Last Week in Event SPACE: Renault/Fiat, Tokyo Electron, Vocus, Sanyo Chem, Glow Energy, PCCW

Last Week in Event SPACE ...

• No mangalores, but it is difficult to understand how Jean-Dominique Senard would agree to an implied number which makes this Renault SA (RNO FP) / Fiat Chrysler Automobiles Nv (FCAU US) merger almost a hostile bid in economic terms, and certainly an opportunistic bid.
• Tokyo Electron Ltd Unsp Adr (TOELY US)'s first buyback in four years is large enough to be impactful.
  
• Vocus Communications (VOC AU)'s pre-event situation is hairy; there is value; and there are (potentially) multiple players out there who could look at this. FIRB approval is a non-negligible issue.
• Another "guess the ratio" trade as Nippon Shokubai (4114 JP) and Sanyo Chemical Industries (4471 JP) announced the integration of their businesses.
• With a Delisting Offer for Glow Energy Pcl (GLOW TB) potentially imminent, there is a trade here.
• PCCW Ltd (8 HK)'s continued underperformance relative to HKT Ltd (6823 HK) may hinge off MSCI Hong Kong Index rebalance concerns.

• 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)

Renault SA (RNO FP) / Fiat Chrysler Automobiles Nv (FCAU US)

FCAU has made a non-binding proposal for a full merger with Renault where the combined business would be 50% held by FCAU shareholders and 50% held by Renault shareholders. The combined company would make it #3 in the world, and with the Alliance, the #1 or #2 last year depending on how you measure things. The Combination would create an additional €5bn/year in synergies (which Mio Kato, CFA questions) between Renault and FCAAU, in addition to synergies from the Alliance, and it would result in a net run-rate savings to the other Alliance partners of ~€1bn/year.

• The bid is opportunistic. The FCAU/RNO ratio was at the highest in well over ten years when the bid was announced, and FCAU offered RNO a 10% premium which puts the FCAU/RNO ratio at what it was a year ago when it was then a 10-year high.
• There should be a bump and it will be difficult to imagine that there will not be. If there is no bump, RNO's management is selling itself far, far too cheaply. At the proposed terms, RNO is probably leaving €20-30/share on the table for a fair comparison, and over time, might be leaving even more on the table (Nissan is trading at a multi-year low, and buying 43% of the company at 0.56x book seems opportunistic).
• The fact that Nissan cannot vote to support or disapprove of a major capital transaction with its 20-year Alliance partner using its 15% stake - a transaction which promises to re-shape the auto industry - may become a bone of contention. The move probably reduces short-term pressure on Nissan for a merger and Nissan and Saikawa are likely to welcome this distraction. And consideration is needed as to how the Alliance's master agreement would be redrawn as a result of this merger.
• Travis would want to be long RNO vs FCAU and long RNO vs Nissan here, with a tilt to being outright long RNO. If the deal looks like it might not make it, one would want to get long Nissan. Time favours Nissan - in getting its act together and returning to profitability. FCAU-RNO Deal Break would favour Nissan too as it would mean RNO had to deal with Nissan again and Nissan would be in a position of greater relative strength.

links to:
Travis Lundy's insight: Fiat-Chrysler Proposes Merger with Renault - Lotsa Moving Parts But RNO Too Cheap
Mio's insight: Renault-Fiat Chrysler Merger Is "Nice" But Fixes Little; Positive for Nissan Though

Tokyo Electron (8035 JP) (Mkt Cap: $22.5bn; Liquidity: $217mn)

Since earnings were announced on April 26 providing a forecast for March 2020 showing an expected net revenue fall of 13.9% yoy, and an EPS fall of more than 33%, the stock itself has fallen 13+%. TEL has now announced revisions to its Medium Term Management Plan and Financial Model. The company also announced a 14mm share buyback going from 28 May through end-December. This is theoretically an 8.5% buyback. The amount available to spend on the buyback is ¥150bn. Given the last traded price of ¥14,615, investors in Tokyo Electron should dearly hope that they don't buy back all 14mm shares because that implies a price of ¥10,714/share.

• Tech is in a precarious situation. Korean exports are down. Semiconductor prices and volumes are down. After a bounce from year-end 2018, shares across the sector have started to fall. Doing the currency conversion and basing the price of 12 months ago at 100 shows that Tokyo Electron has performed generally in line with peers directionally - correlation has been good - but has underperformed all peers over the period.
• The new Medium-Term Management Plan and Financial Model may give investors some comfort that management feels they can see beyond the current valley. The large buyback should give investors additional comfort that management thinks this is a good time to buy and take equity out of the market. The Capital policy of paying at least a 50% payout ratio but no less than ¥150/share in dividends, and conducting buybacks "from time to time" remains unchanged.
• This is the first buyback in four years. The stock will react well to the buyback news because it is large (18-20% of Real World Float) and therefore should be impactful. And large buybacks tend to have a positive impact on stock price. However, over time, this stock is in the valley and it is not clear whether investors are looking beyond even if management is.

(link to Travis' insight: Big Tokyo Electron Buyback)

Vocus Communications (VOC AU) (Mkt Cap: $2bn; Liquidity: $6mn)

Aussie telco Vocus announced it had received a US$2.27bn non-binding, indicative proposal from PE outfit EQT Infrastructure by way of a Scheme, at A$5.25 in cash, a 35% premium to last close. Vocus' board has granted EQT due diligence on a non-exclusive basis, to potentially piece together a formal bid. The proposal arrives almost two years after KKR - followed by Affinity Partners - lobbed identical $3.50/share indicative proposals, both of which were terminated in August 2017.

• The indicative Offer is pitched at a trailing and forward EV/EBITDA of 13x and 12x. This compares with 7.6x forward EV/EBITDA under KKR and Affinity's proposals back in 2017, against a then-peer average of 6.6x. This Offer is also at a level not traded since Vocus' November 2016 AGM spooked investors over the financial performance of recently acquired Nextgen Networks and the ongoing senior management replacements.
• Vocus owns a 16,400km national inter-capital fibre network in Australia, the nation's second largest; a 4,600km Australia/Singapore cable, a 2,100km North East cable system (no competition) and a 4,200km inter-cap network in New Zealand. These are solid, attractive network infrastructure assets, potentially overriding the lackluster/struggling consumer and business segments in Australia, which combined declined 17% in the 1H19.
• IF a deal does get done - this may complete around November. FIRB approval is a risk to the deal. Telco infrastructure is a sensitive area, plus this will be the first test for FIRB since the Federal election. Trading ended Friday with the upside to the indicative price versus downside to the undisturbed about the same. That underscores the "If" to this transaction. I believe this approach has better odds than KKR/Affinity's.

(link to my insight: EQT Infrastructure Into Vocus)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $151mn; Liquidity: $2mn)

After Murakami Group's tender offer crashed and burned, Travis thought it would take time for the firm to get a handle on what to do next. Looks like he was wrong. The company is acting quickly, in model fashion, to create a new governance structure and ensure that the goal is to increase corporate value and value to shareholders.

• Getting rid of Doi-san and cleaning up the board is highly welcome. Adding former auditor Nakatsuji-san to the board is another good decision. He was the only one who stood up to the rest of the board's approval of the lowball Bain offer. Unfortunately, a few of the directors on the old board are staying. Travis thought they should go too, with the possible exception of new CEO Negishi-san.
• As discussed in Kosaido: The Bull Case, The Bear Case, and the Base Case and previous pieces, it will be difficult to rehabilitate the non-funeral parlor business, and the structurally low ROE of the funeral parlor business suggests that selling it for a premium to book may be difficult. Unless there are major and/or surprising changes.
• Travis remains bearish because despite the accelerated introduction of measures to improve management, and to amend governance structure, it will still be tough sledding ahead.

(link to Travis' insight: Kosaido Moves Quickly Post Failed Tenders)

Glow Energy Pcl (GLOW TB) (Mkt Cap: $3.7bn; Liquidity: $7mn)

GLOW popped mid-week on decent volume, apparently in response to media reports that Global Power Synergy Company Ltd (GPSC TB) will conduct a Delisting Offer for the remaining 4.75% of shares not owned, which would likely be done at the most recent Offer Price of Bt90.8136/share, after adjusting for the 2018 dividend. In the tender offer doc (Form 247-4), GPSC said that if it held more than 80% of GLOW at the close of the offer (section 2.1 of page 38 of the PDF), it "has a plan to delist the securities of the Business from the SET within the period of 12 months after the end of the Offer period".

• From the limited survey of prior Voluntary Delistings, the average time from the completion of the prior tender offer until the launch a tender offer is 160 days, and the average from the close of the prior tender offer to payment under the Voluntary Delisting is 232 days - however the range amongst the survey participants is vast.
• The rule on pricing for Delisting Offers is that the offer price must not be less than: the highest price paid by the Offeror in the past 90 days; or the weighted average price for the five business days prior to the board meeting resolving the delisting of the target company; the book value and fair value appraised by the independent financial advisor - whichever is higher.

• Travis was also bullish and suggests buying GLOW in the low 80s to hold it for a Delisting Offer in the low 90s, or hold it until the Board Meeting announces the resolution to conduct a Delisting Offer and sell early. A more aggressive trade would be to fill your boots on GLOW in the low 80s and then buy more at higher prices even to 95-100 - the caveat here is that GPSC/GLOW are under no legal liability to conduct the Delisting Offer promised in the original Tender Offer document. It was an intent. The fines for staying listed while breaching the free float limit - float is just 4.75% - are tiny and GPSC and GLOW have more patience than you.
  

links to:
my insight: Glow Energy: An Imminent Delisting Offer?
Travis' insight: GLOW For It! Be GLOWful... And Full of GLOW... (Trading Tactics)

Sanyo Chemical Industries (4471 JP) (Mkt Cap: $1.2bn; Liquidity: $2mn)

Nippon Shokubai (4114 JP) and Sanyo Chemical, two reasonably similar but complementary chemical companies with pre-existing supply and cross-holding relationships, together announced that the two companies had reached a Basic Agreement to move ahead with the integration of their businesses based on an equal footing to defend against the rising competitiveness of emerging market and global rivals. The trade here is to expect a share price ratio to be decided by late 2019, then there would be a rate of return trade for nine-plus months.

• Both companies have reasonably similar GPM/OPM/EBITDAMs and ROEs and Net Income Growth over the last 10 years. Forecasts show SanyoChem revenues due to outperform Nippon Shokubai revenues by 7% this year and SC Operating Profits due to outperform Nippon Shokubai OP by 11% this year (on a percentage basis, not yen basis).
• Because there is a cancellation of cross-holdings, the combined entity was trading at pro-forma Mar2020 PER of 10.1x, with both stocks trading on a 10.1x 2020e PER when accounting for that cancellation.
• Travis thought both stocks may perform better than their sector on expectations of synergies and scale. He thought the relative trade is to be long Sanyo Chemical, but he thought the best way to trade this is to trade the range around the current level.

(link to Travis' insight: Sanyo Chemical - Nippon Shokubai Merger - Another "Guess the Ratio" Trade)

PCCW Ltd (8 HK) / HKT Ltd (6823 HK)

PCCW's discount to NAV of 40% is at its widest in the past 12-months and compares to an average of ~27%. There is no further update on the stub since my insight StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating back in February this year. PCCW is "cheap", however, stub ops hardly inspire a setup trade after recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16's stub EBITDA was also negative.

• Accumulated shorts announced by the SFC have increased to 64.6mn (0.84% of shares out) as of the 17 May, up from 45.5mn shares at the beginning of the year. Not a lot, but compares with the average trading volume of 12mn shares over the past twelve months.
• From a simple implied stub chart, PCCW had not yet touched all-time low levels - but is trading at its lowest level since PCCW reduced its stake in HKT (the reason for that upward spike in the chart below) back in February 2017 to 51.97% from 63.07%.
• A very real reason for the ongoing bifurcation may be MSCI re-balancing-related. Hang Lung (10 HK) was recently deleted (along with Minth Group Ltd (425 HK)) to make way for Vitasoy Intl Holdings (345 HK). This rebal refocuses the spotlight on other stub names potentially subject to deletion at forthcoming rebalances. PCCW is close to the bottom of the HK constituents. If there are new listings between now and end-August, PCCW may face deletion.

(link to my insight: StubWorld: More Misery For PCCW As Index Re-Bal Weighs)

Intouch Holdings (INTUCH TB)/Advanced Info Service (ADVANC TB)

Intouch's discount to NAV of 22% compares to an average of ~25% over the past 12 months. Intouch bounced 10% on the 23 Jan on news it might sell its 41% stake in Thaicom Pcl (THCOM TB). That was a chunky move - a Bt15.2bn lift in Intouch's market cap, almost ~4.5x the value of the holding in Thaicom. Thaicom accounts for just 1% of Intouch's NAV.

• The purported sale was not illogical - the military/government uses Thaicom, the sole satellite operator in Thailand, and the rumour was (at the time) it was no longer comfortable with Singapore's indirect interest in Thaicom via Singtel (ST SP)'s stake in Intouch. The sale may have also been politically-motivated in the lead up to the 24 March general election.
• Intouch's discount to NAV continued to narrow, peaking at ~18% late March. At that time the implied stub had increased by Bt18bn.
• Intouch is coming up "cheap" on my monitor but in reality this is a much-needed correction with a possible near-term widening in the NAV discount to 25%.

(link to my insight: StubWorld: More Misery For PCCW As Index Re-Bal Weighs)

Briefly ...

Naspers Ltd (NPN SJ) dispatched the circular for the listing of international internet assets on Euronext. The shareholder EGM is scheduled for the 28 June. More details to follow. I see the discount to NAV at 33% against a 12-month average of 35%.

Curtis Lehnert recommends closing his First Pacific Co (142 HK) stub set-up trade, first recommended in his December 2018 piece TRADE IDEA - First Pacific Stub (142 HK): Taming the Beast. I see the discount to NAV at 56%, against a one-year average of 55%, having narrowed from its recent low of 61% in mid-April. (link to Curtis' insight: TRADE IDEA - First Pacific (142 HK) Stub: Parent Pops, Close the Trade)

Sanghyun Park recommends a set up trade for HDC Holdings (012630 KS) which he calculated was at a -1.5σ on a 20D MA. I see the discount to NAV at 53%, a one-year low, against a 12-month year average of 39%. (link to Sanghyun's insight: HDC Stub Trade: Another Entry Point)

Melco International Development (200 HK)'s 54.87% subsidiary Melco Resorts & Entertainment (MLCO US) has agreed to buy a 19.99% stake in Crown Resorts (CWN AU) for $1.759bn, making it the second largest investor after Kerry Packer's entity, Consolidated Press Holdings (which is also the seller). I peg Melco's discount to NAV at 34%, a shade under the 12-month average of 32.5%.

Reportedly insurers may be able to deduct up to 18% of their annual premium income from the current year’s taxable income. The previous tax cap was 15% of premium income for property insurers and 10% for life insurers. Both People's Insurance Co (Group) Of China (1339 HK) and Picc Property & Casualty H (2328 HK) positively reacted, with the discount to NAV narrowing in to ~36% from a recent low of 38%, and compares to a one year average of 31%.

The Australian and Malaysian M&A Guides issued this past week are the fifth and sixth installments in a series of M&A guides that our Quiddity team (Travis, Janaghan Jeyakumar, and myself) are publishing to aid investors in understanding the rules, parameters, possibilities, and processes when companies conduct mergers and acquisitions. These insights are designed to be used as a reference. Any questions are welcome.

links to:
Quiddity Australia M&A Guide 2019
Quiddity Hong Kong M&A Guide 2019
Quiddity Japan M&A Guide 2019
Quiddity Malaysia M&A Guide 2019
Quiddity Singapore M&A Guide 2019
Quiddity Thailand M&A Guide 2019

For the month of May, 12 new deals were discussed on Smartkarma with an overall announced deal size of ~US$8.4bn. This includes the unofficial Vocus Communications (VOC AU) and Circor International (CIR US) deals - the former is indicative and Circor's board has rebuffed Crane Co (CR US)'s proposal.

It does not include insights written on the Fiat Chrysler Automobiles NV (FCA IM) / Renault SA (RNO FP) case (which have a combined market cap of US$38bn) as there is no agreed deal - just a proposal that the RNO board will look at - probably favourably in some context - in the coming days, nor the proposed US$3.5bn merger of Nippon Shokubai (4114 JP) /Sanyo Chemical Industries (4471 JP) which has, as yet, no agreed merger ratio. Both are discussed above.

The average premium to last close for the new deals announced in May was 33%, while the average for the five months of 2019 is ~31%.

(link to my insight: (Mostly) Asia M&A: May 2019 Roundup)

• Malaysian Prime Minister Mahathir Mohamad, in Tokyo for a business conference, was quoted saying "“We think we’ll have to renew the licence” . Lynas Corp Ltd (LYC AU) welcomes the news. The share price is up 60% since mid-May.
  
• The Offer price for Indofood Agri Resources (IFAR SP) has been revised upward to S$0.3275 from S$0.2775 (originally S$0.28/share but adjusted for the FY18 dividend of S$0.0025/share). The Offer Price is final. The Offer closes on the 25 June (or such later date). Tendering totals 7.86% as at 31 May giving the Offeror 82.35%. The Offer is subject to a 90% acceptance condition.
• Nasdaq Inc (NDAQ US) withdrew its offer for Oslo Bors VPS Holding ASA (OSLO NS).
• Including the acceptance facility, Ap Eagers Ltd (APE AU) holds 61.81% in Automotive Holdings (AHG AU).
• Additional tendering into Harbin Electric Co Ltd H (1133 HK) since the extension is just over 1%. Still need 3.14% of shares out for the Offer to turn unconditional.
• The High Court hearing for China Power New Energy Development Co (735 HK) is set for the 4 June to consider and if thought fit, approve the Scheme. Expect the scheme doc to to be issued shortly after.

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.