Last Week in Event SPACE: Nippon Suisan, Investa Office, LCY, Nittoc, Takara, Nevsun, Guoco

Last Week in Event SPACE ...

• Nippon Suisan Kaisha (1332 JP) will be a big winner should Amarin (AMRN US) release positive data later this month
• Nittoc Construction (1929 JP)'s partial offer is likely a pre-cursor to AN Holdings taking the company private
• In terms of time value of money, it's time to get out of Investa Office Fund (IOF AU)
• Zijin Mining Group Co Ltd H (2899 HK)'s offer for Nevsun Resources (NSU CN) trumps Lundin Mining (LUN CN)'s hostile bid
• Last minute regulatory hitches, but KKR's offer for Lcy Chemical (1704 TT) is expected to get up
• Takara Holdings (2531 JP) gets a boost after its unexpected non-exclusion in the N225 rebalance
• Guoco Group Ltd (53 HK) still looks mispriced after the release of full-year results, but is trading with a view to complete
• Plus funky radars and more looking at Japan's seasonality

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

Nippon Suisan Kaisha (1332 JP) (Mkt Cap: $1.7bn; Liquidity: $13mn)

Amarin (AMRN US) is set to release data this month from a 7-year, multi-country clinical trial for its drug using fish-oil EPA to reduce cardiovascular events. If this data shows a better than 15% improvement for patients, Nissui is prepared to supply Amarin with its high purity eicosapentaenoic acid (EPA, a type of Omega 3 fish oil) and has already spent ¥9bn (or 20% of 2 years' worth of capex) to double its EPA production capacity.

• Nissui already supplies Mochida Pharmaceutical Co (4534 JP) with its highly refined EPA for Mochida’s "Epadel" drug, which was co-developed with Nissui.
• While it is still a 50:50 chance on the Phase III trial outcome, this event is attractive because it has already been conducted before with Mochida and the outcome was very positive.

(link to SC Capital 's insight: Nippon Suisan - The Biggest Event in Japan's Food & Beverage Sector Comes Within 4 Weeks)

Japan Seasonality

Campbell Gunn's seasonality approach differs to earlier work done by Travis Lundy, in that he analysed the seasonality of every currently listed stock of the last 34 years and then aggregated those results by capitalisation range, fiscal year end and by his thirty sectors.

• In summary, "1st Half > 2nd Half + 1st Quarter > 2nd Quarter > 4th Quarter >> 3rd Quarter", and so perhaps the old adage should be modified for Japan to read 'Sell in July and Say Goodbye...Please Come Back on Culture Day (November 3rd)'. Plus some funky radars to illustrate sector seasonality.

(link to Campbell's insight: Japan: Seasonality - "Sell in July and Say Goodbye...Please Come Back on Culture Day")

Investa Office Fund (IOF AU) (Mkt Cap: $2.2bn; Liquidity: $12.5mn)

The arb that keeps on giving. Two days before Investa Office Fund (IOF AU)'s Scheme meeting to vote on Blackstone's A$5.3485/unit (net of the A$0.105/unit declared distribution) offer, Canada's Oxford Properties Group, which previously inked a call option with ICPF to acquire 9.99% of IOF at A$5.25/unit, upped the ante with a $5.50/unit offer for all remaining IOF units.

• Despite initially calling foul on the 11th hour Oxford tilt, Blackstone countered with A$5.52/offer, subject to the scheme meeting being reconvened no later than 14 Sept, the break fee bumped to A$33mn from A$20mn, the restriction of DD investigation by Oxford into the IOF's property, amongst other conditions.
• Shares are suspended as I type with a last close of A$5.54. This deal arguably could go back & forth for a while between these two bidders. However, the upside is less assured given Oxford's indicative offer already exceeds IOF's most recent NTA, while Blackstone added just A$0.02/share above Oxford's offer. And if Oxford was to be the ultimate winner here, payment would not take place until December, possibly January. I'd recommend taking profit/selling in the market here.

(link to my insight: Oxford Tops Blackstone Offer for Investa)

Nittoc Construction (1929 JP) (Mkt Cap: $275mn; Liquidity: $1.1mn)

Nittoc's largest shareholder AN Holdings announced a Partial Tender Offer for the reasonably-well-known public works construction company. The Partial Tender Offer is for 6,783,810 shares at ¥780/share, which if completely successful will lift AN's stake from 41.65% of voting rights to 57.91%.

• This is a Partial Tender for a private strategic owner to go to a majority. This has been building for years. Travis' guess is that it will probably end up being either a reverse merger, or taken private.
• At ¥780/share, it is not at a huge premium to last - just 20%. Travis is inclined to think that the proration is likely to be 40% or higher against a bare minimum of ~28% and a base case minimum of 34%.
• There is no minimum so no risk this trade does not go through if not enough tenders. If one can purchase the shares at ¥700 or below it is a good long position to hold. Travis expects eventually AN Holdings may try to take the firm private.

links to Travis' insights:
Nittoc Construction (1929 JP) Partial Tender by Existing Shareholder: Part 1
Nittoc Construction (1929 JP) Partial Tender: Part II The Arb Grids

Renesas Electronics (6723 JP) (Mkt Cap: $11.2bn; Liquidity: $50mn)

In Would a Maxim Acquisition Be Digestable?, LightStream Research discussed the difficulty of Renesas completing an acquisition of Maxim Integrated Products (MXIM US) due to the relatively equal sizes of the two companies and Renesas' balance sheet situation following its Intersil acquisition.

• Lightstream noted that given the company's balance sheet would be better served by acquiring one or two smaller players rather than trying to complete a giant acquisition, and identified Semtech Corp (SMTC US), Power Integrations (POWI US), Sanken Electric (6707 JP), Monolithic Power Systems, Inc (MPWR US) and Integrated Device Tech (IDTI US) as likely targets. The last of these candidates has now emerged as the front-runner target in Renesas' quest for a comprehensive product lineup.
• Lightstream would be in favour of this acquisition as it believes the product lineup fit is attractive and it also removes the overhang from the acquisition of an oversized competitor such as Maxim.

links to Lightstream's insights on Renesas:
Renesas Electronics: Our Shortlist Candidate IDT Emerges as Acquisition Target
Renesas Electronics: Refreshing the Toyota Production System for Industry 4.0

Ing Life Insurance Korea Ltd (079440 KS) (Mkt Cap: $2.7bn; Liquidity: $3.7mn)

After 6 months of speculation, MBK Partner's 59.15% stake (48.5mn shares) in ING Life will be sold to Shinhan Financial (055550 KS) for ₩2,298.9bn or ₩47,400/share, around a 27% discount to the EV, in line with peer insurance companies. In addition, Shinhan announced a ₩200bn share buyback. That just leaves a tender offer for the remaining ING Life shareholders.

• Korea's financial holding company law states that a bank-centered financial holding company like Shinhan must own a 100% stake in subsidiaries, which means it is required to buy the remaining stake (40.85%) it does not hold. A stock swap with Shinhan shares through a tender offer may be one option. Shinhan has a two-year grace period in which to mop up minority shares.

(Link to Sanghyun Park 's insight: Shinhan & ING Life Deal Is Now Official - Deal Summary)

Briefly ...

Lcy Chemical (1704 TT) shed 1.9% Wednesday on above-average volume. My understanding is that the Taiwanese regulator sought the final % composition of Carlton, which was not previously disclosed in the share exchange agreement. Carlton is the KKR/Lee family vehicle to ultimately hold LCY should this transaction be successful.

• The Lee family holds around 30% in LCY, but rumoured to hold 45% in Carlton upon successful completion. It’s not clear why this detail was not made public previously. Nevertheless, KRR would still be the major shareholder, but would not have more than two-thirds of the voting power as previously expected.
• The EGM kicks off at 9AM tomorrow. The Lee family can vote and the resolution requires two-thirds approval. Dissenting shares shall not represent more than 12.5%.

Wheelock Properties (S) (WP SP) extends its unconditional offer until the 21st Sept. Tendering to date totals 1.37% resulting in Wheelock & (20 HK) now holding 76.21%.

Technopolis OYJ (TPS1V FH) (Mkt Cap: $847mn; Liquidity: $2mn)

Kildare Nordic Acquisitions S.à r.l announced a recommended public cash tender offer for all shares in Technopolis at €4.65/share. The offer is expected to open in September, with the Offer subject to (inter alia) Kildare acquiring at least 90% of the shares outstanding. The Board of Directors of Technopolis have unanimously recommended the Offer. The two largest shareholders, collectively holding 34.5%, have irrevocably undertaken to accept. The Offer has an indicative closing data of the 8 October.

• The Offer price equals to Technopolis’ most recently reported NAV as at June 30, 2018.
• This appears a straightforward takeover and should trade tight to terms.

(link to my insight: Kildare Taps Technopolis' Office of the Future)

Sprint Corp (S US) (Mkt Cap: $24.2bn; Liquidity: $56mn)

T Mobile Us Inc (TMUS US) and Sprint are in talks with regional wireless carriers C Spire, Shenandoah Telecommunications Company (SHEN US) (Shentel), and Us Cellular (USM US) in addition to Dish Network Corp A (DISH US) as the merging carriers seek ways to divest assets to create a fourth large wireless company.

• C Spire and Shentel are exploring other alternatives, including divesting their wireless businesses and merging them into Sprint and T-Mobile; while C Spire is understood to be in talks with AT&T about selling itself in its entirety.
• The aim in creating a fourth large wireless carrier is to ease antitrust concerns stemming from a Sprint/T-Mobile combination, which would reduce wireless competition from four large carriers historically preferred by antitrust regulators in the U.S., to three, a situation the Federal Communications Commission and the U.S. Department of Justice have thwarted in the past.
• T-Mobile has 60 days after the Sprint acquisition to decide to buy Shentel’s wireless business, excluding towers and fiber. If opting out, Shentel has the option to acquire T-Mobile customers and network at a pre-determined purchase price with T-Mobile financing the transaction at their cost of capital for up to five years.

(link to CTFN's insight: T-Mobile and Sprint in Talks with Small Carriers for Fourth Wireless Player)

Nevsun Resources (NSU CN) (Mkt Cap: $1.1bn; Liquidity: $5mn)

Zijin Mining Group Co Ltd H (2899 HK)/Zijin Mining Group (601899 CH) announced a friendly, all-cash bid for Nevsun at C$6/share, a 26% premium to the hostile bid from Lundin Mining (LUN CN) of C$4.75/share, and a 57% premium to the undisturbed price prior to Lundin’s first announcement in April.

• Regulatory approval from Canadian authorities should be straightforward given Nevsun's key assets are outside of Canada. Zijin has a proven track record in overseas transactions - it inked a US$1.26bn Serbian transaction last week - and as an SOE-backed company, PRC approvals should similarly be forthcoming.

• The implied price/NAV & premium under the Offer is more in line with recent comparable base metal transactions; while Zijin's Offer is at a premium to the average street target price of C$5.88 after Lundin's initial tilt.

• Nevsun is currently trading at a gross/annualised spread (conservatively using the long-stop date) of 2.5%/6.5%, which is tight, but expected. Lundin announced it won't counter.

(link to my insight: Nevsun's Copper Solution for Zijin)

Sinclair Pharma (SPH LN)(Mkt Cap: $177mn; Liquidity: $0.2mn)

After confirmation of discussions of the merger back in early July, Sinclair Pharma (SPH LN) announced that they have entered into an Offer Agreement with Huadong Medicine Co Ltd A (000963 CH) at an indicative offer of £0.32/share.

• Subject to PRC regulatory approvals, this appears a straightforward takeover situation. The indicative offer is pitched at a substantial premium to the undisturbed price and it has the backing of Sinclair's independent directors and almost 50% of its shareholder registry.
• Huadong is a large cap player (US$9.3bn) and formerly an SOE. This is a small deal for them and although outbound transactions are subject to various PRC approvals, as the deal size is less than US$300mn, below that guided by new outbound rules released this year, such a transaction may be fast-tracked. The short timeframe in which to secure the pre-conditions is indicative of this.
• Trading at a gross/annualised spread of 18.1%/53% assuming end-Jan 2019 payment. This appears a relatively safe bet for those investors following small-cap arb events.

(link to my insight: Europe M&A: Huadong's Offer for Sinclair Looks a Done Deal)

Takara Holdings (2531 JP) / Takara Bio Inc (4974 JP)

I touched on this extreme Holdco last week in my insight StubWorld: The Demand for ASM Intl's Front-End; Takara's Spending for Spending's Sake, which was then trading at a then discount to NAV of 28%. Mid-week, Nikkei Inc announced the results of the Annual Review for the Nikkei 225 (Cyberagent Inc (4751 JP) will replace Furukawa Co Ltd (5715 JP)) and the Nikkei 300 (Keyence Corp (6861 JP) will replace Nippon Sharyo (7102 JP)). The most important news was probably Takara on the "were expected to be excluded but were not" list.

• Travis expected Takara to have the biggest bounce as shorts cover and he wasn't wrong. The stock was up 18% in two days with the discount to NAV with the discount at the close Friday of ~15%.

(link to Travis' insight: 2018 Annual Nikkei 225 Rebalance - Small Potatoes As Expected)

Guoco Group Ltd (53 HK)

Following Guoco FY18 results, cash at the parent level as at 30 June 2018 declined 6% from 1H18 (Dec), or ~HK$1.20/share; while the trading portfolio as stated in the accounts decreased to HK$15.3bn as at June 30 2018 from HK$16.57bn as at Dec-18, or ~8% increase. (my insight, at the time, incorrectly stated an 8% increase).

• I still consider the offer to be light given Guoco's relatively simple Holdco structure made up of listcos, a portfolio of blue-chip international equity securities, and cash.
• Yet, shares have not traded through terms, and the gross & annualised spreads have been relatively resilient and declining (at least for the gross spread), since the delayed despatch announcement.
• A blocking stake of 2.517% is equivalent to 8.28mn shares. 3.8mn shares have traded since the 2 July announcement, which even if this was fully taken up by an activist (at best it's probably ~60% or 2.2mn), still falls well short of block. There is not, as far as I'm aware, any public pushback from shareholders. This offer appears on track to complete. The Scheme Doc is expected to be despatched on or before 19 October

Hang Lung (10 HK) / Hang Lung Properties (101 HK)

HLG's discount to NAV of 36.5% compares with the one-year average of 34.3%. The value of the deconsolidated stub assets as at 30 June increased by ~HK$0.09/share since 2017 year-end.

• HLG announced last week it had increased its stake in HLP to 57.03% from 55.69% as at Dec 2017. Although HLG is unrestricted from taking its stake in HLP all the way up to 75%, the announcement was made pursuant to Chapter 14 of the Listing Rules as it is a disclosable transaction such that the transaction where the percentage ratio (under section 14.07 and appears to be in reference to HLG's market cap) was 5% or more, but less than 25%. You would have to go back to March 2004 when HLG held a higher % in HLP.
• HLG remains a passive Holdco. The only noted action in the last 12 months was the sale of Amoycan last November to HLP. Buying into HLP when it trades at 0.5x P/B seems like a pretty good trade when the recent property sale was done at 1x and you buy back at 0.5x.
• As HLG moves to offload its stub assets and acquire more shares in HLP, it bolsters the case for the two companies to be even more closely aligned. Indeed, given the relatively simple structure, that provides an argument for a further narrowing in the discount to NAV which bounced off a 12-month low of 41% back in May; while the simple ratio (10/101) is around a 7.5 year low.

(link to my insight: StubWorld: Guoco's Offer Is Still Mispriced; Hang Lung Bumps Stake in HLP)

United Inc (2497 JP)/Mercari Inc (4385 JP)

LightStream Research no longer feel this stub trade is attractive and would be looking to exit. Mercari is now down 35.5% from the first day close when it recommended exiting in its insight: United (With Mercari) We Stand. United holds a 7.49% stake in Mercari worth ~50% of its market cap.

(link to Lightstream's insight: Still United but Mercari Being Refunded)

My ongoing series flags large moves in CCASS holdings over the past week or so (~10%), 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.