Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko

Last Week in Event SPACE ...

• Mangalores lurk as Renault SA (RNO FP)'s Senard bares his fangs and Nissan Motor (7201 JP)'s Saikawa said Nissan's duty is to use the Alliance to its own advantage rather than be used by the Alliance.
• There are interesting dynamics at play, but staying long NTT (Nippon Telegraph & Telephone) (9432 JP) vs NTT Docomo Inc (9437 JP) doesn't sound like a bad idea even though we are just off long-term highs in the NTT/Docomo ratio.
• Ayala Corporation (AC PM) drifts lower on speculation of another placement from Mitsubishi Corp (8058 JP) and the lock-up expiry of the prior placement.
• Yungtay Engineering (1507 TT) stock is "dead money" near-term as it will take time to muddle through control issues.
• The tendering of Perpetual's shares into Ap Eagers Ltd (APE AU)'s offer for Automotive Holdings (AHG AU) moderates the size of the bump (if any) needed for this deal to get up.
• Even the bull case for Kosaido Co Ltd (7868 JP) doesn't provide enough upside to warrant carrying it through the path that could occur if you keep the shares AND the Tender Offer is successful.
• SK Hynix Inc (000660 KS) is short-listed to acquire MagnaChip Semiconductor Corp (MX US)'s foundry business.
• Occidental Petroleum (OXY US) shareholders' support is key as OXY comes over the top of Chevron Corp (CVX US) in its bid forAnadarko Petroleum (APC US).
• 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)

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Despite his initial conciliatory stance prior to his appointment to the board and as the new chairman of Renault, Jean-Dominique Senard said the Alliance needed to be re-balanced "in spirit" to counter fears among its Japanese partners that Renault wants to dominate the partnership. Subsequent to his ascension to the board, Renault has made a new proposal for integration. Indications are that proposal was rebuffed by Nissan. This was followed by Nissan's CEO Hiroto Saikawa saying "What’s most important is Nissan’s future. The question is how we should use the alliance for our future, not how we should be used by the alliance.”

A Yomiuri article said that Renault told Saikawa that if he did not toe the Renault line and agree to support Renault's plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. This is a serious escalation in tensions.

• Renault is pushing at a time when they should not, and lobbing threats like flaming barrels of oil over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if treating one's partner right is not enough to guarantee they would want to continue to enjoy the cost-savings of scale. Renault is acting now while Nissan is weak from the governance scandal and after Nissan has lowered its forecast for a second time this year. Yet Renault clearly needs to shoulder some of the blame of Nissan's Ghosn scandal-induced governance crises.
• Nissan could sell new shares in itself to dilute Renault below 40%. Or buy more shares in Renault to own more than 25%. Or commence constructive disengagement. Renault could go hostile on Nissan, which would break the Alliance Agreement and start a war. All told, the possibilities for the Alliance look bleaker.
• If Nissan engages in defense, the "attack to defend" trade is to own more Renault. If Nissan defends itself with good governance, the trade is to own more Nissan. It's not an easy trade, but Travis Lundy tilts to Renault, for now. That could change quickly.
  

(link to Travis' insight: Renault/Nissan: Mangalore Alert!)

NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

Travis recommended a NTT/Docmo set up last October NTT Stub Vs MktCap Near 10yr Lows, Stub Earnings Vs Total Near 10yr High around the time of the "Docomo Shock" of lower pricing come April 2019. The stub - if you measure it that way - doubled from less than ¥600/share to ¥1200/share as of the close earlier this week. Since the initial recommendation, NTT Docomo has executed a large buyback and NTT has executed a smaller buyback and the market expectation is for another NTT buyback from the government sometime after earnings.

• NTT Docomo has now released its new lower-priced and simpler pricing plans which start in June this year. The Nikkei released an article over the past weekend saying that OP would fall 20% this year. This was a full 11.5% below the consensus forecast. Shares ended up on both sets of news, but once again the stock ended up. That left NTT at a higher price vs Docomo than before but the ratio is almost 5% below recent highs despite worse than-expected forecasts for NTT Docomo's OP and a promised four-year soft spot.
• NTT Docomo trades at 12x its highest EPS for the next several years. NTT trades at sub 10x on a consolidated basis and well less than that on a parent-implied basis (leverage helps).
• Travis was a buyer of the NTT/Docomo "dip". He expected a 20% drop in OP at NTT Docomo would be absorbed in stride, but not really. However, ongoing cost-cutting, lower depreciation and writedowns of fixed line assets, and better profitability on a mature cash-cow business means NTT parent-only (i.e. NTT less Docomo and Data) earnings should continue to progress higher, and NTT should continue to distribute that capital to shareholders.
• A priori, there has been shorting of Docomo vs NTT for the past several months and that has now reached a point of "sell the news" where those short are buying back their Docomo. And near-term may favour Docomo vs NTT in regards to buyback flows as Travis expected a Docomo market buyback of ¥300-400bn.
• After the close on Friday, Docomo released earnings forecasts - OP down 18% and NP down a little less. Docomo also announced a buyback of ¥300bn to be conducted in the market over the next year.

(link to Travis' insight: NTT Vs Docomo: Where To From Here?)

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

AC's 8% decline (at the time of my note) since the beginning of the month, compared to ALI's 5% gain, has resulted in the discount to NAV widening to ~13% against a one-year average of 4%. Although ALI's exchangeable bond was cited as a possible cause for the recent bifurcation - the last day for conversion was the 22 April and was fully converted - the chief suspect is the unlocking of a recent placement by Mitsubishi Corp (8058 JP) and the possibility of a new placement.

• On 20 March 2018, Mitsubishi placed 8.5mn shares of AC at ₱934/shares (~7.5% discount to last close). The placement reduced Mitsubishi's stake to 8.75% from a little over 10% and was the first time it has sold since securing its stake in early 2007 when AC traded around ₱55.
• On 15 January 2019, Mitsubishi placed 13mn Ayala shares at ₱900 per share (~7.3% discount). Allegedly Mitsubishi initially offered 9mn shares. As with the shares sold in March, this shares placement had a 90-day lock-up on further sales, which expired last week.
• Mitsubishi is a seller of AC - that is evident - and still holds 41.57mn or 6.58% of shares out. However, the urgency to sell more is not apparent - the most recent placements occurred ahead of their year-end. Stub earnings are tonking along, propped up by the energy division. All things considered, AC looks interesting here.

(link to my insight: StubWorld: Ai Ya! - Ayala Corp Tanking On Possible "Portfolio Rebalancing")

First Pacific Co (142 HK)

Curtis Lehnert revisits this holdco, having first propositioned a set-up trade back in early December. The trade is moving in the right direction and recent developments indicate there is room for a further narrowing in the discount.

• In March, First Pac announced it is exiting its 50% stake in the Goodman Fielder JV (GF) for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. But this is a significant step towards narrowing the discount to NAV as GF was the second largest component of the stub (~18% of NAV).
• Proceeds from the sale would be used to pay down debt and for share repurchases. The company also mentioned they have identified further assets for sale outside of emerging Asia. Curtis' take on this statement is that the Pacific Light project that operates a LNG-fired power plant in Singapore may be the next to be sold as it is the only other significant asset that is not in "emerging" Asia.
• There is also Indofood Sukses Makmur Tbk P (INDF IJ)'s voluntary offer for Indofood Agri Resources (IFAR SP), which I discussed in PT Indofoods' Voluntary Offer for 74% Held Sub IFAR.
  The impact on First Pac is minor, but it is a wider sign that the group is in the midst of restructuring and streamlining its shareholdings.

(link to Curtis' insight: TRADE IDEA - First Pacific (142 HK) Stub: Assets Sales Pave the Way to a Narrower Discount to NAV)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $172mn; Liquidity: $2mn)

Kosaido came out with lower "forecasts" for the year to this past 31 March, which consisted of (possibly kitchen-sinking) writedowns in relations to the funeral parlor business and writedowns and weakness in the info business. The OTHER news is that Kosaido's independent directors came out "neutral" on the Murakami Tender Offer at ¥750/share.

So... Kosaido directors WERE able to recommend minorities sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) a few months ago, but now cannot recommend to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss - part of which is almost certainly due to bad management.

• The Murakami bid is ¥750. It is not supported by Kosaido, is still well below BVPS (which is now lower than at the start of the Tender) and the Murakami bid is not designed to squeeze out minorities. If you do not tender, even if it DOES succeed, there is zero guarantee that the backend will trade higher than the current price or the Tender Offer Price.
• The Bull Case here is that Minami Aoyama Real Estate gets 51%, then replaces all the directors at both Kosaido and Tokyo Hakuzen, and then embarks on an asset-lightening exercise to fund rehabilitation, then sells off the parts to deliver book value to investors.
• The Bear Case is that there is no successful tender, and the shares fall back to some level lower than here as punters bail and then the Murakami group scoops up more stock lower. The Worse Bear Case is that the company simply cannot rescue itself. It has had years to fix an obviously weak "info" business and it has not done so.
• The Base Case could be seen that the tender goes through, Murakami gets 51%, then it takes a while for anything to happen, things come out less than optimal, and because Murakami-san gets to consolidate, he doesn't care about his mark-to-market. But you will.

(link to Travis' insight: Kosaido: The Bull Case, The Bear Case, and the Base Case)

Automotive Holdings (AHG AU) (Mkt Cap: $560mn; Liquidity: $2mn)

Ap Eagers Ltd (APE AU) has now dispatched the Bidder's Statement for its all-scrip (1 APE share for every 3.8 AHG shares) offer for AHG. The Offer is conditional on ACCC approval and no MACs. There is no minimum acceptance (shares tendered are irrevocable, which hasn't stopped what appears to be Perpetual tendering in its 9.2% stake to the IAF) threshold nor finance condition or due diligence. AHG recommends shareholders take no action as it considers the proposal to be highly conditional and that AHG trades through terms.

• The merged AHG/APE is expected to exact pre-tax cost synergies (according to APE) of $13.5mn annually. Although he agrees the merger rationale to have merit, AHG's CEO John McConnell argues synergies "may be a bit light by the way we're looking at it''. APE's CEO Martin Ward countered estimates may potentially increase with the benefit of a full operational review.
• With AHG's share price languishing, there is a hint of opportunism to APE's Offer. But not a lot - the scrip ratio is not unreasonable when viewed from a 1M, 3M and 6M viewpoint. Only when the timeframe extends further out to one-year (3.52x) and beyond does the ratio appear to take advantage.
• With car dealerships under the hammer amidst declining new vehicle sales, the benefits from a merger are apparent. This Offer may just require a small kiss to terms to get all parties on board. The premium to terms has come in since Perpetual tendered.

(link to my insight: AHG & AP Eagers - Smart Carma)

Yungtay Engineering (1507 TT) (Mkt Cap: $800mn; Liquidity: $1mn)

The tender results gets Hitachi ~39.7% of shares out. Hitachi got about 28% of the non-Hitachi and non-Hsu Cho-Li shares in the tender. 70+% of what was possible did not tender. This cannot be seen as a big victory for Hitachi and they know it. They do not have the "control" to consolidate as evidenced by the EGM spat. Travis expects this has now turned into a waiting game for them.

• At the EGM on the 18th April, the Hitachi/Yungtay side got three directors, the "Market Faction" led by the The Baojia Group and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of Schindler Holding Ag (SCHN SW) and United Technologies (UTX US)'s Otis Elevators business - which combined have 11+% between them - obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The "opposition" had in some way "won" management rights.

• Baojia Group and Hsu Tso-Ming plus Otis and Schindler will find it difficult to win enough to oust Hitachi. They can't force capital decisions because Hitachi has negative control. They can only hope to greenmail Hitachi, or grow the company out from under them. A second tender offer by Hitachi was rumoured apparently, but Hitachi stomped on that rumour immediately.
• Minority shareholders are left with a much less liquid instrument than before, which is expensive and has a kind of takeover premium built in when Travis expects there are few chances of a near-term takeover.

(link to Travis' insight: Hitachi Deal for Yungtay Completes But Control Is Elusive)

SK Hynix Inc (000660 KS) (Mkt Cap: $47bn; Liquidity: $221mn)

On April 22nd, it was reported that SK Hynix is interested in acquiring MagnaChip Semiconductor Corp (MX US)'s foundry business. Magnachip (market cap of US$316mn) employs about 2,500 people in the Cheongju and Gumi fab facilities and R&D centers in Korea. The foundry business currently represents about 45% of Magnachip's sales.

• In 2017, SK Hynix launched the SK Hynix System IC which focuses on the foundry business. There have been numerous speculations about a potential M&A of various foundry businesses by either Samsung Electronics and SK Hynix in the past year. Recently, Global Foundries, the world's third largest foundry player, has been looking for a buyer of its 300 mm fab (Fab 7) in Woodland, Singapore. Neither Samsung or SK Hynix have expressed interest.

• It has been noted that the final bidders for the Magnachip foundry business may also include China's Jian Guang Asset Management, and SMIC (China). Although this is a small scale deal, Douglas Kim believes SK Hynix would be the best fit as it would accelerate the company's ambitions in the foundry business, which would be negative for the industry leaders Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) and Samsung.

(link to Douglas' insight: Korea M&A Spotlight: SK Hynix to Acquire Magnachip's Foundry Business?)

Ki Holdings (6747 JP) (Mkt Cap: $169mn; Liquidity: $0.3mn)

Koito Manufacturing (7276 JP) announced a Tender Offer to take out the minority shareholders in Ki Holdings. This has been long-awaited and long-needed. However, the modalities of how this is getting done are symptomatic of a shocking lack of good governance process. This deal effectively requires zero independent-thinking, economically-motivated investors to tender to make it a success and force minority squeezeout and delisting. This deal can almost certainly be accomplished with every single one of them refusing to participate.

• The company needs 66.7% to get this over the hump and the combination of the parent and existing financial and corporate cross-holders would put this over 67% quite easily. This tender offer effectively requires zero non-crossholder shareholders to tender to make it a success.

• Is the Tender Offer Price at least in the middle of the DCF range? No. Did either the Target or the Buyer obtain Fairness Opinions? No. Does the forward forecast for this year look like it is low-balled? Yes.
  

• This is a done deal, and there is not much you can do about it unless you take the appraisal rights route.

(link to Travis' insight: Koito Mfg (7276) Finally Announces TOB for KI Holdings (6747) Subsidiary)

Hanergy Thin Film Power (566 HK) (Mkt Cap: N/A; Liquidity: N/A)

The Scheme Document has been dispatched with a court meeting tabled for the 18 May 2018. The terms remain unchanged from the initial announcement on the 26 February - the proposal is one SPV share for each Scheme share. The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

• We now know the SPV is incorporated in the BVI. Interestingly, "independent" shareholders now comprise 40.51% of shares out, up from 32.49% in the February announcement, after the Offeror's stake (in concert with subsidiaries) has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage. As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.
• Questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles (a delisting procedure will commence if Hanergy does not resume trading before the end of July) or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.
• For shareholders angling for the A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings - there is no guarantee - as it silos independent shareholders into a separate entity which, according to PRC law, facilitates the A-share application. On account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

(link to my insight: The Hanergy Dilemma: Vote For The Scheme)

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

Occidental Petroleum (OXY US) announced a proposal to acquire Anadarko, potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko. OXY proposed a 50/50 cash/stock deal comprised of $38 cash plus 0.6094 OXY shares per APC share, or a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd.

• OXY would need to issue about 309mn shares to fund the stock portion of its proposal, which is about 41% of its current share count, and would leave the combined company owned 71% by current OXY shareholders and 29% by current APC shareholders. Such a large share issuance will require the approval of OXY shareholders, which might present a challenge.
• OXY’s CEO Vicki Hollub justified the pursuit of APC by claiming OXY is best equipped to exploit APC’s Permian Basin and DJ basin assets, stating that Oxy is “the right acquirer for Anadarko Petroleum because we can get the most out of shale."
• If the Board of APC determines that the OXY proposal is a Superior Proposal, CVX will have four business days to revise (improve) terms. If OXY then improves its proposal so it is a Superior Proposal, CVX will have a further three business days to further improve its terms.
• CVX must now decide how badly it wants this deal. John DeMasi thinks there’s a decent chance they step up. With some upside to the OXY proposal and the possibility of CVX topping OXY’s terms by enough of a margin to put it firmly ahead, he thought APC was an attractive speculative merger arbitrage situation here.

(link to John's insight: Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath)

Briefly ...

On May 31, 2018, Spirit Realty Capital (SRC US) spun-off its lower quality and debt encumbered assets into a vehicle Spirit MTA REIT (SMTA US), leaving SRC as a triple net lease REIT that is primarily focused on single tenant retail real estate in the US. Investors have yet to buy into the transformed SRC as the value gap between it and its closest peers has actually widened. Robert Sassoon delves into why this should reverse. (link to Robert's insight: SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit)

• First Steamship (286.05mn) and Kuo Jen Hao (83.9mn) - collectively holding 24.66% in Summit Ascent Holdings (102 HK) - have sold their stakes to Suncity Group (1383 HK) @$1.94/share. After the transaction, Suncity holds 27.94% in Summit. This is still below the 30% MGO threshold. But outgoing ED John Wang also has 5% of shares out.

• "'Big bully' Lynas Corp Ltd (LYC AU) must send waste home" is the headline in the AFR article (paywalled). This is quoting Malaysian government deputy minister and Kuantan MP Fuziah Salleh, who has been Lynas' most outspoken critic. She acknowledged Malaysia's Cabinet is divided on the issue.

• Indofood Agri Resources (IFAR SP)'s Offer doc has been dispatched. The offer is now open and the first closing date is the 24 May. The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.

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.