Last Week in Event SPACE: Nexon, Bank of Kyoto, Yungtay, Asiana Airlines, Anadarko

Last Week in Event SPACE ...

• The incentive of most potential buyers of Nexon Co Ltd (3659 JP)/NXC (possibly a MBK+Tencent Holdings (700 HK)+Netmarble Games (251270 KS) consortium) is to take the thing private, mash it around a little bit, financially re-engineer the balance sheet and if possible push the revenue side a bit more aggressively.
• Top up profit or policy cross-holding focus? Either way, Bank Of Kyoto (8369 JP)'s discount to NAV is now at a level 2StDev away from its historical average after selling shares in Nintendo Co Ltd (7974 JP) back in February (written before Nintendo's giant pop on China Switch news).
• Hitachi's Tender for Yungtay Engineering (1507 TT) was done and dusted before the news of the new board. The recommendation was to tender into it.
• Kumho Industrial (002990 KS)'s 33.47% stake in Asiana Airlines (020560 KS) may cost potential buyers upwards of ₩2tn.
• Chevron Corp (CVX US)'s mega-deal for Anadarko Petroleum (APC US) may tease out activism.
• 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)

Nexon Co Ltd (3659 JP) (Mkt Cap: $12.6bn; Liquidity: $47mn)

Travis Lundy returned to possible-change-of-control-at-Nexon situation where there is an ongoing inconsistency in the news regarding the sale of Founder Kim Jung-Ju's personal holding company NXC Corp. The latest development is that the deal was still for NXC, not Nexon shares, and NXC and its bankers had received an opinion from the Tokyo Stock Exchange that a Tender Offer for Nexon shares would not be mandatory. While the idea that the deal is for NXC not Nexon shares is complex, the idea the TSE would have written such a letter is odd. The TSE does not determine legality vis-a-vis the Financial Instruments & Exchange Act. The FSA does.

• There is structurally no reason why buyers would not want to do a Tender Offer for the rest of the company. Because they can access the cash on Nexon's balance sheet if they get the whole company, it makes buying the second half of the company significantly cheaper and more efficient than buying the first half. Combine that with full control and it seems a no-brainer if you are paying ₩10tn for ~48%. And even that ₩10tn number may need to be taken with a grain of salt.
• Done right, a buyer/consortium (leaning towards a Tencent Holdings (700 HK) anchor as surmised by Sanghyun Park) would have very good equity terms on a deal to buy the whole thing (NXC plus Nexon minorities so the buyer owned 100% of Nexon and subs) if Kim Jung Ju provided vendor financing. Kim Jung Ju would get a better sale price and buyers would get a better IRR.
• Ultimately, Travis expected the deal could be for buyers to buy NXC, and then for NXC to buy out the rest of Nexon, merge the entities with NXC becoming the surviving entity, then to rename itself Nexon and aim for a relisting in Korea in 12-18 months from deal date.
• In the low ¥1600s, this is an OK reward to risk. Below that even better. There still remain slight negative angles - DunFa may be a huge game in China, but Nexon through its own efforts and its Korean subs are not burning down the house elsewhere - however games on deck may make the royalty stream look even better and make this an attractive bet.

links to:
Travis' insight: Nexon: Deal Structure, Valuations, Question Marks
Sanghyun's insight: Nexon Sale: Main Bidding on May 15, NXC Stake Up for Sale & No Mandatory Tender

Bank Of Kyoto (8369 JP) (Mkt cap: $3.2bn, Liquidity: $8mn)

Back in February Nintendo Co Ltd (7974 JP) announced a buyback (E, J), a share cancellation (E, J), and a public equity offering of secondary shares (J-only), stating: "in the context of how companies deal with their policy cross-holdings becoming the subject of greater focus, we confirmed that several shareholders desired to sell shares, and as a company subject to such cross-holdings, we are conducting the above-mentioned Offering." BoK was one of the sellers.

• But was the sale really because of the new focus on policy cross-holdings, or just BoK topping up profit before the end of the fiscal year? The NAV discount narrowed immediately afterwards, from 38.5% to ~30% by mid-March. That trend subsequently reversed, with the current discount to NAV of ~40% at its widest in the past five years.

• BoK has an estimated total cross-holding of 277 securities with the "reason" for holding these companies in most cases being "to maintain and broaden the overall transactional relationship and strengthen the long-term stability of the relationship." Yet the vast majority of the portfolio are companies that do not need to borrow nor require BoK's backing. The holdings are effectively more there due to legacy than to existing need.

• Travis was bullish BoK late Feb on the possible salutatory effect on banks with cross-holdings. The discount narrowed sharply at the time, but there has been no further clarity on this cross-holding focus and the NAV discount is now wider than at the time of the Nintendo sale and at an extreme level of 2StDev. It remains speculative however BoK looks a buy against a basket of its cross-holdings.

  • UPDATE: Nintendo Co Ltd (7974 JP) popped 14% on Friday after it announced Tencent will distribute Switch in China. BoK gained 2.5%.

(link to my insight: StubWorld: Bank of Kyoto's NAV Discount At Multi-Year Low)

Briefly ...

Reportedly Champion REIT (2778 HK), 66.1%-held by Great Eagle Holdings (41 HK) is seeking to sell Langham Place for HK$20bn.

Yungtay Engineering (1507 TT) (Mkt Cap: $855mn; Liquidity: $1mn)

Taiwan's Fair Trade Commission approved Hitachi Ltd (6501 JP)'s deal (in Chinese here), saying that while there would be an overall increase in "market power" between the two companies, given the presence of strong market competition, it saw little ability for the company to unilaterally take action to disadvantage customers or the market", and the TFTC sees little overall restriction on competition in the market due to the deal.

• All regulatory conditions were then met. The company also announced that 89,002,841 shares had tendered against a minimum threshold of 88,504,328 shares. That means that this deal is, for all intents and purposes, done because when the company makes such an announcement, shareholder withdrawals of tendered shares are not allowed.
• Unless you want to own the back end because you see shareholder competition continuing through the end of June, Travis said he would tender what position he had and await the possibility of a future fall in price if one wanted to participate in the "fun" involved with the current opposition mounting another proxy battle for the June AGM.
• Subsequent to his insight, the 18 April EGM voted in a new board which consists of three members from Yungtay and Hitachi, three from "the market" (i.e. the opposition candidates), and three "independent" directors with two of the three independents coming from "the market". This means that if the independents vote with those who sponsored them, the opposition (Baojia group, the rogue family member, Otis, and Schindler) now control "management rights" but this could disappear in June, especially if Hitachi gets over 50% in the tender.

(link to Travis' insight: Hitachi Deal for Yungtay Meets All Conditions)

Asiana Airlines (020560 KS) (Mkt Cap: $1.3bn; Liquidity: $30mn)

Kumho Industrial (002990 KS) has officially confirmed it has put its 33.47% stake in Asiana Airlines up for sale along with all of its subsidiaries stakes, including Asiana IDT Inc (AIDTZ KS) and Air Busan Co Ltd (298690 KS). KDB has accepted this revised plan.

• Asiana was valued at ₩1.49tn after two days of hitting the daily ceiling limit at the time of Sanghyun's insight. Kumho's 33% stake alone costs ₩500bn, assuming no management premium. At a 20% premium, this will cost ₩600bn. A buyer will then have to inject at least ₩1.2~1.5tn through 3rd party allocation rights offer. This means total cost will be in the neighborhood of ₩2tn at least.
• Several names are already being tossed around as potential buyers. They are SK Group, CJ Group and Aekyung Group. Hanwha Group is also considered by some as a potential buyer.

(link to Sanghyun's insight: Asiana Airlines Stake Sale: Deal Conditions & Potential Buyers)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $880mn; Liquidity: $2mn)

Since the dispatch of the composite document on the 20 March 2019, the Offer is open to acceptance. This dual-stage privatisation requires a scheme-like vote on the 7 May AND a tendering acceptance condition of 90% of H shares outstanding.

• Tendering has already commenced. CCASS analysis indicates 7.64% of shares have now tendered - obviously friendly hands have tendered as such tendered shares are irrevocable and cannot be withdrawn.
• The 90% acceptance is not without precedent. The crucial takeaway is that the acceptance conditions for both the Shanghai Forte and Hunan Non-Ferrous privatisations could have be waived.
• I still question the risk/reward here. Nevertheless, for arb investors, this is a small deal and potentially worth a punt as shares trade around the lowest traded price since mid-Jan.

(link to my insight: Harbin Electric’s "One For The Brave" Offer Update)

Briefly ...

Sanghyun revisited Hanjin Kal Corp (180640 KS) which recorded a staggering gain the previous week. The jury is still out whether KCGI will launch a hostile takeover against the owner family. KCGI needs Korea NPS, but reportedly there was a low chance that NPS would side with KCGI. Hanjin declined 13% this week, placing the discount to NAV at 3%. (link to Sanhyun's insight: Hanjin Kal Situation Update: Owner Family, KCGI & Meritz Financial)

Anadarko Petroleum (APC US) (Mkt Cap: $32bn; Liquidity: $400mn)

Chevron Corp (CVX US) and APC announced a definitive agreement on April 12, 2019 whereby CVX will acquire APC for $33bn stock and cash deal with an indicative value of $65/share. This represents a nearly 39% premium to APC’s closing price on April 11^th of $46.80, and a 47% premium to APC’s 30 trading day average close through April 11^th. The purchase of Texaco in 2000 was Chevron’s largest acquisition historically before the APC merger announcement.

• Apparently Occidental Petroleum (OXY US) had bid more than $70/share for APC during the sale process - with more cash than Chevron - and is now considering options. OXY’s proposed bid would have required OXY's shareholders' approval (additional uncertainty), and would require issuing more than 20% of its existing share count. John DeMasi did not see how OXY can realistically expect to compete with CVX, and discounted the likelihood of OXY ultimately making an offer.
• A great buyer, strategically logical deal, no financing condition, massive liquidity and manageable antitrust issues (if any) resulting in a delay at worst. The OXY speculation makes the spread unattractive for now but in time John expects this is one for rate-of-return investors to own once the spread widens to compensate for the risk.
• Of note - Anadarko's shares did trade higher back in October therefore which may stir up activism.

(link to John's insight: Chevron Acquisition of Anadarko Petroleum – E&P Tempers Flare)

This is the second installment in a series of M&A guides that our Quiddity team (Travis, Janaghan Jeyakumar, and myself) are publishing to aid investors in understanding the rules, parameters, possibilities, and processes when companies conduct mergers and acquisitions. These insights are designed to be used as a reference.

links to:
Quiddity Hong Kong M&A Guide 2019
Quiddity Singapore M&A Guide 2019

• The SMH headline Thursday morning was: "Lynas still has to move a radioactive mountain, say Malay officials". Yeo Bee Yin heads the Ministry for Energy, Science, Technology, Environment and Climate Change, a government body in charge of the Atomic Energy Licensing Board which approved Lynas Corp Ltd (LYC AU)'s PDF Planning Framework and Site Protection Plan back in 2014.

• Healthscope Ltd (HSO AU)'s scheme booklet has been dispatched. The scheme meeting will be held on the 22 May with an expected effective date on the 24 May and an implementation date on the 6 June. Full timetable on page 12 of the PDF.

• Cutting it fine: 82.59% voted for KKK's MYOB Group Ltd (MYO AU) scheme, and 17.41% against. The effective date is the 24 April and the implementation date the 8 May.

• Panalpina Welttransport Holding (PWTN SW) reported strong results but is constrained from talking much about guidance because of the merger situation.
• As largely expected, DuluxGroup Ltd (DLX AU) announced a $9.80/share cash offer (27.8% premium to last close) from Nippon Paint Holdings (4612 JP) by way of a scheme. The vote is expected to take place in late July with expected implementation mid-August.

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.