Last Week in Event SPACE: NTT/Docomo, Dena, Nexon, Harbin Electric, Advanced Disposal, DSV

Last Week in Event SPACE ...

• While the NTT Docomo Inc (9437 JP) buyback appears to have the possibility of a greater market impact for longer, there may be mitigants such as finding a large foreign long-only willing to sell into a ToSTNeT-3 buyback. NTT (Nippon Telegraph & Telephone) (9432 JP) found such a seller last autumn, against the odds.
• Dena Co Ltd (2432 JP)'s huge buyback - and the company will still be in a position to buy back more shares.
  
• The delay in the Nexon Co Ltd (3659 JP)'s bidding process is no surprise - the situation is complicated, and the size large enough, that it behooves the sellers to give as much time as needed for potential bidders to come up with their bid.

• The current level implies a 65% likelihood of completion for the Harbin Electric Co Ltd H (1133 HK) Delisting Offer, which is not far removed from a coin toss, however there is arguably greater certainty of this completing.

• Advanced Disposal Services I (ADSW US)'s draft merger proxy provides some information to determine the HSR waiting period expiration date, and confirms that the offer is not particularly generous, but it’s likely the best price ADSW could command at the time.

• DSV A/S (DSV DC)'s surprise buyback will likely fall short of (the announced) 5.38% of shares out, but it helps support the stock price.

• 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)

NTT (Nippon Telegraph & Telephone) (9432 JP) (Mkt Cap: $83bn; Liquidity: $136mn)

On 13 May after the close, NTT announced a ToSTNeT-3 buyback to buy back 15mn shares for up to ¥71.6bn pre-open on 14 May 2019. The results and forecasts and what they imply for NTT ex-Docomo ex-Data earnings do not suggest a trade any different than the one recommended recently in NTT Vs Docomo: Where To From Here? published just a few days before Docomo's earnings.

• Travis Lundy expects another ¥90-100bn of ToSTNeT-3 buybacks by NTT to be completed over the next couple of months, with the balance of ¥80-90bn executed in the market by end-July. The NTT Docomo buybacks will be conducted in the market. It is possible there would be another NTT buyback announced at the time of the Q1 or H1 earnings release. Once shares are bought back from the government, the additional lee-way to buy more is limited. To replenish potential, the only thing NTT can do is buy from the market.
• NTT Doco's buyback is likely to be ¥300bn of stock purchased on-market. This IS large enough to warrant excitement. It is less than 4% of shares outstanding, but it is more like 17% of Real World Float, if not more. It requires buying 10% of 4.3mm shares of ADV every day for almost a year. For that reason, Travis wonders whether the buyback will be completed, or whether there is a large long-only willing to sell a large number of shares via ToSTNeT-3 buyback.
• NTT ex-Docomo ex-Data operating profit is implicitly forecast (within the NTT Group and company earnings forecasts) to rise 13-14% yoy in FY2019 from ¥502bn to ¥571bn. NTT Docomo OP is currently guided to an 18% fall in FY2019 to ¥830bn. For that, the NTT/Docomo ratio should continue to rise as NTT ex-Docomo ex-Data contributes 37% of Group OP, which would be a multi-decade high.

(link to Travis' insight: NTT & Docomo Buybacks To Start FY19)

Dena Co Ltd (2432 JP) (Mkt Cap: $2.7bn; Liquidity: $25mn)

Dena announced a ¥50bn, 38mn share buyback or 26.14% of shares outstanding excluding treasury shares. Given the market cap at the time of announcement was ¥256bn, it is a bit less than 20%, which is still a lot.

• DeNA has long had a sizable net cash pile - it has been over ¥100bn at the end of the fiscal year. DeNA is finally putting that cash pile to good use - using some of it to generate accretion and absorb the selling by investors disappointed with financial results.
• The buyback headline of 38mm shares is not likely unless the share price falls a LOT. The amount available to buy back shares did (at the time of the insight) align with a buyback of about 17% of shares out and 24.7mm shares. Because half of the company is not float (39mm shares held by insiders and crossholders and 33mm shares held by passive trackers are not part of real daily float), that means buying back 17% of shares out means buying back 34% of float.
• The buyback should come on market. Given the "long-term goal" of ¥100bn in OP, Travis doubted Namba-san would be willing to sell in a block, suggesting that the company could be buying something like 200k shares a day (10% of a slightly higher-than-normal-recently-but-historically normal 2mm share ADV) and the buyback would last almost 6 months.
• With no real debt and ¥50+bn of net cash available after this buyback, the company will still be in a position to buy back more shares. The only question longer-term investors should have is whether DeNA has any ability to execute on its ambitions outside the gaming space.

(link to Travis' insight: DeNA's Yuuuuuge Buyback)

Briefly ...

Reportedly, MBK Partners plans to sell Doosan Machine Tools (DMT) for ₩2.5tn to ₩3tn, having bought the company for ₩1.1tn back in 2016. One of the key competitors of Doosan Machine Tools is Hyundai Wia (011210 KS). With Doosan Machine Tools up for sale, there may be a greater spotlight on Hyundai Wia. The share price is up 20% YTD having languished for the past five years. (link to Douglas Kim's insight: Korea M&A Spotlight: MBK Partners Plans to Sell Doosan Machine Tools)

Nexon Co Ltd (3659 JP) has delayed the bidding process for the controlling interest in the company, which was originally scheduled to take place on May 15th. Various local sources suggest that the final bidding may be delayed by about one to two weeks. Even the "final" round of bidding may not be final.
links to:
Douglas' insight: Nexon M&A: Another Delay & The Endgame?
Sanghyun Park's insight: Nexon Sale: Bidding Delay Clarifications

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $822mn; Liquidity: $3mn)

A perceived low tendering % into this two-stage offer spooked investors mid-week, leaving the closing price on Friday at a gross spread of 18% against a downside of 35%. Or an implied ~65% chance of completion. Yet CCASS tendering figures should be seen as a guide and not definitive of the final outcome. A lot can and will happen in the last 2-3 days before the close of a tender.

• As with the Delisting Offer for PRC-incorporated Hunan Non-Ferrous and Shanghai Forte, tendering predominantly occurs in the final 2-3 days of an offer. PBs/custodians have recommended investors tender into Harbin's Offer beginning Thursday - and at latest this past Friday - rather than wait until tomorrow (the close of the Offer, the 60th day since the issuance of the composite doc) to take the shares out of CCASS.
  • Shares tendered into the Offer - or those shares which have moved outside of CCASS since the Offer was open to acceptances - now tally 65.44%. If taking the view those shares outside CCASS prior to the Offer will ALL tender, this would raise the theoretical level of acceptances to 72.49%.
• For arb investors. Tender or sell here? Or simply hold. There is simply no way of knowing what is the % that is undecided and sitting on the fence, and whether that % will even have a bearing on the outcome. Therein lies the rub - one small investor tendering - or not - may have a negligible impact on the deal completing. But if a sufficient number of (small) investors are likeminded, it may.
• I would not borrow and tender. If this goes through, you could end up buying significantly through terms. I recommended tender into the Offer. Shareholders have already voted "yes" to the delisting.

(link to my insight: Harbin Electric: Tendering Game Theory)

Tosho Printing (7913 JP) (Mkt Cap: $546mn; Liquidity: $1mn)

Toppan Printing (7911 JP) and 51%-held subsidiary Tosho announced a merger where Toppan will acquire Tosho this summer, with completion scheduled for August 1st - a mere 11 weeks away. Shareholders of Tosho Printing are scheduled to receive 0.8 shares of Toppan Printing for every Tosho share held, or a 41.2% premium to last.

• Toppan, DIC Corp's trust account holdings in Tosho, and other corporate crossholders in Tosho own 67+% of Tosho shares as far as Travis can see. They will vote "for" in all likelihood. That means even if every other shareholder voted against the deal, it would still go through.
• Tosho looks cheap at a terms-adjusted market cap of ¥57bn and net cash of ¥20bn plus an equity portfolio of ¥47bn. However, the combination of deferred tax liabilities and unfunded PBOs means the market price at terms is an EV/EBITDA somewhere north of 5x.
• But Toppan is even cheaper. EV is less than the portfolio holdings by almost ¥100bn. Adding back ¥210bn to account for a discount on the equity portfolio and deferred tax liabilities on the equity holdings, and unfunded PBOs, and you get an Adjusted EV/EBITDA ratio of just over 1x. Tosho shareholders are getting a good deal because of this 40% premium on market cap.

(link to Travis' insight: Toppan Printing Bid To Take Over Subsidiary Tosho Printing)

Memtech International (MTEC SP) (Mkt Cap: $136mn; Liquidity: $0.5mn)

M-Universe Investments, a vehicle led by the Chuang Family/Keytech which hold 57.7% in Memtech, have announced a voluntary conditional offer for the precision components manufacturer at $1.35/share cash - a 23.9% premium to last close and a 31.5% premium to the one-month VWAP. The Offer is conditional on 90% acceptance - including the Offeror's - with the Offeror reserving the right to reduce this to 50%. The Offer price is Final.

• The Offer is pitched in the wake of increasing costs across the board, declining earnings and a global slowdown in car sales. That cost pressure alongside operational challenges are expected to persist in FY19 - as already seen in 1Q19 - and into next year.
• The Offer price is fair with respect to peers and recent precedent transactions in Singapore (Spindex Industries (SPE SP), Innovalues Ltd (IP SP) and Interplex Holdings (INTX SP)); and the premium to last close and one-month VWAP is reasonable.
• There is an air of opportunism to the Offer, especially given the uncertain global economic backdrop arising from US-China trade tensions, which have yet to reach a conclusion. Memtech's operations are all located in China. But as in the case of 800 super holdings (ESH SP)'s Offer last week, minorities have a weak hand, with limited options in an illiquid stock, and would be better off tendering.

(link to my insight: Memtech's Precision Exit)

Techno Associe (8249 JP) (Mkt Cap: $209mn; Liquidity: $0.2mn)

Sumitomo Electric Industries (5802 JP) and its 36.25%-owned affiliate and electronics designer, manufacturer, and distributor Techno Assoc announced (J-only) that Sumitomo Electric would launch a Tender Offer to purchase up to 2,734,100 shares for ¥1380/share in a Partial Tender Offer. This partial tender gets Sumitomo Electric from 36% to 51% at 0.55x book and an adjusted EV/EBITDA of well below zero.

• Sumitomo Electric's very low offer price to get control of the board is not really the fault of the Techno Associe directors, but they should be more forthright in making it super clear that this is a very low price for transfer of control. There are potentially some very interesting things to do here. Someone should be looking at this situation from an activism angle.
• Travis estimates the proration to be far higher than it would appear at first glance and expects the fair value residual is too low currently for where this should get taken out in 2-3 years.

(link to Travis' insight: Sumi Elec (5802) Tender on Techno Associe (8249) Done Too Cheap)

Golden Land Prop Dvlp (GOLD TB) (Mkt Cap: $617mn; Liquidity: $1mn)

At the EGM the prior week, shareholders of Frasers Property (Thailand) Pcl (FPT TB) approved the acquisition of GOLD by means of a voluntary tender offer (VTO) at Bt8.50/share. The VTO is still pending the last pre-condition regarding the approval from the Office of Trade Competition Commission (OTCC). A response from OTCC is expected shortly, according to my discussions with FPT, following which FPT will submit filings to the SEC and proceed to launch the VTO, possibly this week.

• This VTO has been initiated to consolidate the Sirivadhanabhakdi family's 80.2% holding into GOLD - via Frasers Property Ltd (FPL SP) and Univentures Public (UV TB) - under one roof. The intention is to delist GOLD if FPT secures 90%+ in the VTO process. The premium is marginal (2.4% premium to last close), but GOLD has not closed above terms since the Offer was announced and recent results are mediocre. The VTO will be unconditional - FPT will take as many shares as it can get.
• Should FPT secure 90% of GOLD in the VTO, it may proceed with its delisting. A voluntary delisting is still achievable with ~80% in the bag, but that is conditional on <10% of shareholders not voting against.
• Currently trading at a tight gross/annualized spread of 1.8%/8.1% assuming early August payment.

(link to my insight: Golden Land: Tender Offer Into The Home Straight)

Nitto Fc Co Ltd (4033 JP) (Mkt Cap: $274mn; Liquidity: $1mn)

A pair of entities called East Investments and West LP jointly announced a Tender Offer on smallcap Nagoya-based Japanese fertilizer company Nitto. The existing owner/CEO Watanabe Kaname and his relatives and associated companies own 32.86% and they have agreed to tender their shares. The minimum threshold for success of this Tender Offer is 66.67% so that minorities may be forced out in case of success. This delivers - mostly coincidentally - the requirement that a majority of the minority tender their shares to make this deal successful.

• Minorities are being asked to give up their shares cheaply so the Owner can get out and the Buyer can get the cheap asset. It is not an overly convincing proposition with a medium-term outlook, but the Offer Price is at a 25yr high.
• The stock is trading at terms or 10bp below. It almost seems as if someone is accumulating a stake and will go activist. If Travis were a betting man/arbitrageur, he wanted to own a stake at ¥1199-1200 on the off-chance someone like the Murakami companies were to take a crack at it. He tends to think they won't, but it is not unthinkable.

(link to Travis' insight: Nitto FC (4033 JP) Tender Offer: Cheap Asset Takeout of Owner)

Advanced Disposal Services I (ADSW US) (Mkt Cap: $2.8bn; Liquidity: $38mn)

ADSW has now filed its draft merger proxy for the special shareholder meeting to vote on the acquisition of the Company by Waste Management (WM US). The date for the special shareholder meeting is left blank except for the year 2019; the merger is expected to be completed by the first quarter of 2020; and appraisal rights will be available to the holders of ADSW common stock.

• The U.S. antitrust filing under the Hart-Scott-Rodino Act was filed on May 9, 2019 so the 30-day waiting period will expire on June 8, 2019, which is a Saturday, therefore we should hear news by Monday, June 10, 2019. A second request is a basically a foregone conclusion.
• What’s interesting from this comp analysis is that the acquisition multiples paid for ADSW (which includes a premium for control) are lower than the mean, median, and even the lowest individual trading multiple of any of the comps. Also, ADSW traded at a sizeable discount to peers before the deal was announced.
• Next events to watch out for are the HSR expiration followed by an amended merger proxy filing (mid to late June) - unless this proxy escapes SEC review, in which case it could be cleared in a week or two with a shareholder meeting about a month later.

(link to John DeMasi's insight: Advanced Disposal Services/Waste Management – Draft Merger Proxy Filing Details)

Sprint Corp (S US) (Mkt Cap: $25bn; Liquidity: $97mn)

There is speculation whether the merger between T-mobile and Sprint will be approved by the regulator. Although the US market and political landscape is different from Europe, Sebastian Ashton, CFA highlights in his insight that industry consolidation from 4 major players down to 3 has been a theme playing out over the last 7 years in Europe, not dissimilar to the proposed Sprint/T-Mobile merger.

• Nevertheless, he believes the downside for bondholders outweighs the upside as the bonds are trading above par and recommends exiting at current levels. Should the merger fail, Sprint may face liquidity constraints in the medium term in light of its poor fundamental performance.

(link to Sebastian's insight: Sprint Corp – Time to Exit?)

DSV A/S (DSV DC) (Mkt Cap: $15.9bn; Liquidity: $45mn)

Arriving earlier than previously speculated, DSV announced a new buyback program to spend up to DKK 3.5bn to buy up to 10mn shares within the mandate granted at the 15 March 2019 annual meeting. 10mn shares would be 5.38% of the then current share capital of DSV. The buyback period was announced as 30 April 2019 through 9 November 2019. Unless something drastic happens, the amount of stock purchased will be far lower than 5.38% of shares out (DKK 3.5bn at DKK 600/share is 5.8mm shares or 3.13% of shares out).

• Travis details the buyback rules in Europe. Through the first two weeks of the buyback (through and including 10 May), DSV has bought 347,000 shares or about 3.5% of the total limit available, buying 6.3% of eligible volume. DSV has increased its presence in the market as the days have gone by. Travis expects a slightly higher level of buyback than the current rates so it can complete by the buyback end date -~10% of ADV should be thought of as a base case.
• Travis would expect DSV to leave room to buy up to 10mn more shares AFTER the deal has been consummated, and he would expect a much more flexible and dynamic execution - if DSV shares are down hard on higher volume, expect DSV to buy a greater percentage of the trailing 20-day average volume so as to absorb Deal Flowback.
• Assuming one-third of Panalpina shareholders outside the Ernst Göhner Foundation are arbitrageurs who will have purchased Panalpina and short sold DSV ahead of completion, and half of the rest wish to keep their shares in MergeCo, that would suggest there are something like 4.2mm shares of Panalpina held by investors who would wish to sell. That translates to 10mn shares of DSV. Assuming DSV purchases ~5.8mm shares in its DKK 3.5bn programme currently running, there will be 12.2mm shares remaining in the buyback mandate approved by shareholders on 15 March.

(link to Travis' insight: DSV Buyback - Slow and Steady Now, Could Grow Later)

Great Eagle Holdings (41 HK) /Champion REIT (2778 HK)

GE's discount to NAV of ~57% is the lowest level since the 2013 spin-off of Langham Hospitality Inv Ss (1270 HK). The implied stub, with reference to CREIT, is at its lowest level outside the GFC. The GE/CREIT bifurcation may be two-fold in nature: rumours have resurfaced, again, that CREIT is scoping out interest for its 100%-owned Langham Place office tower. Separately, the Great Eagle family feud is an overhang on GE's shareholding structure. A verdict is expected this year.

• My read on the family dispute is that the trust manager will not be dismissed and the rumoured apportionment of the trust holdings amongst the nine children appears fair and logical.
• The forthcoming (3Q19) pre-sale of the residential property project in Pak Shek Kok, Tai Po, provided the market is receptive to the sale, should provide clear support to the stub.
• Yet interest, or lack of it, in this Holdco boils down to one of liquidity - GE trades a little less than US$1mn/day.

(link to my insight: StubWorld: Great Eagle Tests Post-GFC Lows)

BGF Co Ltd (027410 KS)/BGF Retail (282330 KS)

Hong Jung-Guk, the Vice President of BGF Co. announced he will receive a 9% stake in BGF Co. (8.579mn shares) from his father Hong Suk-Jo (the Chairman of the BGF Group) and 0.51% stake in BGF Co. (0.487mn shares) from his mother Yang Kyung-Hee. The acquisition price is ₩7,610 for BGF Co. Chairman Hong's stake in BGF Co., which will decline to 53.54% from 62.53%, and Hong Jung-Guk's stake will increase to 10.33% from 0.82%.

• In cases like this (typically, but not always) when there is a major transfer of ownership of this scale, the holding company's (BGF Co in this case) share price tends to do well as many investors perceive that there is less incentive for the major insiders to keep the share price "low" on purpose after the transfer. As a result, Douglas recommends a pair trade of going long BGF and short BGF Retail.
• As an aside, I estimate the current discount to NAV at 50%, around the lowest inside a year and compares to a 12-month average of 40%.

(link to Douglas' insight: Korean Stubs Spotlight: BGF & BGF Retail Pair Trade - Son of Chairman Receives 9.5% Stake of BGF)

Briefly ...

MSCI announced the results of the May 2019 Semi-Annual Index Review on the 14 May. For the MSCI Hong Kong Index, Vitasoy Intl Holdings (345 HK) was included while Hang Lung (10 HK) and Minth Group Ltd (425 HK) were excluded. These changes will take effect after market close on 28 May. The estimated outflow for HLG is 26 days ADV. I peg the discount to NAV at 45%, around its all-time low, while the implied stub is at its lowest ever level.

LG Chem Ltd (051910 KS)/LG Chem Ltd (051915 KS)

LG Chem C/1P have oscillated in almost perfect fashion. The price ratio is currently near the 3M low. The div yield difference is now 1.35% on FY19E earnings. Sanghyun believes this would be a good entry point to trade this pair.

(link to Sanghyun's insight: LG Chem Share Class: C/1P PR at 3M Low, Time for Stat Arb Trade)

• Renault SA (RNO FP) has "officially" proposed a business integration to Nissan Motor (7201 JP) according to TBS, quoting the results of a JNN article. The proposal put forth on the 12th May is to establish a holding company in a third country where the executives would be split 50/50 and the ownership would be an equal partnership.

• Softbank Group (9984 JP) has completed its buyback, buying back just over 5% of shares out and just over 11% of the Real World Float. Average participation rate in daily volume during the period was just over 10%.

• The Scout24 AG (G24 GR) Offer by H&F did not go through.

• Including the acceptance facility, Ap Eagers Ltd (APE AU) holds 54.05% in Automotive Holdings (AHG AU). Separately, AHG now targets FY19 operating NPAT of ~A$50mn versus $52-56mn previously announced in February this year. And AHG's target statement is out. The IE concluded the Offer is not fair but reasonable after reaching an assessed value for AHG between $2.64-$3.01/share.

• Preliminary results of the tender offer for Glow Energy Pcl (GLOW TB) show 5.62% of shares out have accepted the Offer, bringing Global Power Synergy Company Ltd (GPSC TB) stake to 74.73%. The tender offer period closed this past Friday.

• GK Goh has launched a voluntary unconditional offer for Boardroom Ltd (BOARD SP) at A$0.88/share, a 14.3% premium to last close. The Offer price is final. GK Goh currently holds 80.72%.

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.