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Last Week in Event SPACE: Prosus/Naspers, Wilmar, Invesco Office, Boral, Honshu Chem, Crown Resorts

370 Views16 May 2021 08:00
SUMMARY

Last Week in Event SPACE ...

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

STUBS

Naspers (NPN SJ) /Prosus (PRX NA)

Naspers and Prosus surprised most of us by announcing a Proposed Voluntary Share Exchange Offer to Naspers Shareholders. The deal involves offering Naspers shareholders the chance to convert their Naspers shares to Prosus shares at a premium to the last trade and recent value, and offer "value" to Prosus shareholders via accretion. The resulting complexity is, however, less attractive. Eventually, the model accretion plus buyback accretion at Prosus should win shareholders over, and domestic Naspers shareholders should find the structure slightly attractive, but the investor call made clear that despite executives having spent a LOT of time on this, they clearly hadn't thought everything through.

  • It is most valuable if investors believe that at the other side of the rainbow there will be eventual monetization and Prosus will distribute proceeds and assets to its shareholders. If you do not believe that, there is some benefit to doing this, but substantially less (the benefit comes from shareholders getting single-taxed rather than double-taxed (Prosus level and as SA residents).
  • Prosus shareholders are getting an uplift in NAV via the peculiarities of the circulatory. But it is also issuing discounted scrip of ~33% for shares they are effectively trading at ~50% discount. That is positive. Plus you have Prosus' large buyback program which will also support shares near-term. Although the overall construct is accretive, it is complex. And circularities, as seen with Jardine Strategic Holdings (JS SP) in the past, may not be embraced.
  • Risks to the transaction are numerous - this deal is not rubber-stamped. One of the key questions outstanding is whether Naspers can vote it 73.2% stake at Prosus EGM.
  • The Trade: play the spread. NPN/Prosus was at a 7% discount to terms at the close of the first day. At those levels, set up a long Naspers, short Prosus here.

Links to:
Travis Lundy's insight: Naspers & Prosus Exchange Offer - Accretion Vs Complexity
my insight: Naspers/Prosus: South African "Keswicks"
Sumeet Singh's insight: Prosus/Naspers Holdco - Round Tripping US$46bn

Wilmar International (WIL SP) / Yihai Kerry Arawana Holdings (300999 CH) (YHA)

I see Wilmar's discount to NAV at 63%, around the level when YHA IPO'ed last October, and closing in on the Archer Daniels Midland Co (ADM US)'s placement levels last August.

  • Wilmar's consensus target price has increased 31% since YKA's listing; 29% YTD and 9% since the release of the FY20 results. . Wilmar looks inexpensive here, even for a cross-border, possibly-difficult-to-short subsidiary, Holdco situation. But it is a very clean holding company structure, with a potential near-term catalyst from Adani Wilmar's listing, in tandem with the continuing buybacks. Management's average buyback price of $5.11/share provides some validity as to where value emerges.
  • The pushback? The deconsolidated EBITDA is flat to +ve this year and next, although the bottom line appears to be declining, with no apparent justification. Irrespective, the market is assigning a negative value of S$46.6bn to the stub ops, up from S$42.7bn in the middle of last month. In addition, is Wilmar's exposure to palm oil exposing it to a growing number of ESG risks?

(link to my insight: StubWorld: Buybacks Resume Into Inexpensive Wilmar)

M&A - ASIA

Invesco Office J Reit (3298 JP) (Mkt Cap: $1.8bn; Liquidity: $20mn)

Starwood Capital Group and its bidding entity 101 LPS raised its bid from ¥20,000/unit to ¥21,750/unit - an 8.75% bump - and lowered the minimum threshold for tender success from 5,344,355 units to 4,341,133 units or from two-thirds plus one share to about 55.27%. Travis suggested on the 6th in Invesco Office OPPOSES Starwood Hostile Offer and Gets a Distinctly Beige Knight that it was in Starwood's interest to respond to Invesco's new tactic of having the parent buy shares and do so early on. First was to ensure Invesco had to newly decide to pay more, and second was to make it clear they were paying up. There was an added aspect of them being able to not extend the end of the Tender Offer if they revised by the 10th, which they did.

  • This is now a 19.9% premium against "Peer-Adjusted Undisturbed", and a P/NAV which is 22-24% higher than the rest of the Office J-REIT sector other than the two majors with a different class of building. This looks like a decent exit. Invesco, in defending its value, did not say what the appropriate "value" was. They have not yet responded. They will likely respond to this new proposal shortly. In the new response, they MAY clarify what "fair" is to them.
  • If you are a long-holder, I believe the trade here is to sell one's long, and redeploy. If able to short, Travis would short Invesco Office REIT and buy other REITs. If the deal is successful, expect any further bump to be minimal, and expect the capital to be re-deployed in other REITs, where new money would have to replace 1% of existing ownership in the rest of the REIT index. If the deal is unsuccessful, expect Invesco Office REIT shares to fall relative to its peers. The key to this is a belief that Starwood will not bid substantially higher.
  • UPDATE: Reportedly Requested Party Invesco Investments (Bermuda) had purchased 5.66% of Invesco REIT. If the Requested Party buys back shares up to ¥21,750/share so as to make sure nobody wants to tender, Travis would sell my long position to them. At a price close to ¥21,750/share, he would short the shares to them (they are willing to buy blocks, as shown in the filing, but there are limits to this in the TOB rules). Starwood likely MUST raise their bid. Invesco has shown they will buy at ¥21,770/share. If Invesco International (Bermuda) keeps on buying, it makes getting to the minimum hurdle quite difficult.

Link to Travis' insights:
Starwood Bumps Terms, Lowers Threshold on Invesco Office
Invesco Office's Terrible, Horrible, No Good Very Bad Day... Changes Things

Boral Ltd (BLD AU) (Mkt Cap: $6.5bn; Liquidity: $17mn)

After completing the $1.3bn sale of its 50% stake in USG Boral to Knauf Gips KG, international building and construction materials play Boral announced on April 1 it would use the proceeds to reduce net debt to A$1.5bn from A$1.9bn, and apply the remaining proceeds to commence a buyback. Boral aims to buy up to 10% of shares out, or ~122mn shares, at a cost of A$670mn based on the then-prevalent share price. By the 9 May, Boral had bought back ~10.15mn shares. But then Seven Group Holdings (SVW AU) lobbed a strange Offer.

  • Seven announced an off-market takeover at $6.50, a nil premium to last close. There are essentially no conditions to this Offer. There is no minimum acceptance condition. Seven currently holds ~23.18% and would be "satisfied" for the Offer to result in a holding of around 30%. The Offer is expected to open on May 25 and close on June 25, unless extended.

  • Seven began buying shares in Boral in March last year and held ~10% by June 2. By September 11, Seven had upped its stake 19.98%. In Australia, a company is not permitted to own more than 20% in another company, unless it launches a takeover. There is a marginal workaround: Australian law provides a "creep" provision such that shareholders can add an additional 3% - even through 20% - every six months. And on the 9 April, Seven did just that, lifting its stake to 22.984% - or ~23.18% after taking into account Boral's buyback. Seven is therefore restricted from acquiring additional shares in Boral until early October.

  • The Offer appears geared to lift its stake, but not secure majority control. With no premium to last close, it is inevitable Boral's board will reject the Offer - which it subsequently did.
  • An interested large investor looking to raise its stake, coupled with a solid buyback - if you can buy shares at or near the Offer price, do so. You have a hard floor of $6.50/share near-term.

Honshu Chemical Industry (4115 JP) (Mkt Cap: $0.2bn; Liquidity: <$1mn)

In mid-November 2020, Mitsui & Co Ltd (8031 JP) and Mitsui Chemicals (4183 JP) announced a transaction to take out minorities in jointly-held subsidiary Honshu Chemical. The price was at a 43% premium to then-traded price and a 20-year high. At the time, in Honshu Chemical (4115) - An Embarrassment of Riches Travis said "The result is a governance embarrassment for the two major acquirers, and the target company itself."

  • At the Tender Offer Price, the ex-cash PER based on management forecast OP for March 2022 is 3.7x. At the Tender Offer Price, the management forecast EV/EBITDA is 2.73x. And the buyers see "high growth potential." That seems... insultingly low. If Travis were someone who had a care about this (and capital to exercise that care), he would have been buying since November.
  • Since the announcement, the two parent companies' total share return has averaged +30%. Since the original announcement, Honshu Chemical's earnings forecasts are up 33% a share. A basket of mostly Chinese peer pure plays has outperformed Shanghai Composite by 13% since the announcement. This was always bumpable. This remains highly bumpable.
  • Travis still advises getting long. If you can get a block today at TOB price before earnings, he would take it. If you can get long at the Tender Offer Price later, he would take it. This strikes Travis as an ideal situation to push. Either before, during, or after the Tender Offer. Cowbell, folks. Definitely needs more cowbell.

(link to Travis' insight: Honshu Chemical (4115) Shareholders Perhaps One Day From a Wrong Price Takeover)

Crown Resorts (CWN AU) (Mkt Cap: $6.8bn; Liquidity: $12mn)

When Crown announced on the 22 March it had received an unsolicited, non-binding and indicative takeover proposal, by way of a Scheme, from Blackstone, at $11.85/share - a 19% premium to the average price of Crown's shares since the release of its 1H21 results, my initial takeaway was "Blackstone needs to bid higher". On the 10 May, This morning, Blackstone did just that - increasing its non-binding proposal by 4% to $12.35. Seven minutes later, Crown's domestic rival Star Entertainment Grp (SGR AU) tabled an unsolicited, non-binding, and indicative proposal, by way of a Scheme, either via the issuance of 2.68 new Star shares for every Crown share, or a possible cash alternative of A$12.50/share, subject to a scale back.

  • Blackstone's proposal is a clean $12.35/share cash Offer. Star's scrip Offer is worth $10.67/share - using last Friday's close - or $12.50/share in cash, subject to clawback (25% of Crown's issued shares). Star/Crown shareholder would own 34%/66% in the combined entity under a full scrip Offer, or 41%/59% is the cash option is fully taken up. The five, three, and one-year ratio (Crown/Star) is 2.62x, 2.85x & 2.92x. Crown shareholders who accept the scrip consideration may qualify for capital gains tax rollover relief. Yet Star reckons the scrip Offer is worth north of $14/share, based on net synergies (corporate, IT, operations, marketing etc - see page 8).
  • Assuming Crown retains the licenses in Sydney, Melbourne, and Perth - subject to various investigations and royal commissions - removing the investigative overhang, which has been bubbling well beyond the ILGA inquiry first announced in August 2019, then Crown will re-rate beyond that Offered by Blackstone and Star.
  • And on the 19 April, Oaktree made a non-binding proposal to provide a funding commitment of up to A$3bn to Crown via a structured instrument to be used to buy back some, or all of Crown shares held by Packer's CPH. Separately, both Apollo and BGH have been rumoured to be interested in Crown. I think this transaction needs a clean A$14+/share handle to get up.
  • UPDATE: Reportedly, according to the AFR, C C Land Holdings (1224 HK) is interested in making an Offer for Crown, although Aussie/China tensions may scupper such a bid from the onset.

Maruka Machinery (7594 JP) / Furusato Industries (8087 JP)

Friday after the close, trading company Maruka and steel frame and pipe company Furasato which also became a machine and tool wholesaler, made an announcement that they had decided to form a holdco called MARUKA FURUSATO Corporation. This is a merger between an inexpensive, cash-rich, company that has nearly 20% of its voting rights owned by an activist, and an even cheaper one. The "Cheap One" with the Activist is experiencing a takeunder, but it is a highly accretive takeunder for shareholders. It is possible that SFP would be against this deal. It is possible they would support it. It is possible this deal is designed to dilute SFP and it is possible that they helped arrange it.

  • From a longer-term perspective, a deal like this makes sense. It creates larger market cap which means the two companies can stay listed in the future TSE Prime, but ideally, the best way to do this would have been to have Maruka use their cash to buy out Furusato minorities in a partial tender offer, then to merge the remaining Furusato stock. Then to have the remaining cash be spent on buying out corporates. Instead, Furusato minorities should be upset that they are selling their company so cheaply.
  • Maruka looks like it is being taken under but this is a gift to Maruka shareholders if they know how to use it. Maruka is likely to trade "through terms" because takeunders are often like that. I would NOT short this. There is a possibility that someone tries to get a higher ratio done (even though it would not be appropriate, fundamentally speaking).
  • From a medium-long-term perspective, this company should be taken out in an MBO, should then buy other companies using its cash, rolling up into a bigger company, then getting relisted, or sold to a strategic. Longer-term, I would want to be long this combo. The dilution of corporate cross-holding ownership at Furusato, and Furusato-san's own dilution means activists have a chance to push harder on this one going forward.

China Youzan Limited (8083 HK) (Mkt Cap: $3.7bn; Liquidity: $40mn)

On the 28 February, e-commerce and payment solutions provider China Youzan announced a pre-conditional Offer by way of a Scheme to take its GEM-listed shares private, then list 51.7%-held Youzan Technology on Hong Kong's mainboard. Shareholders are offered HK$0.1352/share in cash plus an in-specie distribution of 0.05077265 Youzan Technology shares for every China Youzan share held. All in, the indicative Offer price was HK$2.3088/share, a 30.2% discount to last close. China Youzan was up 283% in the past year, and 44% YTD prior to the offer. On the 6 May, Disinterested Scheme Shareholders approved at the First SGM a rollover arrangement and other side-agreements. The Scheme Document is expected to be posted on or before the 15 June.

  • In China Youzan (8083 HK): Proposal Towards Relisting Youzan Tech, I recommended avoiding the stock, with a view to re-entering if it closed in on the implied fair value - at the time - using peer multiples, or ~HK$2.20/share.
  • At the time of this latest insight, China Youzan was down 46% from its February high of $4.50, but still up 88% in the past 12 months. The downside appeared limited here. But the insight was labelled bearish as shares are notoriously volatile. Buying China Youzan means you are buying the Youzan Tech IPO at an Implied EV/sales multiple. That's around a 40% premium to peers currently.
  • Share promptly tanked another 24% after my note, and at $1.62/share, and are around my indicative "fair value" of $1.65.

Sawada Holdings (8699 JP) (Mkt Cap: $0.3bn; Liquidity: $1mn)

The shareholder structure of Sawada looks quite a bit different than it did a few weeks ago. The Qualifying Shareholder who needed to sell down below 20.00% from above got permission to sell in the market on 19 April, and started selling on the 22nd. Then sold some more. As far as I can tell, they were below 20.0% - the level required by the Mongolian Central Bank - on 26th April after the close, at 19.35%. Four trading days later and they were below 10%. That changes things.

  • Travis remains bullish on an outcome of the Khan Bank selldown which provides more value to shareholders than we see at Friday's closing price. Like most long-dated situations, when there is a lack of information, Travis is often inclined to trade as if he had an options position, and hedge the "Delta" around moves. If it goes up a lot, sell some. If it goes down a lot, buy more.
  • The more that Sawada Holdings can make nice with the Mongolian Central Bank, the more that there is a chance that the outcome is better. However, while there was a 25% float, there is now 42% float, and that changes things. Travis also notes that large holders cannot "push" the way they might in a normal activist situation because of the caveat announced by Sawada on the 23rd of March whereby it is possible that Sawada shareholders holding over 5% or over 8.33% would be deemed Qualifying Shareholders in some future iteration of interpretation of the law. Bluntly, this means that those who would squeeze float to ensure there wasn't that much float to sell will have a tougher time doing so.
  • However, Sawada-san still owns 29.5% and World Capital owns 15%. Two holders holding a combined 5.6% could theoretically act in concert with those two shareholders to oust the directors, bring in a new slate, and change the course of the asset liquidation. We know that Sawada-san himself - in agreeing to tender at JPY 1050 - has effectively decided to bail. I assume his long-time partner in investing at World Capital is of a similar mind.
  • UPDATE: And Upsilon extends the Tender Offer on Sawada to May 25 close. 305 days so far.
APN Property Group (APD AU) (Mkt Cap: $0.2bn; Liquidity: $1mn)

Real estate manager APN made an announcement it had entered into a Scheme with Dexus Property (DXS AU) at a price of A$0.915/share, a 50% premium to last close. The Offer has the unanimous backing of APN directors. In addition, APN directors holding 33% of APN's outstanding shares intend to vote in favour of the Scheme. APN Chairman Chris Aylward has separately granted Dexus a call option equal to 19.9% of APN's shares, exercisable in the event a competing proposal is announced. The Offer Price will be reduced by any distribution declared by APN on or after the announcement and prior to 30 September.

  • The Scheme meeting is expected to be held mid-July with implementation potentially early August.
  • APN's five-year average trailing P/B is 1.2x vs. 1.5x now. According to CapIQ, shares last traded above terms in May 2008.
  • Board support, a hefty premium to last close, and a decade-plus high - this is priced to complete and is trading accordingly.

(link to my insight: APN Prop (APD AU): Dexus' Done Deal)

Mainstream Group Holdings Ltd (MAI AU) (Mkt Cap: $0.3bn; Liquidity: $1mn)

SS&C exercised its matching right after Apex raised their bid to A$2.60/share, and raised their bid to A$2.61/share. In addition to the revision to the Offer Price, there have been some other changes to SS&C's Scheme Implementation Deed, including a limit on employee bonus payment has been increased from A$1.7mn to A$1.8mn, a limit on Adviser's fees in connection with the Scheme increased from A$9mn to A$9.5mn.

  • MAI directors have unanimously recommended MAI shareholders to vote in favour of this Transaction. Consequently, MAI has terminated discussions with Apex according to the latest announcement. However, the same was said when MAI first matched Apex's bid at A$2.35/share on 29th April and when SS&C trumped Apex's bid on 6th May (A$2.56 vs A$2.55) but that did not stop Apex from launching a fresh bid.
  • This is SS&C's 5th bid and for the same reason I mentioned in my previous insight - the premium vs. opposing bid being too low (+A$0.01/share this time) - this is not convincing enough to be called a "knock-out" bid and given the size of the Target Co and the strategic nature of the transaction, I suspect that high multiples are going to be major deterrent for further upward revisions to Terms. For this reason, I am NOT ruling out a Bump.
  • The Trade: AVOID. While Janaghan Jeyakumar is not ruling out another upward revision to Terms, he does not feel the risk-return trade-off is attractive at the current share price (A$2.69). He would revisit this situation if MAI trades below Terms again.

(link to Janaghan's insight: Mainstream (MAI AU): +120% in ~2 Months but Bidding War Continues.... )

Net cash to the tune of 85% of market cap - check. The company has been exiting out of a PRC-listed entity, increasing its cash pile - check. The chairman privatised a UK-listed entity earlier this year, which in turn, is the controlling shareholder of the company - check. Said chairman has been aggressively increasing his stake, and is now just shy of 70%, up from ~53% in December last year - check. The company is Lansen Pharmaceutical Holdings Co, Ltd. (503 HK). It's not large, nor liquid. But it's cheap, and in Lansen Pharma (503 HK): This Is A Buy, I reckon this is a likely privatisation play.

Resona Holdings (8308 JP) announced its results for FY2020 to 31 March 2021 on the 11 May. The bank today also announced a buyback of up to 88,000,000 shares (3.51% of shares out) for up to JPY 50bn. This was known, and effectively pre-announced. Resona absorbed a subsidiary (Kansai Mirai Financial Group) through a share exchange at the end of the last fiscal year, in a transaction announced 10 November 2020. In that announcement, it was announced there would be an acquisition of treasury shares in case of a dilution of EPS according to the transaction. Fulfilling its promise meant a buyback. Travis cannot suggest that the full 88mm shares are required to avoid dilution. If so, that is a lot, but it should be clear that the goal is to get those shares bought so that EPS is not diluted. Link to Travis insight: Resona (8308 JP) BUYBACK - Respectably Large But Looks Like A One-Off.

Qilu Expressway Co Ltd (1576 HK) has announced Shandong Hi-Speed Group (SHSG) plans to inject 778.5mn domestics shares, or 38.93% of Qilu, into Shandong Hi-Speed, an entity 70.91% controlled by SHSG. The completion of this restructuring also triggers an MGO - unless a waiver is granted. This all looks like history repeating itself after last year's merger by absorption. Shandong SASAC holds (indirectly) 44.12% and SASAC (indirectly) 36.08% in Qilu. In practice, 60.2% of shares out are locked up by the government. This doesn't change under the current restructuring. In Qilu Expressway (1576 HK): Deja Vu All Over Again, don't expect an MGO to unfold this time either.

Mebuki Financial Group (7167 JP) which was formed after Joyo Bank absorbed Ashikaga Bank announced earnings that were about 3% better than consensus, and forecasts for 2022 which appear about 2% lower than consensus expects for March 2022, but they also announced a buyback of up to 60 million shares spending up to ¥16bn. That is 5.17% of shares out. That is non-negligible and will bring the EPS forecast back above consensus even if pre-tax is just below. They get that started by launching a ToSTNeT-3 buyback for the same 60 million shares. Link to Travis insight: Mebuki Follows Resona - Bank Buyback Season Starts Strong And This Is A Good Sign.

Shinsei Bank (8303 JP) reported results that were "in line" with the revised forecasts of 6 May. The Bank also announced a buyback of up to 20 million shares, spending up to ¥20 billion. Travis is a little disappointed by the buyback quantity as well. This should be higher. It is likely that Shinsei did not "expect" MSCI deletion (though many did), and it is likely they do not "expect" TOPIX downweight in October, though it will happen. At the then current price, Travis expects 5.7% accretion to EPS over the course of the year, which means a likely average of say 2.9% vs the existing "forecast". In Shinsei Reports Results - What Looks Bad Isn't So Bad, But It Isn't Fantastic, Travis is bearish because he does not see enough of an impulse against the sector to be worthwhile at the current price in the very near term.

EVENTS

Nikkei 225 Proposes Minor Impact Rule Changes

The Nikkei Index Team announced the first proposed revision to the methodology of the Nikkei 225 Average in twenty years. Because the concept of Par Value is no longer used in Japan in the Companies Act, it would get rid of the "Presumed Par Value" or "Deemed Par Value" for members and potential members of the Average, and replace it with a Price Adjustment Factor ("PAF") which is an inverse multiplier of the Deemed Par Value. In short.... it would do nothing to the index and its constituents as they stand today.

  • And new additions would be assigned a PAF which would presumably be related to their previously understood Deemed Par Value. But in any case, new constituents would be capped at 1% weightings so would see their Price Adjustment Factor.... adjusted.
  • There are other changes proposed which change the rebalancing possibilities, and there is a note that the Average would only include members of TSE Prime (such that existing TSE1 and Nikkei 225 members which chose not to become members of TSE Prime would find themselves booted from the Nikkei 225.
  • This is highly disappointing. A 20-year review could have been so much more interesting and the Nikkei could have rescued itself from effective oblivion. Alas, this misses the mark, by a wide margin.

(link to Travis' insight: After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?))

On 13 May, Evergrande Real Estate Group (3333 HK) placed 260m shares of Evergrande Auto (708 HK) at HK$40.92/share, a discount of 20% to the closing price, and raised around HK$10.6bn. Despite its large market cap of nearly US$60bn, Evergrande Auto (708 HK) is currently not a member of any of the major global or local indices since it is on the SFC's High Shareholding Concentration list. The placement of 260m shares will reduce the shareholding ratio of the top 20 shareholders of Evergrande Auto to below 90%, and this could take the stock off the SFC's High Shareholding Concentration list. Link to Brian Freitas' insight: China Evergrande New Energy (708 HK): Placement Could Pave the Way for Multiple Index Inclusions.

In Evergrande Property Services Lock-Up Expiry Trade - The Next One to Be Sold by Evergrande, Zhen Zhou, Toh flags the Evergrande Property Services (6666 HK) 's lock-up expires on the 2 June.

TOPIX INCLUSIONS

Tess Holdings Co Ltd (5074 JP) (Mkt Cap: $0.5bn; Liquidity: $100mn)

Japanese small-cap renewable energy player Tess was listed in the First Section of the Tokyo Stock Exchange (TSE) on 27th April 2021. When a company gets listed in the First Section, it subsequently gets included in the TOPIX Index and as a result, TOPIX-tracking funds will have to purchase the stock during an Inclusion Event which presents interesting trading opportunities for active investors to generate sharp market-neutral returns in the space of few trading days. Alternatively, this can also be considered as a key point in time where short-term IPO investors could decide if they wanted to exit their positions by utilizing this liquidity event.

  • Janaghan estimates Inclusion Quantity to be 1.27mn-1.56mn shares which translates to an Inclusion Size of ¥2.5 - 3.1bn and an Impact of 0.1-0.2 days of volume going by ADV for the last 5 trading days. However, the impact can also be estimated to be around 1.8 times the trading volume on May 7th (which paints a more accurate picture by somewhat removing the distortion caused by the post-IPO transient volume patterns).
  • Pre-Inclusion Trade (Identified as LONG: 10th May to 28th May): BULLISH. The overheating prior to the beginning of this trade does not look very significant and on a growth-adjusted basis there do not seem to be any major concerns of relative overvaluation vs peers.
  • Post-Inclusion Trade (Identified as SHORT: 28th May to ~11th June): REVISIT LATER. This will depend on the trajectory of the share price between now and the Inclusion Event. If the price gain is excessive, it might be worth going short for the subsequent 10 trading days.

(link to Janaghan's insight: TOPIX Inclusion: Tess Holdings (5074 JP))

M&A - EUROPE

On 8 May 2021, Traton SE (8TRA GR) submitted a specified request to the Board of MAN SE (MAN GR) to convene the AGM of MAN SE to resolve on the transfer of the shares held by its minority shareholders to Traton SE. Traton SE currently holds 94.36 % of the share capital of MAN SE. Volkswagen (VOW GR) has a c. 90% stake in Traton. The proposed cash compensation is €70.68 (27% premium to last close) per both common and preference share and is addressed to c. 8.29 mn shares, for a total consideration of c. €586 mn. In Traton SE/MAN SE: Minority Squeeze-Out, Jesus Rodriguez Aguilar reckons this news took the market by surprise.

On 12 May, Udg Healthcare (UDG LN) announced that it had reached an agreement with Clayton, Dubilier & Rice LLC on the terms of a recommended cash offer at 1,023p for the entire issued capital. For an implied equity value of £2,611 mn and implies an EV of £2,777 mn, according to the release. 16.6x EV/21e EBITDA and 27.6x P/21e E (source: Capital IQ consensus). The bid was recommended by the board, and at 27.6x Fwd P/E, Jesus believes it is a full price that will be accepted by shareholders, although in CD&R/UDG Healthcare: Recommended Cash Offer, he does not discard a competing bid.

In Iberdrola (Avangrid)/PNM Resources: Regulator's Reprimand and Capital Increase, Jesus discussed the two approvals pending - New Mexico Public Regulation Commission & Nuclear Regulatory Commission - re: the Iberdrola SA (IBE SM) / PNM Resources (PNM US) deal. PNM closed on 12 May at $49.15, vs. an offer price of $50.3, which represents a gross spread of 2.3%, c. 4.6% annualized (assuming the deal completes in six months.

INDEX REBALS

Adani Group. Brian previously highlighted the potential inclusion of Adani Transmission Ltd (ADANIT IN), Adani Gas Ltd (ADGAS IN), and Adani Enterprises (ADE IN) in the MSCI Standard indices at the upcoming May SAIR. All the three potential inclusions have run up a lot over the last few months, outperforming the NIFTY Index (NIFTY INDEX) as well as other Adani group stocks. In Adani Group: Trim Longs on Potential MSCI Inclusions, Brian recommended trimming positions.

Nikkei225 Market Consultation. The main changes proposed include capping the weight of new constituents in the index at 1% by using a Price Adjustment Factor, limiting the number of index changes at a periodic review to 3, and changing the index universe from stocks listed on TSE's 1st section to stocks that are listed on the Prime Market (post the reorganisation). Limiting the weight of the new constituents in the index at 1% will keep index turnover low and reduce the impact of passive buying on the inclusions. In Nikkei225 Market Consultation: Tweaks and Changes Proposed; Nikkei Will Use Its Own Discretion, Brian recommends limiting the Price Adjustment Factor to 1 decimal place will necessitate selling of Sompo Holdings (8630 JP) by passive funds if the proposals are implemented.

Alibaba (9988 HK/​​ BABA). MSCI announced a market consultation that will run for one day on the treatment of the potential switch in listing from Alibaba Group (BABA US) to Alibaba Group (9988 HK). In MSCI announced a market consultation that will run for one day on the treatment of the potential switch in listing from Alibaba Group (BABA US) to Alibaba Group (9988 HK). In Alibaba (9988 HK/​ BABA): MSCI Conversion Is a Done Deal Brian reckons this will be done as a market neutral event and passive trackers will not need to execute any market trades - they will just need to convert their ADRs to the HK listing.

MSCI May 21 Index Rebalance. MSCI announced the results of the May Semi-Annual Index Review (SAIR). The changes will be effective after the close of trading on 27 May. There will be 109 inclusions and 96 deletions for the MSCI ACWI Index (MXWD INDEX) with the bulk of the change in Asia Pac. For Asia Pacific, there are 80 inclusions (60 of those in China) and 75 deletions (mainly 29 in Japan and 21 in China) for the MSCI Standard Index. Link to Brian's insight: MSCI May 21 Index Rebalance: Mostly In Line With Expectations.

SK IE Technology (361610 KS) has now listed on the KRX. The stock opened at double the IPO price, moved up another 5.95% and then had a massive sell off from there, dropping 28.54% from the highs in 20 minutes. The stock was trading at KRW 164,000/share, up 56% from the IPO price. At that price, SK IE easily makes the cut for inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX). We believe the inclusion will happen at the June review and will be announced after the close of trading on 1 June. Link to Brian's insight: SK IE Technology: KOSPI200 Inclusion Most Likely in June; Selloff Means No FTSE/MSCI Fast Entry.

Following the listing switch from Alibaba Group (BABA US) to Alibaba Group (9988 HK) in the FTSE indices in March and the upcoming switch in the MSCI indices as part of the May SAIR, in HK Secondary Listings - Switch in MSCI & FTSE Indices, Brian flags 7 secondary listing in Hong Kong that are eligible for a listing switch from the ADR line in the FTSE All-World and MSCI Standard indices.

FTSE Russell will announce the changes to the Global Equity Index Series (GEIS) as a part of the quarterly review on 21 May and the changes will be effective after the close of trading on 18 June. In FTSE GEIS June Index Rebalance Preview: One Week to Announcement, Brian see 20 stocks that are eligible for inclusion to the FTSE All-World and FTSE All-Country indices. 19 stocks are IPOs while Xiaomi Corp (1810 HK) will be included in the index after being dropped from the US Department of Defense NS-CCMC list.

OTHER M&A & EVENT UPDATES

  • Vitalharvest Freehold Trust (VTH AU) recommends MAFM's A$1.28/share Proposal.
  • Target's Statement and Bidder's Statements were published on the 14 May. Primewest Group Ltd (PWG AU)'s Board has unanimously recommended shareholders to accept the Offer.
  • Think Childcare (TNK AU) has agreed to extend the Exclusivity Period with Busy Bees to 31st May 2021 (vs. original deadline of 14th May). This is still a non-binding deal with an expected completion date to be in 1Q CY22.
  • The Tender Offer for Funai Electric (6839 JP) completed with 16,054,300 shares tendered. That was 47.05%. It was above the minimum of 11.16mm shares, which means that this will now lead to a squeezeout of minorities as the bidder and affiliated holders now hold 81.2%.
  • T Rowe Price has jumped in big on Harmonic Drive Systems (6324 JP), declaring a 5.0% position. Nabtesco Corp (6268 JP) has more to sell. Maybe TR will want more later.

CCASS

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

Name

% chg

Into

Out of

Wang On (1243 HK)75.00%MSBNP
C.Banner International Holdings (1028 HK) 18.23%GuotaiCCB
WMCH (8208 HK)12.00%EasyOutside CCASS
WAi Hung (3321 HK)67.50%KingstonSpace
Jiashili (1285 HK) 60.355BOCIOutside CCASS
Theme International Holdings (990 HK) 59.26%UOBHSBC
Pps International Holdings (8201 HK) 10.05%HSBCKingston
Source: HKEx

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

Name

% chg

Into

Out of

Channel Micron (2115 HK)10.28%PhilipOutside CCASS
Source: HKEx
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