about 2% of the company above the Tender Offer Price of ¥4000/share, spending about ¥4200/share on average for those shares.
• It should be noted that Unizo management has effectively shown itself willing to liquidate the company as it is, and move on under a new format. The MOU gives them two years without interference to sell above the appraised value of the asset after which Fortress takes control of the portfolio. Elliott and anyone else should be able to see this and know that Unizo management has sold itself and Elliott may have just decided it wants to renegotiate the terms.

(link to my insight: UNIZO: Elliott Goes "Deemed Insider" Buying 6% Through Terms)

Yixin Group Ltd (2858 HK) (Mkt Cap: $1.6bn; Liquidity: $1mn)

Tencent Holdings (700 HK) and Hammer Capital have tabled a preliminary non-binding proposal for Bitauto Holdings Ltd Adr (BITA US) at US$16/ADS, a ~20.6% premium to last close and a 36.1% premium to the 30-day VWAP. Separately, BITA owns ~43.74% of shares out in Yixin. Tencent holds 20.59%, JD.com 10.74%, and Hammer 1.48%. Should the Bitauto proposal complete, there will be a change in statutory control in Yixin, obligating Tencent to make an unconditional mandatory general offer.

• JD.com has given an irrevocable to not accept the MGO of Yixin Group provided the Offer Price is <$2. However, their statement stops short of agreeing to tender if >$2. Even if Tencent pitches a low-ball MGO, BITA, JD, and Tencent all hold >10% and holdings above 10% are excluded from the public float. Together with Hammer's 1.5% and connected parties at the time of the listing, this would appear to give Tencent & Hammer >77% in Yixin, breaching its permitted public float of 22.99%, which was granted at the time of its listing.
• Of interest, under the chain principle in The Codes on Takeovers and Mergers and Share Repurchases, I estimate Tencent is only required to make a downstream Offer of $1.04/share. My workings are towards the end of this insight.
• Shares touched an intra-day high of $2.39 on the announcement, but closed the week at $2.03. I would not chase it here. On balance, I think Tencent will look to take out minorities. It's a relatively small deal for them. But at this level, I would not second guess the MGO price. Below $2 and it starts a look a little more interesting.

(link to my insight: Tencent's Potential Downstream Offer For Yixin)

Briefly ...

There is growing speculation that SK Holdings (034730 KS), not SKT, is preparing for an Asiana Airlines (020560 KS) takeover. Reportedly SK E&C's recent CGH block deals (3.3% stake for ₩787bn) is a part of capital raising for Asiana. (link to Sanghyun Park's insight: SK Holdings Short Idea on Asiana Airlines)

I filtered through the short-selling information provided by Hong Kong's SFC, and after bolting on CCASS analysis and valuation metrics, fleshed out a slew of companies which probably deserve a second look - such Artgo Holdings (3313 HK) (down 11% on Friday) - for one reason or another. (link to my insight: Artgo And Other Short Sell Ideas)

London Stock Exchange (LSE LN) (Mkt Cap: $32bn; Liquidity: $73mn)

John DeMasi notes that If HKEX had made its proposal before the Refinitiv deal was announced, it would be a lot harder for LSE to summarily dismiss it. The multiples offered are clearly fairly dizzying, though this is tempered by the form of consideration being about three-quarters in HKEX’s own heady scrip. And this is before even considering the massive wall of issues and hurdles that would need to be addressed and the opportunity cost of backing out of the clearly attractive Refinitiv deal already in the works.

• While things percolate, John expects HKEx to take another stab with an improved offer (adding more cash), including with proposed improvements in its own corporate governance provisions to address some of those glaring issues. It could also propose a reverse termination fee to sweeten the pot if it really has conviction in its ability to get regulatory clearances.
• This would make a position in LSE currently an attractive trading position (buy on the rumour, sell on the news), though the eventual outcome still seems to favour the Refinitiv deal, which itself is an attractive proposition. It just means if the next HKEx proposal is rejected and left for dead then LSE’s share price will probably have gotten ahead of itself at current levels.
• Regardless, the odds are stacked against HKEx winning, and after trading out of any short-term opportunistic position on a bump, John would stay on the sidelines until the dust settles after HKEx folds its tent and goes away. The uncertainty over Brexit, geopolitical risk, the significant acquisition integration challenges of the Refinitiv deal, and the lofty valuation of LSE absent a proposed bid make this one situation that’s too rich for his blood.

(link to John's insight: London Stock Exchange Group (LSE LN) - Thoughts On Valuation)

Bitauto Holdings Ltd Adr (BITA US) (Mkt Cap: $1bn; Liquidity: $10mn)

Tencent Holdings (700 HK) and Hammer Capital's preliminary non-binding proposal for BITA at US$16/ADS, has the backing from shareholders holding 48.5%, including JD.com Inc (ADR) (JD US)'s 25.1% stake via JD Financial. Tencent currently holds 7.81%.

• As a matter of course, most Chinese companies incorporated in Caymans and listed in the US are already "locked up". The key privatisation risk is often on timing - numerous past Chinese ADR privatisations had protracted completion timelines, some well in excess of year, due in part to funding constraints; or as in 2015, when Beijing suspended the approval process of IPOs after an A-share equity rout, delaying the urgency to privatise ADRs.
• This is a non-binding proposal. Due diligence still needs to be carried out. Tencent has been a shareholder since 2Q16 and JD - with whom Tencent has close ties, including its proxy voting agreement into Yixin Group Ltd (2858 HK) - has been invested since 1Q15. This DD should be satisfied quickly, and a definitive agreement entered shortly after. As per the announcement, "given the involvement of Tencent and the Supporting Shareholders, we expect that the independent, disinterested members of the Board will proceed to consider the proposed Transaction".
• Using various Chinese ADR precedents, a firm Offer may be forthcoming mid-November, with the deal conservatively wrapping early April.

(link to my insight: Tencent's Offer For Bitauto Is A Done Deal)

China Biologic Products (CBPO US) (Mkt Cap: $4bn; Liquidity: $12mn)

CBPO has announced the receipt of a preliminary non-binding proposal from Beachhead Holdings, CITIC, Pw Medtech (1358 HK), Parfield International, HH Sum-XXII Holdings and V-Sciences Investments for US$120/share, in cash. This consortium holds 58% of the shares out in CBPO. Former CEO Bing Li is the controlling shareholder of Beachhead. Marc Chan (a major shareholder in PW Medtech) is behind Parfield and V-Science is a Temasek vehicle.

• Separately, and not mentioned in the CBPO announcement, PW Medtech announced it has entered into a SPA such that it will sell 1mn CBPO shares to Bing Li for $101/share. The sale requires the approval of PW Medtech shareholders which should be a formality. Subsequent to the sale, PW Medtech's holding in CBPO would decline to 13.91% from 16.52% currently.
• A key risk to the privatisation of Chinese ADRS is often on timing. CBPO has received and rejected two Offers last year, with superior premiums to last close. This Offer is only a 1.7% premium to the US$118/shares submitted by the previous chairman a year ago. However, this proposal has the backing of 58% of the shareholder register. Temasek is also a party to the consortium and is unlikely to put its name out there if not committed to a firm Offer.
• Pricing is okay (not great) versus peers, but it is at a two-year high level. This needs another 8.7% of shares out to get over the line. Capital has 5.3%. I would not rule out a small kiss to the deal. Due diligence still needs to be carried out. Bing Li was the CEO up until May this year and should know the financials intimately. Using various Chinese ADR precedents, a firm Offer may be forthcoming mid-November, and potentially wrapped up by mid-April.

(link to my insight: Vital Fluids: Proposal Rejuvenates China Biologics)

The A/H premium on Ping An Insurance Group Co Of China (601318 CH) / Ping An Insurance (H) (2318 HK) has shown cyclical behaviour going back to 2015 with a high around 15% and a low around -8%. Brian Freitas looked at the historical pattern of the A/H premium, compared it to the A/H premium index and to the A/H premium on a few other large caps, correlated movement in the short interest on Ping An H-shares with the A/H premium, and identified reasons for the latest jump in the premium and catalysts that could cause the A/H premium to drop back to historical averages. (link to Brian's insight: Ping An A/H Premium - Near the Highs)

The Infosys Ltd Sp Adr (INFY US) ADR has historically traded at a premium to the local Infosys Ltd (INFO IN) line. Over the last few months, barring a few spikes, the ADR has largely traded at parity. Brian believes a weakening INR, the end of Infosys' stock buyback, and a possible tweak by MSCI in not considering Depositary Receipts (DRs) in Foreign Ownership Limit (FOL) calculations for Indian securities could lead to an increase in the ADR premium in the near future. (link to Brian's insight: Infosys ADR - A Premium Trade)

The premium on Bangkok Bank's foreign shares Bangkok Bank PCL (BBL/F TB) has gone from 7% - at the time of the insight - to parity to its local shares Bangkok Bank Public (BBL TB) over the last six months. While the foreign shareholding has stayed at its 25% limit, there was a sell-off in the NVDRs leading to more headroom for NVDRs to be created. However, the number of NVDRs outstanding has been increasing over the last few days accompanied by a small premium of the foreign shares to the local shares. If this trend continues, there could be a substantial increase in the premium on the foreign shares and Brian considered (at the time of his note) a good time to buy the foreign shares relative to NVDRs. (link to Brian's insight: Bangkok Bank - Foreign Premium Ticking Up)

• Pacific Energy (PEA AU) has recommended QIC's revised Offer of A$1.085/share, which matched OPTrust/ICG's prior Offer.
• CK Asset Holdings (1113 HK) has dispatched its circular for the Greene King PLC (GNK LN) Offer. The Court Meeting is scheduled for the 9 October. GK's FA considers the Offer fair & reasonable.
• As Ap Eagers Ltd (APE AU) has acquired >90% of Automotive Holdings (AHG AU), it will now move to compulsorily acquire all remaining shares. AHG will be suspended at the close of trading on the 24 September.
• A takeunder for Unisplendour Technology (Holdings) Limited (365 HK). A consortium comprising UNIC Capital (50.1%), Shanghai SEMI Fund (28%), the Zhanxing Fund (21.9%) have entered into a SPA to acquire 67.82% from Unis Technology for $1.01/share, the completion of which will trigger an unconditional MGO. Unispelendour last closed at $1.70.
• The chairman of Thorney Opportunities Ltd, a small stake investor in Aveo Group (AOG AU) is "shocked the Aveo's directors and company's major shareholders are supporting the deal rather than actively working to secure a better return for all shareholders".
• Media are reporting that San Miguel (SMC PM) may consider divesting some of its cement interests to secure PCC approval in its bid for Holcim Philippines (HLCM PM).
• The equity transfer involving Maanshan Iron & Steel H (323 HK) completed on the 19 September. The Composite Document in relation to the conditional MGO will be dispatched no later than 31 October, following which the Offer will be open for acceptances. My guess is the Offer will be open for 21 days, the bare minimum under the Code, and will not be extended. Unless the Offer turns unconditional.
• The media are reporting that China Merchants Port (via Team Able) will not accept the HK$1.0127 MGO for Dalian Port (Pda) Co Ltd H (2880 HK). This should not be surprising. The intention is not to delist the company.
• Leyou Technologies (1089 HK) announced its major shareholder with 52.37% is in talks to sell his stake, the completion of which would trigger an unconditional MGO. No price was announced.
• 17.83% of Gcl New Energy Holdings (451 HK) moved out of HSBC into Shun Long Securities. This follows the transfer of 20% of shares out, or 3.8bn shares from HSBC to Get Nice Securities late last month. Gcl Poly Energy Holdings Limited (3800 HK), the 62.28% shareholder of GNE, has entered into a Cooperation Intent Agreement with China Hua Neng Group (a subsidiary of SOE China Huaneng Group) to sell 51% of GNE, the completion of which would trigger an unconditional MGO for GNE. (see my insight: New Development In GCL’s New Energy)

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

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.