Last Week in Event SPACE: Red Hat, Don Quijote, Toshiba, Healthscope, Unisem, CEVA, Hanjin Kal

Last Week in Event SPACE ...

• Dress up your event-driven portfolio with some Red Hat Inc (RHT US).
• Don Quijote Holdings (7532 JP) is squeeze-able, during and after the Tender Offer period.
• Real game theory in Toshiba Corp (6502 JP)'s ToSTNeT-3 buyback.
• The same players and roughly the same pricing, but Brookfield Capital has the edge on BGH in their second tilt for Healthscope Ltd (HSO AU).
• Unisem (M) (UNI MK)'s Offer is now binding after securing PRC approvals.
• Short-term suffering shareholders are offered an unconditional exit out of Ceva Logistics AG (CEVA SW).
• Hanjin Kal Corp (180640 KS) is the latest corporate activist target in Korea.

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

Red Hat Inc (RHT US) (Mkt Cap: $30.6bn; Liquidity: $432mn)

Intl Business Machines (IBM US) announced on October 28th it would acquire Red Hat for $190/share in cash in a $34bn deal, in IBM's largest ever acquisition. The deal price is a 62.8% premium to RHT’s undisturbed price of $116.68, and a 52.7% premium to the average closing price of $124.43 for the month prior to the deal's announcement. Red Hat is trading at a 9% discount to the deal price, creating uncertainty over prospects for the deal’s successful completion.

• John DeMasi dug deeper and sees a committed, strategic buyer who has been moving away from its legacy business for a number of years and has chosen Red Hat as its partner to complete its transition with this “transformational” deal.
• He also considers the merger agreement is balanced and well-written with no unexpected surprises. While some commentators have pegged this deal being in the tech industry as a reason for the large spread, the merger agreement MAE definition specifically carves out financial and securities market declines that do not disproportionately affect Red Hat relative to similar sized peers in its industry.
• The antitrust picture, while far from clear, doesn’t appear to present any obvious deal breakers. Chinese approval appears not to be a requirement. A quickly growing industry with large, deep-pocketed competitors and rapid technological change set the stage well for what he felt could be quick clearances. But even in a longer timeline scenario - that is, an extended antitrust review in the USA and/or Europe - the return is still attractive.

(link to John's insight: Red Hat/IBM: Does This Red Hat Go with My Big Blue Outfit?)

Don Quijote Holdings (7532 JP) (Mkt Cap: $9.7bn; Liquidity: $47mn)

Familymart Uny Holdings (8028 JP) has launched its Tender Offer to buy 20.17% of retailer Don Quijote, as a way of gaining an equity affiliate stake in the company to which FamilyMart simultaneously agreed to sell the remaining 60% of the UNY GMS business it acquired when it merged with Uny Group Holdings (8270 JP) in 2016. Since the rumour/announcement of the intention to launch the Tender Offer last month, the stock price of Don Quijote has risen from ¥5500 to over ¥7070.

• FamilyMart should not have sold UNY. It was a good business right under their noses. But Don Quijote will make it a better business. Read Michael Causton's Don Quijote: The Future Aldi of Japan Fomenting a Revolution in Japanese Food Retailing for a good explanation of why.
• FamilyMart's Tender Offer is at a 19% premium. That is an OK premium but not a great one, especially given Don Quijote's quickly proven ability to generate more income out of UNY's real estate.
• The biggest "problem" for FamilyMart is that Don Quijote is a growth stock in a tough industry, and growth stock fund managers don't like to sell growth stocks when they are growing. It is not clear FamilyMart has offered a large enough premium to dislodge 40% of the float from its current owners.

(link to Travis Lundy's insight: FamilyMart Tender for Don Quijote - Elmer vs Mr. Partridge?)

Healthscope Ltd (HSO AU) (Mkt Cap: $2.9bn; Liquidity: $12mn)

Healthscope has received a takeover offer from Brookfield Capital Partners - an Off-Market Takeover Offer of $2.455/share (50.1% acceptance condition), and a simultaneous Scheme representing a total value of $2.585 a share - both inclusive of an interim dividend of A$0.035/share. These proposals, trumping BGH-AustSuper's $2.36/share proposal announced on the 23rd of October, value Healthscope upwards of ~A$4.5bn. Healthscope considers Brookfield's proposal to be attractive and has granted it exclusive due diligence. Healthscope has denied the request for due diligence by BGH.

• I had considered BGH's prior indicative proposal to be full at ~14x forward EV/EBITDA vs. peers at 8.4x and a 32.6% premium to last close. Brookfield's Scheme proposal is 9.5% above BGH's tilt and ~3.4% above its own previously rejected indicative $2.50 offer announced on the 14th of May.
• The Scheme vote will not take place until at least the 1st of April. Under BGH's proposal, a five-month extension to the exclusivity arrangement amongst the Consortium's member is in place, which will expire on the 31st of March, unless extended. The Consortium's interest in Healthscope was 19.13% as at end-Oct, sufficient to all-but-block the Scheme vote.
• The current gross/annualised spread for the Off-market Offer and Scheme are 4%/10.2% & 9.5%/22.3%, respectively, assuming mid-April completion for the former and early May for the latter. That looks a little wide. I'd get involved around here.

(link to my insight: Not To Be Outdone, Brookfield Revisits Healthscope)

Unisem (M) (UNI MK) (Mkt Cap: $535mn; Liquidity: $1.8mn)

Three down, one to go. Unisem's Offerors recently secured key PRC approvals (including China’s Gansu Department of Commerce and from the NDRC), which as of when I wrote all but guaranteed the final pre-condition from SAFE. A firm Offer would ensue immediately after receipt. On the 12th of September, Unisem's CEO controlling shareholders and CEO John Chia, together with Tianshui Huatian Technology Co, Ltd. (002185 CH) (TSHT) (the Joint Offerors) announced a pre-conditional takeover at RM3.30/share, an 11.1% premium to last close, in an RM1.82bn deal.

• Guidelines handed down last year by China on outbound investments encourage transactions in industries such as high-tech businesses and advanced manufacturing enterprises. Coupled with NDRC approval, in practice, SAFE's approval should be straightforward for this transaction.
• TSHT acquired American wafer level packaging solutions company, FlipChip International in 2015. Though this took place prior to the recent tweaking in outbound investments, it shows TSHT has prior experience in making international acquisitions, and in turn, has the knowledge to obtain approvals from the Chinese regulatory authorities.

• These recent PRC approvals would indicate this Offer is on track to become binding. This also potentially suggests an earlier completion, well ahead of the long-stop date of mid-March under the pre-conditional offer. The gross spread narrowed this week to 3.1%. Tight, but worth getting involved if you can get in a tick or two below.

(link to my insight: Mind The Gap as TSHT Closes In On Unisem)

Propertylink Group (PLG AU) (Mkt Cap: $519mn; Liquidity: $2mn)

Warburg Pincus-controlled ESR Real Estate has launched a $1.20/security cash Offer for Propertylink by way of a Bid Implementation Agreement. There's an intriguing backdrop to this offer - Centuria Capital (CNI AU) pitched an A$0.95/proposal (subsequently rejected) in September last year; followed by an Offer for Centuria Industrial Reit (CIP AU) (in which CNI is the major security holder) by PLG in September of this year, whereupon CNI called into question PLG's business acumen, and requested an EGM to spill PLG's board, which failed to carry this past Thursday.

• Both ESR and CNI hold similar percentage holdings in PLG. Although PLG's Board has opted to pursue a transaction with ESR, CNI's vote of no confidence in PLG's Board is not entirely unfounded, and quite possibly, is shared by ESR.
• The EGM to spill the board was instigated by PLG's tilt at CIP. That proposal was also the trigger for ESR to launch its bid for PLG, conditional on PLG no longer pursuing CIP. Both CNI and ESR raised concerns over the NTA dilution from the CIP acquisition, and PLG's increased gearing should the transaction complete.
• This could be a very fast-tracked deal, with FIRB already received. The Bidder's Statement is expected to be dispatched by the 21 November. The $1.20/unit offer is a 14.3% premium to the undisturbed price, and represents a P/NTA of 1.2x, which looks fair with respect to peers, and to precedents, both property and pure REIT plays. However, tendering may not be straightforward, with around 25% (if including Vinva) not expected to tender. Yet overall, the deal appears full. Trading tight at 84bps.

(link to my insight: ESR Inks Deal With Hunter-And-Hunted Propertylink)

Toshiba Corp (6502 JP) (Mkt Cap: $22.5bn; Liquidity: $79mn)

Last Monday, Toshiba announced it would conduct a ToSTNeT-3 buyback for all ¥700bn of its share buyback at the prior closing price of ¥3,635/share. That was 192.5722mm shares or roughly 30% of shares outstanding. 33.2286mn shares were bought, leaving Toshiba with ¥579.21bn left to spend. So it announced another ToSTNeT-3 buyback for this residual two days later. The response was even more subdued - 3.9717mn shares. Perhaps it's a case of overestimating the number and size of weak hands here and underestimating the solidarity of those who want to take Toshiba for a ride.

• Travis was surprised but the tactics to launch the full ¥700bn. Perhaps this is Toshiba chipping away at the ¥700bn total opportunistically. It could have been an effort to "prove" there are no sellers, therefore, the stock should go up, and Toshiba will subsequently buy on the market, and the stock price can go up. It could be that a holder approached Toshiba, and Toshiba decided to put it all out there just in case.
• Toshiba is likely interested in getting as many of the activists out of the stock as possible. But even if all of the ¥700bn had been sold by activists, foreign active holders would probably hold some 45% of the remaining shares, and as the price goes up, they would hold even more.
• Travis thinks the stock is not overly expensive if the company can execute on the Toshiba Next Plan. He was leaning towards the idea not everyone wants to sell at this early low price. After the first one resulted in a partial buyback but left significant funds on the table, he said on the announcement of the second ToSTNeT-3 buyback that while long-term he thinks the direction of the stock price is still up, on a reward/risk basis in near-space, he thought the tradde was probably getting crowded. He said before the second ToSTNeT-3 buyback that he would prefer to be neutral/ unless you had an ability to trade very short-term as the trade will have short convexity characteristics.

link to Travis' insights:
Toshiba's ToSTNeT-3 Buyback: Unwinding? Another Game of 🐓?
Toshiba ToSTNeT-3: Round 2 (¥579bn To Go)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.5bn; Liquidity: $15mn)

Hanjin is the target of corporate activism after Grace Holdings Ltd, a subsidiary of Korea Corporate Governance Improvement (KCGI), acquired a 9% stake (5.32m shares). KCGI's corporate activism on Hanjin Kal is the third major case of corporate activism in Korea in 2018, following Elliott Management vs. the Hyundai Motor Group (Elliott Mgmt Goes "Activist" On the Hyundai Motor Group) and Platform Partners vs. MKIF (Platform Partners Goes Activist on Macquarie Korea Infrastructure Fund (MKIF)).

• KCGI has yet to reveal its detailed demands for changes. However, it is expected that in the coming weeks, KCGI is likely to demand significant changes to Hanjin Kal's Board of Directors including the resignation of Chairman Cho Yang-Ho as well as higher dividends for the company.
• Douglas Kim 's NAV analysis of Hanjin Kal suggests an NAV (after applying a 20% holdco discount) of ₩1.9tn or ₩31,917/share, representing a 12% upside from current share price. A big component of the company's value includes a 29.62% stake of Korean Air Lines (003490 KS) and a 60% stake of Jin Air Co. Ltd (272450 KS).

(link to Douglas' insight: KCGI Goes Activist on Hanjin Kal Corp & Our NAV Analysis of Hanjin Kal)

Samsung Electronics (005930 KS) (Mkt Cap: $15.3bn; Liquidity: $408mn)

Sanghyun Park flagged that the common/pref price ratio now stands at 1.19246 compared to the one-year average of 1.22732, and recommends a long common/short pref trade, and would close the position when the price ratio gets reduced by 2.5~3%p.

(link to Sanghyun's insight: Samsung Electronics Share Class Trade: Initiate Long Common/Short Pref Position)

Hyundai Motor Co (005380 KS) (Mkt Cap: $18.2bn; Liquidity: $51mn)

Elliott ratcheted up the pressure on Hyundai Motor Group earlier this week, urging it to return $10.6bn of capital to shareholders and consider selling non-core assets.

• The consensus dividend for this year is ₩4,088 for common shares. This is a 48.14% payout. At the Nov 13 closing prices, the dividend yield for common stands at 3.99%, and 6.59% for pref 1, 6.14% for pref 2 and 6.78% for pref 3. Pref 2 is now overvalued relative to pref 1.
• The previous Elliott push back in April eventually reduced the pref 1/pref 2 price gap. Sanghyun recommends to set up a long pref 1 / short pref 2 trade.

(link to Sanghyun's insight: Hyundai Motor Share Class Trade: Long Pref 1 / Short Pref 2 with Elliott's Latest Action)

SK Securities (001510 KS) (Mkt Cap: $225mn; Liquidity: $1.9mn)

SK Securities subscription rights are now trading, and will run for 5 trading days until Nov 22. Preliminary pricing was done on Oct 25, and it was priced at ₩564, and will likely serve as a price ceiling for the offer. As of now, subscription rights are trading at ₩144. Preliminary price is ₩564, and the current stock price is at ₩740. The spread stands at 4.8%.

• Short selling was restricted on Friday as a result of heavy short selling the prior day. It seems that local arb trading institutions (mainly local brokerages) must have shorted shares Thursday to make a move one step ahead. Their VWAP shorting price was ₩735. Their arb yield would be at 4~5%.
• The spread may get smaller by the time short selling restriction is lifted on Monday but should still be worthy of attention.

(link to Sanghyun's insight: SK Securities Rights Offer: Arb Trading Status)

Ceva Inc (CEVA US) (Mkt Cap: $1.6bn; Liquidity: $13mn)

After CEVA rejected unsolicited, non-binding offers from Danish freight-forwarding group DSV A/S (DSV DC) of CHF 27.75/share and CHF 30/share, CMA CGM SA (144898Z FP) has (reluctantly?) stepped in and entered into a new relationship agreement with CEVA, such that CMA CGM will transfer its freight management activities to CEVA Logistics (subject to anti-trust approval). CMA CGM announced a voluntary public tender offer at CHF 30/share - despite earlier being on record it had no plans to launch a full takeover.

• Shortly after DSV's initial tilt, CEVA announced that CGM had increased its stake to 33% (from 25%) in CEVA, and had also entered into a derivative transaction giving CMA CGM an additional economic exposure in CEVA of 4.56%. CMA's offer potentially thwarts another bid either from DSV (who may still reload) or another party.
• CEVA's 9M18 results announced earlier this week shows the company burning through US$1mn/day. CEVA announced that intensifying its cooperation with CMA should help it meet its medium-term targets. If CMA is going to continue funding CEVA out of its operational malaise (only cashflow positive from ops thrice in the past ten years, the last in FY15; the company has never generated a profit), it probably would be better served taking the company private.

• Given earnings uncertainty, investors can opt for the short-term guarantee and take the CHF 30/share. There is no minimum condition attached to this public offer. CMA will formally publish its offer via a “pre-announcement” to be made by 30 November at the latest. The cash consideration is expected 1Q19/early 2Q19.

(link to my insight: CEVA's Days Of Independence Appear Numbered)

Samsung C&T (028260 KS) (Mkt Cap: $15.3bn; Liquidity: $44mn)

The Samsung C&T holdco discount remains at a historic low despite Samsung Biologics Co., (207940 KS)'s recent misfortune. BioLogics' accounting fraud issue is still ongoing. But Sanghyun thinks BioLogics shares fully reflect the negative news. The FSS will likely give a pretty harsh punitive measure to BioLogics, but he doesn't really expect it to go as far as delisting.

• Sanghyun would initiate a setup trade, and short Samsung Electronics (005930 KS), which has risen nearly 10% over the last two weeks. As the SamE common-pref price ratio is also out of sync, one alternative is to short SamE pref for a hedge on my C&T stub trade.

links to Sanghyun's insights:
Samsung C&T Stub Trade: Holdco Discount Still at a Historic Low Despite BioLogics Misfortune
Samsung BioLogics Trade Suspension: Short Celltrion/Long Samsung C&T

• Spring Real Estate Investment Trust (1426 HK). The most frustrating arb in recent years. An excellent and more than reasonable cash offer is being stonewalled by a Manager (& management) whose recent business transactions have been called into question, not just by the Offeror (PAG) but also proxy advisors. Shares closed at $3.77 on Friday, 41% adrift of the $5.30 offer price, with ~20% downside to the undisturbed price. The Offer has been extended until the 28 Nov (final closing date) while the circular for the Huizhou property transaction is further delayed (mmm). Shares tendered total a little over 25%, so PAG still needs a little under 10% of shares out. This is a great deal for retail investors who comprise the bulk of shareholders not tendered. You have to wonder why they would want to remain invested here.

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.