Last Week in Event SPACE: Naspers, Renault/Fiat, Cocokara, GCL, A-REITs, SM Entertainment

Last Week in Event SPACE ...

• An appropriate discount for Naspers Ltd (NPN SJ)/NewCo is a complex subject, but there is a method now. And there is likely to be a method later. And the relationship between one and the other has a delta to the market.

• Fiat Chrysler Automobiles Nv (FCAU US) takes its ball and goes home after French government representatives requested a postponement to the Renault SA (RNO FP) merger.

• A deal whereby an SOE takes control of its key profitable division would leave Gcl Poly Energy Holdings Limited (3800 HK)'s loss-making (yet cyclical) polysilicon/wafer ops in the open.

• Interestingly - and highly unusual for Japan - there are two strategic acquirors for Cocokara Fine (3098 JP), and they are both "friendly."

• Another proposal, another suitor(s), yet even this price for Australian Unity Office Fund (AOF AU) looks light.
• KB Asset Management plays the hostile card on S.M.Entertainment Co (041510 KS).

• Plus, other events, CCASS movements and Mood Spins.

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

Naspers Ltd (NPN SJ) (Mkt Cap: $97bn; Liquidity: $263mn)

Travis Lundy published a couplet of detailed insights (do read them) - the first provides a summary of the expected mechanism of the Naspers' Euronext spin-off plus an expectation of what happens in index land (there is some weirdness which is definitely worth understanding), voting rights, and the impact on different investor types; and Part II discusses an appropriate discount.

• Given the tax basis differential - even for South Africans - on distributions, the minimum discount of Naspers N to NewCo N should be 5%, but perhaps larger. The NewCo structure is akin to magic for international investors. It is less so for domestic investors now but becomes more beneficial as the stock goes up, less beneficial as the stock goes down from the transfer price (of assets to NewCo for the new tax basis).
• There is one event - the arrival of NewCo N and inclusion into FTSE/JSE Top40 and SWIX Indices - which will create liquidity - a need to sell down shares in South Africa. It has limited size and is worth about 60mm shares of NewCo N as far as Travis can calculate. That is worth about 15mm shares of Naspers N.
• Because Naspers N is so big and NewCo is attractive to many non-South African holders, one might expect a little pressure to not see investors on the Naspers line see a 35-40% discount for a sustainable period. If Naspers widens to the 40% area, Travis would be a happy buyer of Naspers vs Tencent Holdings (700 HK) or an appropriate basket to hedge the e-commerce. At 20% he would unwind Naspers, and might unwind some NewCo at 20%.
• Generically, Travis is very slightly bullish Naspers with the discount at 30% and quite bullish the P&L effect of smart trading of the NewCo delivery mechanism. He is medium-long-term bullish a narrowing of the discount, but is not necessarily bullish a narrowing of the NewCo N discount narrower than 20-25% in the very near-term.

Links to Travis' insight:
Naspers ➔ NewCo Spinoff I: Structure, Ownership, Index Effects
Naspers ➔ NewCo Spinoff II: Thoughts on the Appropriate Discount

Gcl Poly Energy Holdings Limited (3800 HK) / Gcl New Energy Holdings (451 HK)

GCL Poly, the 62.28% shareholder of GCL New Energy (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 MGO for GNE. The discussions are at a preliminary and exploratory stage and they may or may not lead to an offer. No price was mentioned in the announcement.

• The announcement indicates the SOE is seeking 51%, suggesting intention to not only acquire a majority control but also to maintain the listing. To facilitate this outcome, the Offer Price may be pitched around the undisturbed price.
• The positive reaction to GNE's share price to the news is likely one of sentiment. An SOE backstopping GNE's debt is a good thing, removing an overhang, and lessening the likelihood of additional solar power plants sold piecemeal to SOE-affiliates, potentially below an optimum selling price.
• The near-term is less clear for GCL. Presumably, it will receive cash for the 51% stake in GNE or ~HK$3bn (if using the undisturbed price), or around 34% of its current market cap. But GCL will no longer control and consolidate its most profitable division, starkly exposing the losses of the cyclical stub/parent ops. I would expect some narrowing in GCL's discount to reflect the positive sentiment surrounding GNE. But should a firm deal unfold, one that is pitched at a zero premium, I would want to exit GCL.

(link to my insight: StubWorld: New Interest In GCL's New Energy)

Renault SA (RNO FP) / Fiat Chrysler Automobiles Nv (FCAU US)

While initial reports suggested that Renault was nearing an agreement with FCA on its proposed merger, Renault decided to postpone a decision to review the terms further, on prodding from the French government. This was swiftly followed by FCA withdrawing its offer. This looks on the surface like it could be a negotiating tactic by FCA - and it is possible that Nissan's wariness is holding up Renault's agreement.

• From the start, Renault's biggest voting shareholder, the French state, has insisted on ensuring no negative impact on employment in France, and Nissan's buy-in. Most likely, the latter was the reason for putting off a decision as the two Nissan directors on Renault's board abstained. The other abstainers were apparently the French state and a union representative.
• There are a lot of moving parts here and Mio Kato, CFA views the simplest and safest bet as being long Nissan by virtue of the bad news being out and its depressed valuation. The major downside risk would be an FCA-Renault deal that significantly impaired its independence - but such an outcome would probably be blocked by the Japanese government. If the deal is consummated then Nissan gets to leverage some operational benefits. If not, then Nissan has bought at least some time to strengthen its operations and Renault would likely be in a weaker negotiating position.
• While Renault has the most to gain from a potential deal, Mio views the moves to delay the vote by the French state as indicative of where the real power lies here. Renault could potentially benefit given both Mio and Travis view the current deal undervalues Renault (and its Nissan stake), but it is also likely to be subject to more volatility.

• Time is on Renault's side, and any expression of upset over pricing is on Renault's side. Expression of upset over pricing on the FCA side is disingenuous - FCA has a number of clouds on the horizon. If this deal fails, a Renault/Nissan deal would become easier in Travis' opinion. Nissan needs time and a diversion here would give them some time.

links to:
Mio's insight: Nissan: FCA Pulls Out as Nissan Demurs and Renault Vacillates
Travis Lundy's insight: Fiat-Renault - "Let's Have a Clean Fight, Touch Hands, Back to Your Corners."

S.M.Entertainment Co (041510 KS) (Mkt Cap: $898mn; Liquidity: $12mn)

KB Asset Management (KBAM) announced that it is going "activist" on SME. KBAM, the Korea National Pension Fund (NPS) and Korea Value Asset Management own 7.6%, 8.1% and 5.1% respectively in the company, which is together higher than founder Lee Soo-Man's stake of 19.1%. Foreigners own a 16.9% stake in the company.

• KBAM has requested that SME start a dividend payout policy of 30%. Since the company's IPO in 2000, it has never paid out any dividends. In addition, KBAM has requested a merger between SME and Like Planning, a company 100% owned by Lee Soo-Man, which currently receives significant interconnected company payments for "consulting".
• In addition, KBAM mentioned that SME's non-core businesses including restaurants, a winery, and resorts do not add any value to the company, and should be disposed. And it wants to replace several key BOD members. KBAM has asked that the company respond to these requests by June 20th.

(link to Douglas Kim's insight: KB Asset Management Goes "Activist" On SM Entertainment)

Australian Unity Office Fund (AOF AU) (Mkt Cap: $2bn; Liquidity: $6mn)

Together, Abacus Property (ABP AU) and Charter Hall (CHC AU) have made a $2.95/share all-cash proposal (6.1% premium to last close and a 10.5% premium to the NTA) for AOF, by way of a Scheme. The proposal is indicative and non-binding, and subject to due diligence. ABP and CHC also announced they currently hold 19.9% in AOF.

• Unlike Starwood's recent (and fourth) proposal, ABP/CHC has stated that shareholders can retain the distribution of up to $0.0395/unit for the quarter ending 30 June (i.e. no reduction in the Offer Price); and the quarter ending 30 September distribution, dependent upon the implementation date. With an expected completion mid-late-October, there is a high likelihood A$0.079/unit will be added to the Offer Price, increasing the premium to last close and NTA to 9% and 13.4% respectively.
• Is it enough? My read is that this may still require a small kiss to get up. I would also not rule out Starwood taking a fifth look.
• Since Starwood updated its Offer post-due diligence at A$2.95 less distributions, the 10-year government bond yield in Australia has dropped from 2.64% to ~1.51%, which is the equivalent of a 10.2% increase in the price on the benchmark ten-year bond. Lower risk-free rates offer higher spreads if the yielding asset (the REIT) price is unchanged but lower risk-free yields may portend economic weakness ahead. Travis expects this deal may need another 15-20cts to account for the lower risk-free rates in the interim.

(link to my insight: Abacus And Charter Team Up For AOF)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $5mn)

Both Sugi Holdings (7649 JP) and Matsumotokiyoshi are wooing #7 Cocokara Fine to create a merger to be the largest market share by revenue and stores in Japan. This is an unusual competitive friendly bidding situation.

• Cocokara has seen OPM and NPM deteriorate, and has seen revenue growth lower than its erstwhile partners over the past several years despite being located in the only major demographic growth area of Japan. It needs help. Travis' first read - and Michael Causton's insight Matsukiyo and Cocokara Fine Tie to Shake up Drugstore Sector delves into greater detail - is that the "culture" may be a better fit with Sugi.
• The sector is relatively inexpensive and is growing. Travis expects it to continue to grow as the stores may expand their role to get into more food sales. Expect more takeup of pharmacy services as small clinics and hospitals and retiring mom & pop operations let established chains take over. When foreign investors come back to Japan in a serious way on a net basis, they will reinvest in this sector.
• Travis was inclined to be bullish Cocokara even after the recent jump, but thought the premium from here may not be high if Matsumotokiyoshi is the preferred partner. There is a little more stretch for Sugi. He expects Sugi has the upper hand in negotiations. He thinks the whole sector is reasonably attractive on a sector basis.

(link to my insight: Cocokara Fine は Cocokara いいね)

Netcomm Wireless (NTC AU) (Mkt Cap: $111mn; Liquidity: $1mn)

On the 22 February, Netcomm received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme. The deal had Netcomm directors' support, including founder David Stewart, an NED, the major shareholder with 12.3%. FIRB was received on the 15 April and the Scheme Booklet was dispatched on the 3 May, with the IE providing a "fair and reasonable" opinion. Proxy advisors Glass Lewis and ISS recommended shareholders vote FOR the Scheme at the Scheme Meeting to be held on the 7 June.

• But in an about turn, Netcomm first retracted the proxy advisor announcement, then pushed back the Scheme Meeting to the 20 June to "enable the shareholders of Netcomm to consider the supplementary disclosure that Netcomm proposes to make in response to matters raised by some Netcom shareholders and ASIC".
• Netcomm shares tanked last August after guiding lower growth in FY17. Disgruntled shareholders considered Casa's bid opportunistic and issued a letter arguing for a higher price. Netcomm demurred. Optically, there is an air of opportunism surrounding the Offer. However, despite the lack of urgency to sell, it has full board support, including the founder and major shareholder.
• Shares last changed hands at $1.09 and have not closed through terms. That proxy retraction appears a technicality - it appears such an announcement is not permissible without supporting evidence why the proxy advisors reached their conclusion. And ASIC is closely monitoring proxy advisor practices.

(link to my insight: Last Minute Hitch To Netcomm's Vote)

Malaysian Telcos

The announced talks for a merger of Telenor's (TEL NO) Asian business and (most of) Axiata (AXIATA MK) will have substantial implications across multiple Asian markets. The greatest impact will be in Malaysia where Telenor proposes merging its DIGI (DIGI MK) subsidiary with Axiata's Celcom. Malaysia now looks to be moving towards a 2-3 player (+1) market if the deal is approved.

• If a DIGI/Celcom merger is allowed it may make sense to allow a merger of Maxis (MAXIS MK) and U-Mobile. It does not seem reasonable that the regulator would block the latter after allowing the former. Malaysia may end up as a 2 (+1) player mobile market (the +1 being Telekom Malaysia (T MK)), with positive dynamics as a result.
• The Malaysian regulator's (MCMC) comments since the deal was announced suggest there could be a real risk the deal is rejected. However, while there has been no official comment, New Street Research thinks it is unlikely the deal would be announced without at least tacit approval of the government and major shareholder. A recent interview with Prime Minister Mahathir suggests the deal has his blessing.
• Along with Maxis, New Street upgraded DIGI to Neutral in early 2019 (after years of being Sellers). The reasons for the upgrade then included improving mobile environment/affordability, fibre wholesaling opportunity (as Telkom Malaysia was forced to open up its fixed network) and the stock being down around 30% from its high.
• In Indonesia, New Street thinks the deal could improve XL Axiata's (EXCL IJ)'s access to funding. That could be seen as a negative for Telkom Indonesia (TLKM IJ). Perhaps the XL Axiata / Link Net (LINK IJ) deal could be resurrected.

(link to New Street's insight: Malaysian Telcos: Heading Towards a 2 (+1) Player Market if Telenor/Axiata Merger Is Approved)

Sanghyun Park flagged SamE C/1P having traded for three days at a -1.5~1.6σ level (on a 20D MA) and therefore suggests shorting 1P class shares and going long C.

(link to Sanghyun's insight: Samsung Electronics Share Class Trade: 1P Is Overbought Relative to C)

• Automotive Holdings (AHG AU) announced it is selling its 74%-held motorcycle businesses for A$18mn.
• The IFA considers the Offer for Lafarge Malaysia (LMC MK) to be not fair and reasonable, and recommends shareholders reject YTL's bid.

• Dalian Port (Pda) Co Ltd H (2880 HK) has announced a possible MGO at $1.0127/share, a 0.27% premium to last close. Various companies under the PRC government, which ultimately holds 68.4% in Dalian Port, are simply rearranging a few deck chairs. The main change: Dalian Port Corporation (DPC) holds 46.8% - via A and H shares - into Dalian Port (Pda). DPC is a 100%-held subsidiary of Liaoning Port Group, which in turn is 50.1% held by the Liaoning Provincial Government (LPG) (through Liaoning SASAC) and 49.9% by China Merchants Liaoning (CML). LPG is transferring 1.1% of its stake to CML, giving CML 51% (& effective control) of Liaoning Port Group. The transfer is subject to a number of conditions, but presumably will be rubber-stamped. The long stop date for the conditions is 30 September.

• Discussions between EQT and Vocus Communications (VOC AU) have been terminated - a little over one week since the indicative offer was announced. No specific reason was cited, only that after an accelerated period of due diligence, EQT walked.

• The Tender Offer doc is out for Golden Land Property (GOLD TB). The offer period is from 5 June to 8 August (45 biz days). Settlement is the 14 August.

• Cordlife (CLGL SP) has announced a non-binding proposal for Global Cord Blood Corp, via the issuance of 2.497bn shares worth S$1.248bn or an indicative Offer Price of US$7.50/share. The transaction is subject to the entry into of definitive transaction documentation, including a merger agreement following satisfactory completion of business, financial, legal and other due diligence.

• FIRB approves Nippon Paint's acquisition of DuluxGroup Ltd (DLX AU).
• Graincorp Ltd A (GNC AU) is proceeding with the sale of its bulk liquid terminals to ANZ Terminals.

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