Last Week in Event SPACE: NTT Docomo, Evergrande Properties/Auto, Wilmar, Swire, Immunomedics

Last Week in Event SPACE ...

• By dint of the fact that NTT (Nippon Telegraph & Telephone) (9432 JP) owns 66.21% in NTT Docomo Inc (9437 JP) to start with, the minimum hurdle is only 66.67%, and other corporate holders own more than enough to get it past the minimum hurdle, this big-ticket shock deal is "done" before it starts.
• Rumours abound on a funding squeeze for Evergrande Real Estate Group (3333 HK). Evergrande has a LOT of short-term debt and short-term liabilities. Some may be able to be postponed, but not all. This past week the company apparently managed to get existing shareholder-lenders to sign on for another year of support to Hengda. But there is still pressure. Assets still need to be sold.
• As Evergrande Auto (708 HK)'s Star Market listing inches closer, its trading valuations cannot be justified.
• Wilmar International (WIL SP) can easily retest their recent high of S$4.86 back in August just prior to the ADM placement and EB issuance. Since that high, uncertainty re: YKH's IPO approval has been removed as has the IPO valuation uncertainty. Plus CPO prices are up and above pre-COVID levels.
• Swire Pacific (A) (19 HK) is cheap on a look-through P/B of 0.2x. But the spectre of pumping more cash into Cathay Pacific Airways (293 HK) is a significant overhang.

• Buy Immunomedics Inc (IMMU US) at 3.2% or wider. The limited conditionality attached to the Offer would indicate this may complete early. However, deals like this should trade wider than normal because of the very small chance of losing a very large amount of money in case of deal disruption of any kind.

• Dcm Holdings (3050 JP) launches a full tender offer for Shimachu Co Ltd (8184 JP) instead of the partial offer mooted by NHK the week prior. This is a worthwhile consolidation and on a capital structure or asset base, it is getting done too cheap, despite being at a 45% premium to undisturbed and a 26-year high.

• Plus, other events, CCASS movements and Mood Spins.

NTT Docomo Inc (9437 JP) (Mkt Cap: $119bn; Liquidity: $142mn)

After the Nikkei published articles that NTT (Nippon Telegraph & Telephone) (9432 JP) would soon launch a Tender Offer to buy out the minority shareholders of its mobile telephony subsidiary and largest mobile phone operator in Japan by subscriber count NTT Docomo, NTT announced it would conduct a Tender Offer to buy out minorities at ¥3900/share, which is a 40.5% premium to the undisturbed price. Given the ownership circumstances and the trading prices of other telecom stocks out there, this is a Very High Price Indeed. Is this deal fair? Yes, for NTT Docomo Shareholders. Not for NTT Shareholders.

• The change in Management Team at DoCoMo - several changes at the top - is curious. This smacks of a situation where NTT got tired of waiting for NTT DoCoMo to act, and finally decided to buy them out. There were hints of that in the updated Asian Nikkei Review article published later in the morning (after Travis published).
• The Trade: for Docomo, if this trades at terms or through terms because of short-covering, Travis Lundy would sell it. It may trade through terms as people who unwind their short position (against NTT?) try to cover quickly. They can probably wait, painfully, but wait.
• For NTT. There are more than a few hints here that this was done to get NTT DoCoMo off its duff, to compete in the 2030s rather than the 2010s. The speed of movement to switch out management is striking. Dramatic, even. The fact they are paying so much tells you that see real money in getting this done. Paying an extra ¥500-800bn vs what they could have paid tells you they see lots of synergies. If you were a long-only investor, use funds getting out of NTT Docomo to buy into NTT as soon as you could get comfortable that there is something there.

Links to:
Travis insights: NTT Docomo SHOCKER - Nikkei Says Parent NTT To Buy Out Docomo Minorities & NTT Deal for DoCoMo - Not Going Gentle, Definitely Raging Against the Dying of the Light
Mio Kato's insights: NTT – Initial Thoughts Reading Through the Lines of the Shock News & NTT – NTT Is Going Big and Our Suspicions Are Aroused Further.

Evergrande Real Estate Group (3333 HK) (Mkt Cap: $33.2bn; Liquidity: $47mn)

A letter purportedly submitted by Evergrande to the Guangdong government asking for assistance lest its cash-crunch lead to much worse has been disavowed, and called a fake by the company. Various news reports have said since that denial that they have seen the letter. The letter lays out the problem of repaying RMB 130bn to investors if the company is not allowed to backdoor-list Hengda Real Estate before end-January 2021.

• What's Real? The Hengda problem is real. And it is RMB 143.7bn. The letter may or may not be real, but the problems outlined in it appear real.
• The pilot programme has been reported upon in both mainland and offshore media. Names have been named. Evergrande is one.
• This means Evergrande needs to sell assets. It needs to sell a lot of them and do so in a hurry. It can sell property. But it actually has to sell a lot of property. It needs to sell a record amount just to lower its leverage ratios from near top in the industry. It may need to sell some subsidiary shares. It may also need to sell some inventory assets. And that ignores the possibility of having to repay RMB 144+bn of Hengda guarantees.
• This is a sector-wide problem in general but it is an Evergrande problem specifically. This will serve to underscore off-balance sheet risks to developer balance sheets and will lead lenders to be more careful. The government is continuing to wield a decent-sized stick to lower speculation, but it is also clear that Evergrande is just a rentier on what is a much larger economic problem - China needs the FAI so it needs people to do the FAI. Evergrande is one of the biggies. However, if China needs to serve up an example in order to save the sector, it can certainly find ways to bring a speculator down to size.
• When he wrote, Travis said he would remain short/underweight. Travis saw no reason why the stock can't test HK$10 again. If the bonds fell to the 50s, he would expect that to be a decent buy (the onshore bonds). China Evergrande is an avatar for over-indebtedness, but such avatars - like HNA - usually see the equity zeroed when they go bust, and someone somewhere takes a hit, but the public gets a large amount of its money back. Because creditors are protected.
• At the end of trading for the foreshortened week, it was reported that Evergrande had come to terms with its investors in Hengda and earned itself some extra time. In the meantime, the equity traded up to the level it was prior to the 20 August meeting first becoming known. Travis notes that all the strictures put in place in the 20 August meeting are still in place for Evergrande. They still need to sell assets and reduce debt. Selling assets will allow them to lower debt but to get back to meet the Three Red Lines they need to pay down a LOT of debt.

(link to Travis' insight: Evergrande May Be Facing a Funding Squeeze)

Shimachu Co Ltd (8184 JP) (Mkt Cap US$1.5bn; Liquidity $10mm day (now)

• A bit more than a week ago, NHK reported that Dcm Holdings (3050 JP) would buy a stake in Shimachu in order to take control. This was mooted to be a Tender Offer. Shares jumped from the high ¥2800s to the ¥3500+ area.
• Travis wrote about the situation in DCM Partial Offer for Shimachu Coming? suggesting buying in that area was a decent idea as a partial would likely have to be in the ¥3700-4200 area because of the structure of the shareholder base.
• On Friday 2 October after the close, DCM and Shimachu announced a deal whereby DCM would launch a Tender Offer commencing 5 October to take Shimachu private. Minimum hurdle is 50% but the goal is two-thirds and a squeezeout. The structure is still deemed to be difficult because of the significant presence of passive investors, though it looks like DCM's advisors have overestimated how much passive is in the register (to their benefit).
• It looks like a great price. High multiple against peers, 26yr high price, 45% premium to undisturbed. But it is at 0.9x book, and a lower EV/EBITDA multiple than peers.
• The price offered is probably too cheap by 20%. Shimachu is in a net cash position and owns ¥160+bn of assets which could be sold and leased back. If done, it would take care of the entire purchase price while leaving roughly 60% of the EBT. That's probably too cheap.
• That said, Travis thinks this could be a tough deal to block given the relatively high "friendly" shareholder ownership.

(link to Travis' insight: DCM Does a Full Takeover of Shimachu - Looks Like a Strong Price. Look Again.)

Swire Pacific (A) (19 HK) / Swire Properties (1972 HK)

(link to my insight: StubWorld: Swire's All-Time Low Stub, But ... )

• This Rights Offering is super-dilutive. That gives arbitrageurs limited room to act. With ten new Rights for every 3 shares held/outstanding, even if arbs could borrow every single share in the market, that would cover only 30% of the new rights. Borrow will be nowhere near that plentiful. Not everyone will want to increase their exposure in Rolls Royce by 80+%. Some of those people will sell now. Some will sell the rights when they receive them. Either way, it means selling pressure.
• For long term investors, sell now. If you really like the stock, Travis expects you will have a chance to buy at a lower net price than the current TERP if you do so. he'd buy back near the end of the rights trading period. There will be selling pressure between now and then, and particularly after the ex-date. For short-term investors, Travis'd be inclined to be short now. If you really liked the stock as a long, Travis would wait to buy.

(link to Travis' insight: Rolls Royce Rights Roll Right Over You)

In Ahlstrom-Munksjo (AM1 FH): Tender Offer Trading Tight - Will There Be Bumpitrage?, Janaghan Jeyakumar discusses Ahlstrom-Munksjo (AM1 FH) agreeing to be acquired by a consortium of investors consisting of Bain Capital and current top shareholders Ahlström Capital, and Viknum AB and Belgrano Inversiones. Following the completion of the Transaction, Bain Capital is expected to indirectly own 55% while Ahlström Capital and Viknum will hold 36% and 9% respectively. The transaction is structured as a Tender Offer and the Offer Price will be EUR18.10 per share in cash (37.1% premium). Minimum Acceptance Condition requires that the Acquirer gains control of more than 90%. This requires an acceptance rate of at least ~85% (i.e. 55%/65%) from shareholders outside the irrevocable undertakings. This is quite high. A bump in terms cannot be ruled out.

• In its weekly update concerning the progress of the High Court sanctioning, Allied Properties (H.K.) (56 HK) says there is no new update. Super strange.

• YuanShengTai Dairy Farm (1431 HK) has announced that due to an inadvertent oversight by the Offeror, it was not brought to the attention of the Executive (of the SFC) before the Rule 3.5 Announcement that PRC anti-trust approval was required for the Offers and such requirement was not disclosed in the Rule 3.5 Announcement. The Offeror is now in the process of preparing the anti-trust filings. This makes sense - the China Zhongdi Dairy (1492 HK) transaction ( Zhongdi Dairy (1492 HK): Possible MGO from Yili) needs SAMR sign-off. The despatch of the Composite Document has also been pushed to the 12 October.

• Changshouhua Food (1006 HK) has announced it will delay the despatch of the Scheme Doc to the 9 November. This was wholly expected. My initial timetable forecast the 6 November.
• Preliminary Non-Binding Proposal at US$2.50/ADS for Wanda Sports Group (WSG US). The Offeror has 91.01% of the voting power. If a firm Offer is tabled, this will be done via a short-form merger - therefore there is no vote and no dissenting.

• Pre-con Offer from Shandong Gold Mining Co., Ltd. (1787 HK) for Hengxing Gold Holding (2303 HK). Pre-cons include approvals from NDRC and MOFCOM. The Offer will be by way of a Scheme with the consideration in scrip - approximate 0.17241* SDGM H Share. Works out to a slight discount to last close. SGM has received irrevocable totaling 75% of the votes of Hengxing. So that's pretty much a lock.

• According to various media sources, Casetek Holdings (5264 TT) shareholders have approved the merger with Pegatron Corp (4938 TT).
• Nordgold extends its Offer for Cardinal Resources (CDV AU) until the 8 October.
• The Fujitsu Frontech (6945 JP) Tender Offer results are in. Fujitsu Ltd (6702 JP) has 87.73%. That means an EGM and squeezeout over the next 2-3 months.
• The sale of golf courses by Accordia Golf Trust (AGT SP) has gone through as per an announcement on the Exchange last night. The shares are suspended now.
• Metlifecare Ltd (MET NZ) shareholders approve Scheme. "It is anticipated that the Scheme will be implemented and shareholders will be paid NZ$6 per share on or around 29 October 2020".

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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.