Last Week in Event SPACE: NTT/NTT Docomo, Alpine, Genting, Greencross, Eclipx, LG Uplus

Last Week in Event SPACE ...

• The ongoing saga of the Ntt (Nippon Telegraph & Telephone) (9432 JP) vs NTT Docomo Inc (9437 JP) Push-Me-Pull-You Virtuous Circle of Buybacks continues.
• A dead horse continues to be beaten, but Alpine Electronics (6816 JP) is still cheap.
• Genting Bhd (GENT MK)'s NAV discount widens as the Malaysian government raises the "sin" duty.
• TPG throws Greencross Ltd (GXL AU) a bone, but it looks light.
• Eclipx (ECX AU) agrees to merge with Mcmillan Shakespeare (MMS AU).
• There is commercial logic to LG Uplus Corp (032640 KS) buying CJ Hello (037560 KS), but overpaying could be viewed negatively by the market.

(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) / NTT Docomo Inc (9437 JP)

NTT Docomo succumbed to government pressure and announced it will lower mobile phone fees by 20 - 40% beginning in the April-June quarter of 2019. A big question is really whether this indicates a clearing of a potential overhang of regulatory risk which has been present in Chief Cabinet Secretary commentary and MIIT negotiations of recent. For the industry as a whole, it may depend on whether KDDI and Softbank figure out a way to show top line falling too.

The bigger news was NTT Docomo announcing their biggest ever stock buyback (or at least, a tie for the largest). This buyback will be conducted via a Tender Offer at ¥2326/share - a 7% discount to its last traded price, and a 3-year low - which means 257,953,468 shares (6.82% of shares out) are to be bought back at maximum.

• NTT has indicated it will tender enough shares to complete the Tender Offer. NTT Docomo minority shareholders are therefore somewhat left out in the cold, because there will be no market impact, but they do get the accretion via NTT filling the buyback. NTT Docomo said it would cancel all treasury shares which would boost NTT's holding back up to 64.1%.
• It does mean that the next buyback NTT Docomo does can be spent entirely in the market - at lower or higher prices. When earnings start to flag, the company can spend all its money supporting its own share price on-market rather than buying shares off-market from NTT.
• NTT also announced a buyback to purchase up to 36 million shares for up to ¥150bn. This is at the lower end of the ¥150-300bn Travis expected, and at the current price, NTT could purchase the whole 36mm shares. It started by buying 12+mm shares in a ToSTNeT-3 buyback this week.
• The upshot of these announcements is that the NTT stub is STILL cheap. The relative fundamentals of the trade look better now than before. The market impact of buybacks supports the trade. The stub trade is implemented by long/short funds by going long NTT and going short NTT Docomo and NTT Data and a small hedge to hedge the resulting NTT stub NAV.

• Both Travis Lundy and Curtis Lehnert discussed the nuances of the NTT/NTT buyback virtuous circle. Both concluded - Don't be short NTT vs Docomo. Definitely be long NTT vs Docomo.

Links to:
Travis' insights:
NTT Docomo Tender Offer Buyback Means Buy NTT
NTT Docomo - Buyback, PushMePullYou, and A Very Cheap NTT Stub.
Curtis' insight:
TRADE IDEA: NTT (9432 JP) Stub - Overreaction to Docomo Rate Cuts

Genting Bhd (GENT MK) / Genting Singapore (GENS SP)

Genting's 49% discount to NAV is around its widest inside a year after Genting Malaysia (GENM MK) and itself were hit following the Malaysian government's Budget 2019 decision to increase the tax on gamblers.

• The increase in gambling duties was not wholly unexpected and it has been around 20 years since the last increase (3 ppt), in the wake of the Asian Financial Crisis. However, a 10% ppt increase (35% from 25%) is significant. To put this in perspective, GENM's Malaysian revenue in 1H18 was RM3.2bn (page 10 of the 1H18 results), net of the 25% gaming duty, or RM4.3bn on a gross basis. A 35% duty lowers that revenue to RM2.77bn.
• GENM accounted for ~48% of GENT's income in 1H18 and FY17, and a similar % for net income in FY17. As GENM is fully consolidated, GENT's future numbers will be directly impacted from the higher duty. And although GENM's cashflow from ops will still be ~RMB2bn+, the government may return to the well in future budgets should it wish to shore up any budget shortfall.
• GENT looks attractive here; but I would not touch it at this stage. Other industries in Malaysia have had a tendency to underperform when subject to excessive government oversight, and it's early days since this duty announcement.

(link to my insight: StubWorld: Higher Duties Target Genting; Intouch Recovers; IMAX Retraces (Rightfully))

IMAX Corp (IMAX US) / Imax China Holding (1970 HK)

Back in early October, I discussed (StubWorld: TCL's Possible Stake in ASM, Imax Is Not The Ticket, Out of Touch Intouch) IMAX's unjustifiably rich stub ops - IMAX's deconsolidated implied EV/EBITDA of 16.6x compared to the then peer average of 12.6x and Imax China's 11.4x - given the groups' growth driver and superior margins are derived from Imax China; whereas IMAX's forward deconsolidated revenue growth was/is flat to negative.

• After releasing its 9M18 results on the 25 October (3Q18 profit of US$5mn vs. a loss of US$850k in the corresponding period), which beat market expectations, the NAV discount has retraced to around the 12-month average. I calculate an implied EV/EBITDA of 11.5x for IMAX's stub ops, a premium to the peer average of 11x and 9x for Imax China. That still looks rich to me, but more manageable versus late September/early October.

(link to my insight: StubWorld: Higher Duties Target Genting; Intouch Recovers; IMAX Retraces (Rightfully))

Alpine Electronics (6816 JP) (Mkt Cap: $1.2bn; Liquidity: $5.7mn)

Last week, Alpine announced FY18 H1 earnings which were above company and Street forecasts. This is the 5th straight quarter since the announcement of the proposed merger with Alps Electric (6770 JP) that Alpine has beat its own and Street forecasts for revenue and OP. The Alpine/Alps share price ratio was decided in July 2017 based on forward forecasts compiled by management, every quarter has seen the Alpine/Alps profit ratio climbing that much further away from the original forecast.

• Alpine management explicitly, and Alps management implicitly (because of their obligations to the minority shareholders of their controlled subsidiaries under the Corporate Governance Code) have not done their duty to explain the valuation of Alpine which would make the currently-proposed ratio appropriate. Indeed, the original IFA had said the original deal was fair to minority shareholders of Alpine. In the process of reviewing the deal, the same IFA has changed their language to only say that the original ratio plus the special dividend is fair for Alps (omitting possible fairness to minorities).
• If Alpine (or its investors) could sell Alpine at the same 5.7x "clean EV" (market cap plus net debt less financial assets which do not contribute to EBITDA) to EBITDA+synergies ratio which is the price at which Faurecia - the buyer of Clarion, explained to its own shareholders was a good deal. Applied to Alpine, that would mean a share price of almost ¥5000/share.
• Travis still believes the trade is still to be long Alps and Alpine, though buying Alpine here puts one at risk of being shut out of the ¥300/share special dividend proposed by Oasis.
• Note that Oasis had a well-attended "Alpine Investor Day" in Tokyo on November 7th, and posted the presentation on their www.protectalpine.com website. The "Flaws in the Process" section describes the contortions that a financial advisor has to go through to make the ratio "fair" for Alpine minority shareholders. Any financial advisor who goes through those contortions in advising minority shareholders should be fired.

(link to Travis' insight: Alpine Earnings Up - Investors Want CLARIONITY)

Greencross Ltd (GXL AU) (Mkt Cap: $477mn; Liquidity: $3.2mn)

Australia and New Zealand's largest integrated consumer-facing pet retail and vet services company Greencross has entered a Scheme Implementation Agreement with TPG to acquire 100% of shares at $5.55/share, a 44.5% premium to the 1-month VWAP (& 34.1% premium to the undisturbed price), which backs out a ~10x FY18 EV/EBITDA and 18x FY18 PER. A scrip option into an unlisted Holdco, subject to scale back, is also being made available to shareholders.

• TPG knows this company well, having approached management in January 2016, first with a $6.45/share offer, followed in February with a $6.75/share offer - while concurrently taking a 5.92% stake. Both proposals were rejected.
• Management supports the Offer in the absence of a superior proposal and as it is accepting of due diligence here, means the Offer price can't be far off. But my gut is that this looks light and may need a bump to get up.

(link to my insight: TPG Throws A Bone To Greencross)

Eclipx (ECX AU) (Mkt Cap: $625mn; Liquidity: $4mn)

Mcmillan Shakespeare (MMS AU) and Eclipx have agreed to merge pursuant to a Scheme Implementation Agreement, in an A$911mn deal. Eclipx shareholders will receive 0.1414 MMS shares plus A$0.46 cash for each Eclipx share, or $2.85/share based on the closing price of MMS on the 7 November, or a 33.2% premium to Eclipx’s undisturbed share price of $2.14 on Friday August 17, prior to to an earlier tilt from Sg Fleet (SGF AU) .

• The merger price looks okay with respect to peers and the fact Eclipx manager support the offer, indicating we are more likely approaching full value. SGF may return to the table. There has also been a lot of movement in substantial shareholders between Jun-Oct, which could flesh out extra terms.
• Currently trading at a gross/annualised spread of 2.1%/6.5% (incl. divs), assuming an implementation date of the 13 March 2019 - as provided in the SIA. Care needs to be taken if setting a long/short here, as MMS's A$0.35/share permitted dividend is not eligible for new shares under the offer, which means you would be short that dividend. The indicative ex-date for MMS' dividend is the 14 March.

(link to my insight: McMillan's Fleet Of Foot Offer for Eclipx)

LG Uplus Corp (032640 KS) (Mkt Cap: $6.1bn; Liquidity: $38mn)

New Street Research's Alastair Jones discussed the renewed speculation about a sale of CJ Hello (037560 KS) to LG Uplus, as previously noted by Sanghyun Park. This is an old story, but there is commercial logic to a deal and he thinks it justifies a premium of 100%+ to CJH's share price, given the scale of the synergies. The most significant opportunity is the network roaming fees currently being paid to KT (030200 KS) for its MVNO business.

• However, such a high premium could be viewed negatively by the market. Should LG Uplus offer to pay 2x the current market price, the market may worry about overpaying and the impact this has on leverage/dividends. With LG Uplus trading close to multi-year highs a bid could lead to a sell-off in its shares. With 3Q earnings also a bit weaker than expected, Alastair reiterates his Reduce recommendation.

(link to Alastair 's insight: LG Uplus: Buying CJ Hello Could Deliver Large Synergies but May Struggle with Market Acceptance)

Advanced Semiconductor Mfg Corp Ltd. (3355 HK) (Mkt Cap: $272mn; Liquidity: $0.5mn)

ASMC's major shareholder Huada Semiconductor (19.65% direct, 25.43% indirect), which itself is wholly-owned by an SOE, is offering to delist the company by way of a merger by absorption at HK$1.50/share, a 66.7% premium to last close, a lifetime high, and an 8% premium to its all-time high of $1.39, which was briefly touched in November 2017. The Offer Price is Final.

• The transaction is a hybrid scheme owing to the fact ASMC is PRC-incorporated with unlisted domestic shares. The proposal still requires ≥ 75% for, ≤10% against, in a scheme-like vote from independent H-shareholders. With Shanghai Belling abstaining, a 10% blocking stake is equal to 109.4mn shares.
• There are dissension rights for shareholders who vote against the proposal, but I wouldn't get too hung up on the possibilities here as prior wording in precedent merger by absorption deals often go out of the way to indicate there are no specific guidelines to determine what is considered a "fair price."
• The fact ASMC is only waiting upon SAMR (PRC anti-trust) approval - in addition to independent H-shareholder approval - suggests this transaction may complete earlier than precedents. SAMR approval should not be an issue as it is the major shareholder making the offer, one that is SOE-affiliated, and the revenue generated by ASMC in the PRC only just triggers prior Mofcom antitrust thresholds.

(link to my insight: ASMC's Merger By Absorption)

U Shin Ltd (6985 JP) (Mkt Cap: $284mn; Liquidity: $0.9mn)

Auto parts, electronics, and bearing specialist Minebea Co Ltd (6479 JP) Minebea announced a Tender Offer to buy out U Shin at ¥985 or a 28.26% premium to the closing price on November 6th (the day before the announcement) and 31-33% above the 1, 3, and 6-month averages. It is also a decent premium to the initial proposal of ¥890. U Shin is best-known for locking systems - the key card systems in hotels, house and office locks.

• The minimum to complete a successful tender is to reach 66.67% so that a two-step process can squeeze out minorities. The largest holder, Effisimo - who recently increased their stake from 5.0% (first announced in January this year) to 6.23% - is an activist. The deal is being proposed at not such a super-high multiple (8x forecast FY earnings for the year ending 31 December 2018) and 4.9x EV/EBITDA.
• Travis reserves judgment on this. While he thinks the stock cheap, and probably at the wrong price in terms of a takeover bid, it is not clear who is going to push this, and it won't likely complete - if indeed it does - until end February.

(link to Travis' insight: Minebea Mitsumi Launches Offer for U-SHIN)

SeAH Steel Corp/New (306200 KS) (Mkt Cap: $154mn; Liquidity: $2.2mn)

SeAH Steel Holdings (003030 KS) announced a tender offer for 1.45mn shares of to SeAH Steel shareholders or 51.12% of shares out. The swap price for the target company (SeAH Steel) is finalized at ₩59,700; while the Holdings' swap price will be the 3-day VWAP on Nov 29~Dec 3 with no discount. At the tentative swap price of ₩49,762, the swap ratio is 1.19971. That is, you will get 1.19971 Holdings shares for each SeAH Steel share.

• The major shareholder has a combined 47.64%. But Sanghyun believes only a 35.53% stake owned by the Lee Ju-seong family will likely be swapped. He also thinks the major shareholder will try to press down Holdings share price in an effort to back out a better swap ratio, which could provide a long/short opportunity.

(link to Sanghyun's insight: SeAH Steel Holdings Tender Offer: Summary & Trading Opportunities)

• Spring Real Estate Investment Trust (1426 HK). Not altogether surprisingly, PAG's revised Offer is considered not fair & reasonable. Tendering over the past week - since the bump - has been trickling in (~0.19% of issued shares by my estimate), and the market is evidently not convinced this will get up, resulting in this week's sharp decline. The case for retail shareholders - who comprise the majority of shares not tendered, excluding the Manager & affiliate - to tender is pretty clear. A 77% premium and a 12.4% discount to NAV is a good deal for shareholders, the "fair & reasonable" opinion is unjustified (& disingenuous), and two proxy advisors recommend shareholders vote against the Huizhou property acquisition - the latter being a vote of no confidence for management - which is indirectly supportive of the Offer. And Spring will trade back down to ~HK$3 if not unconditional by the 28 November. It's just that UBS, PAG's FA, is challenged swaying/contacting those retail investors.
• Lcy Chemical (1704 TT). Taiwan's Fair Trade Commission has granted KKR approval.
• Reportedly Kakao Corp (035720 KS) may be interested in buying Market Kurly (www.kurly.com), one of the best-known grocery delivery platforms in Korea. Both Kakao and Market Kurly have denied the rumours. (link to Douglas Kim 's insight Korea M&A Spotlight: Is Kakao Interested in Buying Market Kurly?)
• Both Daeduck Electronics Co (008060 KS) and Daeduck Gds (004130 KS) received shareholder approval for the merger. The stock purchase spread for GDS common and the arb trade spread are both tight. (link to Sanghyun's insight: Daeduck Merger Update: Stock Swap Spread Is Still at 4%).
• Wonik IPS (240810 KS) announced that it would merge with Tera Semicon (123100 KS) at a swap ratio of 0.7394724. The ceiling for stock purchase is set at ₩50bn for IPS and ₩30bn for Tera Semicon. The arb spread is tight at 0.29% using Friday's close. (link to: Wonik Merger Stock Swap: Summary & Trading Opportunities).
• Restaurant Brands Nz (RBD NZ). RBD updated the market to say there is no update on the non-binding proposal from Finaccess, but it will reach a final outcome by the end of November. Finaccess Serves A Partial Offer for Restaurant Brands.
• APA Group (APA AU). The Aussie Treasurer torpedoed the CKI/APA deal. "I have formed this view on the grounds that it would result in an undue concentration of foreign ownership by a single company group in our most significant gas transmission business. ... The concentration of foreign ownership was not a question considered by the ACCC’s assessment of this proposed acquisition." Shares closed at $8.88 on Friday vs. the undisturbed price of ~$8.27.

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.