Last Week in Event SPACE: Renault/Nissan, Fancl, Unizo, Credible, Jardines, Scout24,

Last Week in Event SPACE ...

• The goal implicit in external understanding and most likely explicit in the negotiations is that any Renault selldown of Nissan shares would be a quid pro quo for Nissan Motor (7201 JP) supporting a tie-up between Renault SA (RNO FP) and Fiat Chrysler Automobiles NV (FCA IM).
• The price paid by Kirin Holdings (2503 JP) suggests that Fancl Corp (4921 JP) is evaluated highly as a (the?) leader in the nutritional supplements domain and should be viewed positively; but if you are expecting large and quick synergies you are likely to be disappointed.
• Unizo Holdings (3258 JP) rebuffs H I S Co Ltd (9603 JP), not surprisingly, but it's not a cheap company and a chunk of the registry are holding stock >60% above the undisturbed price.
• Fox Corporation's Offer for Credible Labs (CRD AU) looks a lock - unless someone actively comes in and overbids.
• A Jardine Strategic Hldgs (JS SP) scrip Offer for Mandarin Oriental Intl (MAND SP) appears unlikely, but MO's commercial building amongst its hotel portfolio needs to be addressed.
• Elliott promoting 30% upside in the stock price because you split the company after a strategic reshuffle, threaten management, do a huge buyback, take on debt, then assume a 20x+ EV/EBITDA multiple is necessary and achievable because a few other comps trade at higher prices seems to be a stretch for Scout24 AG (G24 GR).
• The HSCEI rebalance and the inexorable shift from H-shares to Red-chips and P-chips continues.
• 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)

Nissan Motor (7201 JP) (Mkt Cap: $24.9bn; Liquidity: $94mn)

According to a WSJ article, talks to change the structure of the Renault-Nissan Alliance started soon after the Fiat-Renault talks broke down, and have been tightly confined to a small group of executives and lawyers on either side. The WSJ says it has seen emails (dated 12 July). One of these indicates that Nissan Independent Director Masakazu Toyoda has suggested Renault SA (RNO FP) and Nissan sell down their stakes in each other to relieve a burden and be able to invest in new ventures.

• Everyone involved has said they do not comment on speculation. However, unlike every other article like this which has shown up in the major financial press over the past two years dealing with something which goes against what the French state has said, this article appears to have had no denial issued by the Ministry of the Economy, or seen a denial attributed to such "sources."
• This subject touches at a point sensitive to all corners. Nissan would like Renault to have less control over it in order to not feel like they are constantly in fear of not being independent if they want to be. Renault would really like to be THE number one automaker/group. Fiat would like the "synergies" available of owning a much larger platform.
• All automakers are relatively low-priced but if Renault sells some Nissan shares to get to 20% and one considers Renault as owning 20% of Nissan's OP and EBITDA, Renault is currently trading at just over 1x implied EV/EBITDA. Travis Lundy would be long Renault vs FCA and long Nissan vs Mitsubishi. He might also be long Renault and Nissan vs industry-wide baskets.

(link to Travis's insight: Nissan-Renault-FCA: Working Toward Completing the Circle?)

HSCEI Rebalance

The Hang Seng Indexes Company Limited will announce the results of the 2019 Q2 review of the Hang Seng Family of Indexes on 16 August. The constituent changes will be effective from 9 September and the rebalancing trades will need to be done at the closing auction on 6 September.

• Brian Freitas expects Geely Auto (175 HK), Sunac China Holdings (1918 HK), China Taiping Insurance Hldgs (966 HK), Want Want China Holdings Ltd (151 HK) and China Resources Gas (1193 HK) to be included in the HSCEI, while he sees Dongfeng Motor (489 HK), China Cinda Asset Management (1359 HK), Huatai Securities Co Ltd (H) (6886 HK), China Huarong Asset Management (2799 HK) and China National Building Material (3323 HK) as potential exclusions.

(link to Brian's insight: HSCEI Rebalance Preview - September 2019)

Briefly ...

Allegedly, Samsung Electronics (005930 KS), specifically at the orders of Lee Jae-yong, have decided to go 100% Japan-free for materials and chemicals used in its semiconductor production line, which includes not only memory but also foundry. This is in reaction to Japan's export restriction which first kicked off in early July. (link to Sanghyun Park's insight: Samsung Decides 100% Japan-Free for Materials/Chemicals: Intentions?)

Fancl Corp (4921 JP) (Mkt Cap: $2.9bn; Liquidity: $27mn)

Kirin Holdings (2503 JP) is to acquire a 30.3% stake in Fancl from the company's founder and his family for ¥129.3bn, valuing the company at ¥426.7bn, a 35% premium to the last close and just a hair under its high for this year which is also its high this century.

• This move appears to be almost entirely about ensuring a proper succession and protecting employee interests and the culture of the company rather than an attempt to extract maximum value for shareholders.
• There are probably some synergies to be had and the fit is not terrible but Mio Kato, CFA thinks it would be difficult to argue that Kirin was the best suitor in terms of maximising the value of Fancl's assets.
• Nevertheless, the premium is large and Mio believes Kirin sorely needs a driver of growth in the domestic market. Fancl could be that driver and longer-term, the value generation potential may not be that bad though tangible ideas were scarce.

links to:
Mio's insight: Fancl: Explanatory Meeting On Kirin's Stake Acquisition Light on Details but Stay Positive Anyway
Oshadhi Kumarasiri's insight: Business Alliance Between Kirin & FANCL

Unizo Holdings (3258 JP) (Mkt Cap: $1.1bn; Liquidity: $15mn)

Unizo issued a pretty blunt Position Statement on the Tender Offer by H I S Co Ltd (9603 JP) to purchase approximately 40% of the shares outstanding at ¥3100/share. On the same day, Elliott Management filed a Large Shareholder Report on EDINET disclosing that it had purchased 5.51% of the shares outstanding of UNIZO as of 5 August 2019, acquiring shares 7.7% through terms.

• Now we wait, and we watch. H.I.S. could respond by raising its Tender Offer Price even though it has said it would not. Investors - activist or otherwise - could buy more shares. And if nothing happens at the end of August when the H.I.S. tender offer expires, a slew of investors who purchased will now be long shares at 60% above the undisturbed price.
• Unizo's board is on point when they say they see no synergies with H.I.S because they are different businesses, and the actions by UNIZO if they get the shares could damage the corporate value of UNIZO. But the company is, when de-levered to REIT-equivalent levels, not cheap. If, as the board says, UNIZO is worth a "greatly more" than the ¥3100 Tender Offer price, issuing shares at ¥2159 only 14 months ago to non-holders seems like a gross breach of governance.
• Because Travis does not expect H.I.S. to raise its Tender Offer Price substantially, and does not expect management to want to sell assets to buy back shares to raise the per-share value of the company, he expected that any large bounce from here should be sold. He would not, however, recommend shorting the company's shares (yet).

(link to Travis's insight: UNIZO Officially Opposes The HIS Tender; Elliott Goes Substantial)

Stanmore Coal (SMR AU) (Mkt Cap: $255mn; Liquidity: $1mn)

Privately-held Winfield Energy has tabled an indicative non-binding proposal to acquire all shares in SMR at price between A$1.50-A$1.70/share, a 20.5%-36.5% premium to last close. SMR's shares closed at $1.54/share on the 18 July. The indicative Offer is conditional on further due diligence - it's not clear how long Westfield have had access to the data room. The Offer, should it become official, would be conditional on 50.1% acceptances.

• Last November Golden Investments (Australia) - a company jointly owned by Golden Energy & Resources (GER SP) and Ascend Global Investment Fund - made a takeover bid for SMR at A$0.95/share, which was summarily rejected by SMR and ultimately failed. Undeterred, Golden has sought to spill the board and an EGM is tabled for September to (attempt to) remove SMR’s managing director and chairman as directors.
• It's a busy shareholder register with Golden holding 25.36%, M Resources 19.875%, Regal Funds 10.95% and Paradice 6.24%. While Regal and M Resources have been active buyers this year, M Resource has been aggressive, holding ~5% at the beginning of the year. Is M Resources a potential suitor or is it just taking advantage of a competitive bidding situation?
• Entering around the current levels offers attractive risk/reward, either on the assumption a firm Winfield Offer emerges, or that SMR's current metrics are undemanding with a significant uptick in output and margins expected.

(link to my insight: Winfield's Bid For Stanmore Coal)

Credible Labs (CRD AU) (Mkt Cap: $375mn; Liquidity: $1mn)

Fox Corporation and CRD announced a Merger Agreement between online finance/lending marketplace Credible and a newly formed entity of Fox Corporation. The deal comes at A$2.21/CDI (CHESS Depository Interest), for a market cap of A$585mm which is ~2x the IPO from two years ago. The A$2.21 price is a 12.4% premium to the VWAP since the 31 July 2019 quarterly report, a 20.8% premium to 6-day VWAP to 2 August, and a 55% premium to 90-day VWAP. The deal comes at a 10x EV to trailing revenue multiple, twice the multiple enjoyed by Lendingtree Inc (TREE US) and GreenSky Inc (GSKY US).

• The Fox deal is great - for Fox and CEO Stephen Dash. It is, of course, not that great for existing investors who have bought into a growth asset. Nevertheless, with a majority of the non-Dash shares being required to get this over the line, that is 26.5% of shares out. Directors own 13%. Other shareholders who have agreed to support the offer own about 6.6-6.7% at a minimum. This deal requires 23% of the remaining minority to agree, and would require 77% of that remaining minority to vote against the deal to block it. Travis thinks that is unlikely to happen.
• Travis expected the only possibility of better terms is an overbid by someone else. Given the opportunity, he thought that is not out of the question. BUT... it is not likely to be activism which triggers an independent review or blockage of the Fox deal. He viewed quite positive reward/risk characteristics, but it is not a very liquid or large-cap situation.

(link to Travis's insight: Fox Deal for Credible Labs Great For Fox & Founder. Will Someone Else Decide They Like It Better?)

Sankyo Co Ltd (6417 JP) (Mkt Cap: $2.7bn; Liquidity: $9mn)

Pachinko machinery maker Sankyo announced it would try to buy back just over 22mn shares for ¥75.37bn. The company will buy back those shares principally from Marf Corporation ("MC"), which is the personal company of Mr. Hideyuki Busujima who is the Chairman of Sankyo, and son of founder Kunio Busujima who passed away in 2016. MC held 28.346mm shares as of 31 March, or 34.92%. The buyback will be conducted through the means of a Tender Offer at JPY 3,426/share which is a 10.0% discount to the one-month average closing price in the month to 5 August.

• This will raise EPS by 32% and raise ROE by a significant percentage but even after eliminating 24% of shares outstanding ex-Treasury shares, ROE will remain in the mid-single digits. It will leave the company significantly cash-rich. The net cash + ST investments + equity holdings will still be more than the market cap based on the current price.
• International active investors should take note: this tender offer is not for you, even if the share price falls below the Tender Offer Price. There are mechanics to these things which make it unattractive for you. There may be another way to achieve a slightly better result than the Tender Offer if you want to sell shares. And the more people who sell, the more this becomes interesting on the back end.
• For longer-term investors, it is a waiting game. Wait until the company can buy out the family. Then be more activist. If you are aggressive, you can start early. There is no reason this company should have ten years of EBITDA in short-term investments and cash. Travis would not be surprised to see another large Tender Offer buyback in a year or two.

(link to Travis's insight: Accretive Sankyo Self-Tender - Boring But A Good Kind of Boring, With Something For Everyone)

Tpv Technology (903 HK) (Mkt Cap: $817mn; Liquidity: $3mn)

Back in January 2010, CEIEC, a wholly-owned subsidiary of SOE -backed CEC entered into a SPA with Philips to acquire 200mn shares of TPV (9.47% of shares out)at $5.20/share. Separately, Mitsui entered into a subscription agreement for 234.58mn new shares (11% of shares out) at $5.20/share. Furthermore, CEC, CEIEC and Mitsui - the Joint Offerors - entered into a shareholder agreement in relation to their shareholding in TPV, equating to 36.66% after the completion of the SPA and 43% following the subscription. This triggered an MGO (@ $5.20/share). At the completion of the MGO, the Joint Offerors held 1.175mn shares or 50.12%. This increased to 1.295bn shares or 55.2% shortly after, and this joint holding has remained static since.

• TPV's shares are suspended pending the release of an announcement pursuant to The Hong Kong Code on Takeovers and Mergers. There have been some interesting movements in CCASS recently, which I flagged in my weekly last month - Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIA Engineering - with 18.2% of shares out moving out of Citibank into Zhongrong Securities. This is Mitsui's stake.
• The display industry is a tough, low margin business, with the China-USA trade dispute adding pressure to an already challenging economic environment in China. Since the 2010 MGO, TPV's earnings have collapsed with four of the last seven years in the red. Net income in 2010 of US$169mn was the second-highest since the TPV was listed, and only surpassed in 2007 (US$180mn). The monitor operations are the one bright spot, having consistently returned a profit since 2007.
• Shares are mysteriously up 128% YTD. If the suspension is due to an Offer with an additional 20%+ premium, I would look to exit. The pushback is that shares could be suspended ahead of CEC/CEIEC acquiring Mitsui's stake at around the current price level, or at a token premium to last close, with an objective not to delist TPV as per the prior MGO.

(link to my insight: TPV Halted - A New Offer From CEC/Mitsui?)

Melco Holdings (6676 JP) (Mkt Cap: $525mn; Liquidity: $1mn)

On the 17th of December 2015, memory-stick maker Melco announced a buyback plan to buy back up to 3mn shares for up to ¥6.3bn. Then followed two more buyback (lasting a year) resulting in the buying of 1.2mn shares or about 6.3% of shares out and 480k shares. Around this time it issued ~3mn shares to acquire the 77% of Shimadaya that it did not own, an odd move, as Shimaday makes noodles. Then another buyback last July for up to 3mn shares, again, announcing last week it only bought ~5% of shares out.

• Melco has announced a new buyback. This time there is no messing around. This time it is in the form of a Tender Offer. The buyback is for up to 3,300,100 shares (16.75％ of shares outstanding) for up to ¥9,075,275,000 (i.e. ¥2750/share, a 10.0% discount to the 1-month VWAP as of the announcement). Melco is buying a full 3mn shares from the family company to bring the stake below 50%. The next step should theoretically be to get the family AND the company just below 50%.
• This Tender Offer will raise EPS by 18% ceteris paribus and will raise ROE by a significant percentage, but even after buying back shares and cancelling treasury shares, the company will have significant cash piles keeping ROE in the high single digits rather than in the teens.
• This is yet another Tender Offer situation where it is not meant for you to participate. However, this is an attractive small-cap with a management and family ownership pattern of returning money to shareholders (themselves). The stock trades at 6x cash-and-securities adjusted earnings, < 3x EBITDA and 1x Tangible Book. That's cheap. Travis likes it below the Tender Offer and would buy into weakness.

(link to Travis's insight: Accretive Sankyo Self-Tender - Boring But A Good Kind of Boring, With Something For Everyone)

Briefly ...

The Essel Propack (ESEL IN) Open Offer by a Blackstone Group LP (BX US) fund announced in April, (finally) started last week and completed this past Friday. This partial Offer had a 60.5% minimum pro-ration. Travis thought the share price at the time was right to own in order to tender in order to be long the residual back end. (link to Travis' insight: Last Call for Essel Propack Tender Offer)

Aveo Group (AOG AU) announced an indicative A$2.195/share cash Offer from Brookfield. That's not an exciting number. Negotiations are ongoing between the independent board and Brookfield in order to resolve a number of matters. This is a non-binding Offer after a protracted DD, and below an expected price. I’m not 100% this even gets up at the current terms.

Takamatsu Construction (1762 JP) announced that it would buy out the remaining minorities in Asunaro Aoki Construction (1865 JP) and seek to delist the company. This has been in the works for 15+ years. Takamatsu owns 79.08%. There is no surprise here. This is a pretty "easy" arb at an all-time high price and relatively high PBR/EBITDA multiple. And there isn't much you can do about it anyway. (link to Travis's insight: Takamatsu Construction Tender Takes Out Aoki Asunaro)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

Last month I tilted (StubWorld: Matheson Nudges Strategic Headroom) in favour of JM after inquiries with Jardines indicated JM was nudging the maximum 85% it is permitted to buy in JS. JM did outperform around that time, but has now pulled back to its eight-year average of 1.7x.

• There are media reports that JM's aggressive buying in JS is toward facilitating a privatisation Offer for 78%-held Mandarin Oriental by JS. That privatisation Offer would be conducted via the issuance of new JS scrip. This would (marginally) reduce JM's effective holding in JS, enabling it to buy more shares.
• The motivation to privatise? Back on 5 June 2017, MO announced the Excelsior will be closed and be redeveloped into a commercial building. As the use of the site has changed from a hotel property to a commercial property, the site was revalued and a revaluation surplus of US$2.9bn was recognised (see page 18 & 19 of MO's 2019 interim results). The privatisation idea is that JS can participate in the upside from the redevelopment and not share forward benefits with minorities.
• Maybe, but I'm not convinced. With MO having an office block in its hotel property portfolio, the question has been ongoing as to how Jardines might play this out. It is no longer a clean hotel play. But would shareholders want JS scrip - a complicated beast - in place of a hotel investment? Unless MO minorities received a super friendly exchange ratio into JS they might demur. And even at a $2.50/share Offer price - a 75% premium to last close, but actually just an 11% premium to where it traded a year ago - would dilute JM's holding to ~83.3%.

• As an aside, JS already consolidates MO so they will benefit from the revaluation uptick at MO. In addition, MO was moved to a Standard listing in the UK in 2014. If JS really wants to play hardball, JS can delist MO without any shareholder vote.

(link to my insight: StubWorld: Mandarin in Jardine's Cross-Hairs? Hang Lung & PCCW At All-Time Lows - Again)

Scout24 AG (G24 GR)(Mkt Cap: $6.2bn; Liquidity: $13mn)

In mid-January, a combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in at €43.50/share (€4.7bn) which was about an 8% premium to the then-current market price. Scout24 management said that was too low. The Offer was bumped to €46.00/share but the deal did not go through. Elliott Management has now announced it had accumulated a 7% position in Scout24 and published an open letter to the CEO & Chairman Tobias Hartmann, along with a website to press its case for what appears to be a break up of Scout24 by selling AutoScout24. Elliott reckons Scout24 is worth in excess of €65, ~30% up from here.

• So the proposal is 1) sell AutoScout24, b) repent of your previous sins and buy back a lot more shares, and c) talk to shareholders more. And this will result in a higher price. Also, take on a lot more leverage.
• This sounds more like a lazy long in a situation where Elliott knows management would sell the firm at the right price. So suggesting they sell part of the firm to people who already showed an interest in the AutoScout business isn't a bad idea. But if you buy 7% of a company in order to see a maximum gain of 30% in the stock if it all goes well when right now it is going badly, that seems like one is pushing a bit hard.
• This could go higher, but if the businesses are sold for a combined 20x 2019 EBITDA (the multiple Silver Lake paid for ZPG), that means the upside is 4%. But buybacks! Yes, buybacks deplete cash as well as lower market cap so the effect on EV/EBITDA multiple of a large buyback is in theory zero (though it will lower the PER) and if you think that the business should be valued at 20x EBITDA, that's your bogey.

(link to Travis's insight: Elliott Goes Activist On Scout24)

• Ora Investment - holding 4.27% of shares out,16.70% of Scheme Shares & 16.91% of Disinterested Shares - has given an irrevocable to vote in favour of Asia Satellite Telecom Holdings Ltd (1135 HK)'s Scheme at the Court Meeting.
• The ACCC's decision on the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) merger has been pushed back to the 22 August. The Scheme meeting is still scheduled for the 6 September.

• Axel Springer Se (SPR GR) announced that at the end of the offer period on 2 August 2019, the voluntary public tender offer by KKR to all shareholders of Axel Springer had been accepted by shareholders representing 27.8% of the share capital, above the minimum acceptance threshold of 20 percent. The completion of the offer remains subject to merger control, foreign investment and media concentration clearances.

• DSV A/S (DSV DC) announced that based on preliminary figures, up to the expiration of the Additional Acceptance Period on 7 August 2019 a total of 23,270,295 Panalpina Welttransport Holding (PWTN SW) shares have been tendered into the Offer, corresponding to 97.98% of all Panalpina Shares listed as of 7 August 2019, and that are the object of the Offer (success rate). Settlement is 19 Aug. This deal is done.
• The DuluxGroup Ltd (DLX AU) / Nippon Paint Holdings (4612 JP) Scheme is now Effective. Shares have ceased trading.
• The ratio for Sakura Sogo Reit (3473 JP) vs Mirai Corp (3476 JP) came out both earlier and lower than Travis expected at 1.67. 1.67 is below the midpoint of the three measures noted on p8 and this honestly looks like quite a bad result for Sakura Sogo shareholders given that the deal seems designed to give Mirai some relief on leverage ratio.

• JASDAQ small-cap Gamecard Joyco Holdings (6249 JP) announced a ToSTNeT-3 buyback (for this past Friday) of up to 350,000 shares (2.45% of shares out) for up to ¥500mn.
• Tsukui Corp (2398 JP) announced a ToSTNeT-3 buyback for this past Friday for up to 1.1mm shares and ¥577.5mm. That is 1.52% of shares out.
• Wacoal Holdings (3591 JP) has announced a 500,000 share ToSTNeT-3 buyback for this past Friday.

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.