Last Week in Event SPACE: Navitas, Harbin Electric, Yungtay, Kosaido, Ophir, Tesla/CATL, Ecopro

Last Week in Event SPACE ...

• Agreed deal with no rival bidders coming, expect Navitas Ltd (NVT AU) to trade tight.
• The risk/reward is simply not present in Harbin Electric Co Ltd H (1133 HK)'s low-ball offer.
• One wonders if there is a "gotcha" coming against the foreigner in Hitachi Ltd (6501 JP)'s tilt for Yungtay Engineering (1507 TT)
• We should have seen this coming as Murakami-San Goes Hostile on Kosaido Co Ltd (7868 JP).
  
• Medco Energi Internasional T (MEDC IJ)'s offer for Ophir Energy (OPHR LN) should get up after a small bump and a chunk of the registry giving an irrevocable undertaking.
• A Tesla Motors (TSLA US) / CATL (A) (300750 CH) tie-in lacks credibility.

• Ecopro Co Ltd (086520 KS) is looking "cheap" as 56%-held Ecopro BM Co Ltd (247540 KS) pops 48% since its IPO, and now is now worth 115% of its market cap.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

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

Navitas Ltd (NVT AU) (Mkt Cap: $1.4bn; Liquidity: $4mn)

After 6 months of haggling and due diligence, debt negotiation, and structuring, global education company Navitas has now signed a Scheme Implementation Deed with a consortium led by Australian Private Equity firm BGH Capital consortium, which includes Navitas Founder Rod Jones (also the largest holder at 13%) and AustralianSuper. The Scheme Price of A$5.825 is a 6% uplift from the original A$5.50 offered in the preliminary, indicative, non-binding offer announced on 10 October 2018 and a 34% premium to the undisturbed price of 9 October 2018 of A$4.35/share.

• At an equity valuation of A$2.1bn, this is being done at a TTM EV/EBITDA of ~15.5x (and probably around 0.8 turns less for FY19 forecast, which is healthy, but the company spins off prodigious cashflow, which makes it doable for private equity with leverage.
• Given the lack of any real news or rumour of competing offer in the last five months, or in the period since the lockup, Travis Lundy doesn't think it likely we will see one. Because he thinks this deal has very few hurdles, expect it to trade tight.

(link to Travis' insight: Navitas Gets An Agreed Deal with BGH)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $898mn; Liquidity: $4mn)

Harbin Electric's ("HE") composite doc for its merger by absorption has been dispatched. HE's major shareholder Harbin Electric Corporation, an SOE, is seeking to delist the company by way of a merger by absorption at HK$4.56/share, an 82.4% premium to last close. The offer has been declared final and the IFA considers the offer fair & reasonable. The significant offer premium to last close, the material drop in FY18 profit, and the lack of possibility of a competitive bidder emerging suggests this Offer falls over the line.

• Seeing it blocked at the H-share meeting is a risk, although no single shareholder has the requisite stake to block the deal. The tendering acceptance condition in this two-step hybrid Offer of 90% of H shares out, has been seen in prior PRC-incorporated takeovers.

• However, I still consider a “fair” price to be something like the distribution of net cash (~$3.48/share by my calcs) to zero then taking over the company on a PER with respect to peers. Dissension rights are available, although I am not aware of any precedents from discussions with both the PRC and HK tribunals, nor the calculation methodology of a "fair price" under such a dissension, nor the timing of payment.

• Trading at a wide gross/annualised spread of 8.3%/54.5%, implying a >80% chance of completion. The current downside should this break is 45%. Not an attractive risk/reward.

(link to my insight: Harbin Electric's Offer: One For The Brave)

Yungtay Engineering (1507 TT) (Mkt Cap: $793mn; Liquidity: $1mn)

On March 6th, a day before Hitachi Ltd (6501 JP)'s Tender Offer for a minimum of just over a third of Yungtay was expected to close, the closing date was extended to 22 April, as Taiwan regulators (MEIC and FTC) had not signed off. The proposed purchase price was unchanged at NT$60.

• An EGM called by independent director Chen - who has been against the deal - was expected to take place on the 18 April. It was not clear the underlying purpose of the EGM other than to change the directors in place and gain management rights for the Baojia Group and Hsu Tso-Ming. Perhaps IF the board were to be renewed with less support for Hitachi, then the board could change its support/opinion and that might affect retail investor support for the deal. Retail tends to vote with management. In any event Hitachi filed an injunction to stop the EGM.
• IF Hitachi is unlikely to get the required number of shares, then it could easily be the case that they lose board and management control. If they do get the support, they will effectively control the board and management for the foreseeable future.
• Travis' expectation was that this deal was still "Safe" and would get done, most likely at NT$60 but with the option of a "kiss" to NT$63 or so in the case of more public awareness and castigation of Hitachi and the board for ignoring competing indications at higher prices.
• Helpfully, after the close on Friday, Hitachi gave it a kiss, raising the Tender Offer price to NT$65/share.
• Travis has opinions on what to do here. Read the insights.

(link to Travis' insights:
Yungtay Tummy Rumblings Continue But Not Clear To What Avail
Hitachi Bumps Yungtay Bid to NT$65. Take It.

Kosaido Co Ltd (7868 JP) (Mkt Cap: $165mn; Liquidity: $2mn)

On the 8th of March, Bain Capital raised the Tender Offer Price by 14.8% to ¥700/share and extended the Tender Offer by almost two weeks to the 25th of March. It also lowered the amount which needs to be bought to 50.1% from 66.67%. So, on the 21 March, Murakami-san launched a Tender Offer of his own.

• Murakami-affiliated entities Minami Aoyama Fudosan KK and Reno KK's Tender Offer at ¥750/share is to buy a minimum of 9,100,900 shares and a maximum of all remaining shares. The entities currently own 3,355,900 shares (13.47%). That minimum should be easier than buying a minimum of 12,456,800 shares at ¥700/share under Bain Capital's offer.
• There is a theoretical possibility that Japanese retail investors decide to tender their shares into Bain's bid because it is supported by management rather than sell to a higher bid which is not. Travis doubted it will go this way but stranger things have happened. Bain should be willing to walk.
• After Travis wrote the first two insights listed below with the content above, the stock soared 16.5% on Friday and ended at a 14.5% premium to the Murakami tender of ¥750/share (i.e. closed at ¥859/share). The company maintained its support for the Bain Capital bid at ¥700/share, but withdrew its recommendation that investors tender into it. The company did not yet offer a real opinion on Murakami-san's offer. That must come in the next 9 business days.
• Travis has opinions on what to do here. Read the insights below.

link to Travis' insight:
Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain's "Final" Offer.
Kosaido (7868 JP) - Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
Kosaido (7868 JP) Reaches Value You Can Sell

Villa World Ltd (VLW AU) (Mkt Cap: $200mn; Liquidity: $1mn)

Australian property developer, Villa World Ltd (VLW AU) announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close. AVID's indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.

• During 2018, VLW's share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.
• Ho Bee Land Ltd (HOBEE SP), VLW's largest shareholder and JV partner, responded to AVID's proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share - and a high of A$2.18/share - lifting its stake to 9.41%. VLW has also recently bought back and cancelled 1.76mn shares or ~1.4% of shares out. The highest price paid was $2.09.
• AVID's offer looks opportunistic and it's doubtful VLW will want to engage. VLW is trading below its book, paying out one of the highest yields among its peers, and with ~21% of the share register potentially defending their position- the largest shareholder actively buying - there's likely upside from here. Shares closed Friday at $2.24.

(link to my insight: Ho Bee Ups Stake In Villa World After AVID Lobs An Offer)

Aveo Group (AOG AU) (Mkt Cap: $806mn; Liquidity: $3mn)

Aveo announced in early February a number of indicative non-binding bids were received for a "whole of company transaction" with the AFR reporting (paywalled) that Lone Star had joined the bidding. Other interested parties are believed to include Blackstone and Cerberus Capital. Aveo's share price is up ~11% since announcing the receipt of the indicative bids - and closing at $1.97 on Friday - having drifted down from a (recent) closing peak of $2.14 earlier this month.

• Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.

(link to my insight: Aveo: Take Advantage of the Lull To Take a Second Crack)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $7mn)

The partial offer has successfully closed, with no major surprise in the expected pro-ration and the back end traded higher than one's purchase price - not down. Some of this may be due to lack of stock borrow, and conversely, some of the strength may be due to those who had shorted their borrow buying back their short.

• That left us with a question - do we want to own a residual here? Or instantiate a new position? The current post-tender price was 35.7% higher than the undisturbed price.
• Travis could not recommend an outright buy on fundamental reasons. He thinks the Itochu story is reasonably compelling, or will be, but the lack of near-term observable fundamental turnaround may disappoint some. There may not be a lot of IR or analyst coverage of the situation either. For that, if you have a residual trade, he would sell it here.
• This is not a short recommendation. This is a "It was a good arb trade and now the arb trade is over so don't become a long-term investor just because it is doing better than you thought."

(link to Travis' insight: Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait)

CATL (A) (300750 CH) (Mkt Cap: $28.5bn; Liquidity: $95mn)

CATL which grabbed Panasonic Corp (6752 JP)’s leading position in the battery supplier industry last year now seems to be grabbing the latter’s key customer as well. The news circulating states that CATL could power Tesla Motors (TSLA US)’s Model 3 cars which Tesla is planning to start assembling at Tesla’s new factory near Shanghai.

• However, the news lacks credibility as neither company has commented on the matter, while Tesla has already agreed with Tianjin Lishen to supply batteries for its Chinese Plant.
• But if true, Tesla would be the key one to benefit, while CATL could be taking up a considerable share of risk in terms of stable future orders.

(link to LightStream Research's insight: CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?)

Ophir Energy (OPHR LN) (Mkt Cap: $525mn; Liquidity: $7mn)

The boards of Medco Energi Internasional T (MEDC IJ) and Ophir have agreed to increase the Offer price to £0.575 from £0.55, representing a 73.2% premium to the undisturbed price. All other details of the scheme remain unchanged. The court meeting is to take place on the 25 March, while the long stop is the 20 June - unless both companies agree to an extension.

• Subsequent to the bump, Coro Energy PLC (CORO LN), which had previously submitted a non-binding cash/scrip reverse takeover offer, declared it has no intention to bid. Sand Grove has also announced it has given an irrevocable undertaking to vote its 18.73% in favour of the scheme. Coro held discussions with Sand Grove before abandoning its bid.
• Petrus, which previously estimated a £0.64 - £1.42/share range - just for Ophir's SEA investments, has yet to respond to the Offer increase; but it's wholly doubtful their position has altered. Shortly before the bump, it said it would vote its 3.95% stake against the scheme.
• While I consider the offer for Ophir sub-optimal - and shares have closed above terms on 30% of the trading days since Medco's initial offer - Petrus alone cannot disrupt the vote. Medco's Offer is conditional on 75%+ approval from Ophir's shareholders, which appears less tenuous following the 4.5% bump and Sand Grove's irrevocable undertaking. Shares closed at £0.569 on Friday.

(link to my insight: Medco's Bump For Ophir Won't Sway Petrus)

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $5mn)

CMA CGM SA (144898Z FP) has 89.47% of CEVA and will now move to squeeze out and delist. The additional tender period will run from 20 March to 2 April. CEVA's board of directors have reversed their earlier opinion and recommend shareholders to tender.

• If delisting occurs, it is expected concurrently occur with a squeeze-out, which would be expected to take place in the third quarter of 2019 once all stock exchange and other legal conditions are fulfilled.
• Depending on the final tendered %, the squeeze-out will occur via the simpler market squeeze-out process if CMA gets 98%+; or the more complex off-market merger/squeeze out route if the % tendered is between 90%-98%.

(link to my insight: CEVA Logistics: Okay, Now You Can Tender)

Ecopro Co Ltd (086520 KS)/Ecopro BM Co Ltd (247540 KS)

Ecopro BM is up 48% since its IPO on March 5th. Ecopro, which holds 56% in Ecopro BN is up just 1%. That stake is now worth 115% of its market cap.

• The stub assets primarily comprise a 100% stake in Ecopro Innovation, which is involved in the processing of lithium for lithium ion batteries. Innovation's net profit increased to ₩26.3bn in the 1Q-3Q18 from ₩10.4bn in 2017. Innovation's book value also increased to ₩35.3bn at the end of 3Q18 from ₩7.4bn at end of 2017.
• Douglas Kim recommended going long Ecopro Co and shorting Ecopro BM. Plugging in his numbers, I back out a discount to NAV of 55%. Both legs are pretty liquid.

(link to Douglas' insight: Korean Stubs Spotlight: A Pair Trade Between Ecopro Co and Ecopro BM)

Amorepacific Group (002790 KS)/Amorepacific Corp (090430 KS)

Curtis Lehnert closes this set-up trade as levels have reverted to the average. Both companies recently reported so-so results, suggesting the core business continues to face declining revenue from "roadshop" brands aimed at the lower-end of the market.

• More surprising was the stock buyback announced at both companies 20 days after the earnings announcement, which spurred a 15% rally in the Group's share price while Corp rallied nearly 11%. The buyback announcement seems to have caught the market by surprise and also caused the stub to revert to its 6-month average level of ~16% discount to NAV.
• The pair trade made 2.84% ex-costs in two months.

(link to Curtis' insight: TRADE IDEA - Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade)

Hyosung Corporation (004800 KS)/Hyosung TNC Co Ltd (298020 KS)

Douglas recommended closing the Hyosung unwind trade, which has returned ~8.2% before comms and borrowing cos.

• The reason for Hyosung TNC's recent move upwards? Right place, right time it would seem, as its trading value substantially increased, touching ₩8.9bn on the 19 March, the highest level this year, and the highest level since August 22nd, 2018.

(link to Douglas' insight: Korean Stubs Spotlight: Close Out the Pair Trade Between Hyosung TNC & Hyosung Corp)

Linkbal Inc (6046 JP)(Mkt Cap: $4.2bn; Liquidity: $5mn)

On November 13th last year, Linkbal announced it was looking to move from MOTHERS to the TSE First Section. The stock rallied. Then it fell a lot. On March 5th, the company announced a forthcoming tachiaigai bunbai offering designed to increase the float. This would get it most of the way towards meeting the requirements, but likely not all the way.

• An inclusion is still months off. And there would likely be another sale to increase shareholder count by 800-1000 before then, whether in the form of a Public Offering/Uridashi or in the form of another tachiaigai bunbai.
• The company's market cap is not large enough to warrant analyst coverage, and float will remain relatively small. I expect the stock to get re-evaluated by small-cap managers. There are some. There probably should be more.
• Travis recommended investors buy the stock - which traded over 2% of shares outstanding at -2% in the first five minutes, and 3% of outstanding in the first 20 minutes, before rising to close +13.6% on Wednesday. The stock fell 6% on Friday.

(link to Travis' insight: Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?)

• Hopewell Holdings (54 HK)'s "Egregiously Bad" scheme has passed with 96.27% of disinterested shareholders approving the resolution. Shares will now be suspended at the close of trading on the 17 April. Cheques are expected to be dispatched on the 14 April. Seems like I'm not the only one as David Webb was also unimpressed with the Offer.

• Xenith Ip (XIP AU) has surprisingly concluded IPH’s proposal is not superior to the offer by Qantm Intellectual Property (QIP AU). Also the ACCC will not oppose the Qantm/ Xenith merger. Separately, IPH Ltd (IPH AU) encourages XIP shareholders to vote against the QANTM merger, stating its offer is superior in value.

• After Eclipx (ECX AU) announced a 42.4% decline in NPATA in the first five months vs. FY18, and other significant issues in the Right2Drive and Grays divisions, Mcmillan Shakespeare (MMS AU) said it did "not believe it will be possible to complete the proposed scheme". Eclipx closed down 60% on the week.

• Brookfield has received FIRB approval in its tilt for Healthscope Ltd (HSO AU). The AFR is reporting (paywalled) that BGH is now out of the running for Healthscope. Which leaves Brookfield's twin bids ($2.50 via a scheme or $2.40 via an off-market takeover) as the expected winner. Norges Bank announced it now holds 5.08%.

• Kian Joo Can Factory (KJC MK)'s offer is now unconditional.

• China Power New Energy Development Co (735 HK) is suspended pending an announcement pursuant to he takeovers Code.
• Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector, to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN)through a three-step transaction - 20.3% from Mindtree’s largest shareholder, V G Siddhartha, 15% from the open market, and an open offer for 31%. All purchases up to Rs980/share, a 4% premium to the undisturbed price. (link to Arun George 's insight: Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit)

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.