Last Week in Event SPACE: Samsung Biologics, Shire, Lotte, Mitula, JSW, Nisshinbo

Last Week in Event SPACE ...

• In what is probably the secondmost interesting arb in the world, the attractive trade may simply be to go long LIFULL Co Ltd (2120 JP) outright
• Lances at the ready ahead of the regulatory watchdog's first scheduled review of Samsung Biologics Co., Ltd (207940 KS)'s alleged accounting fraud
• There is entirely negligible risk Nisshinbo Holdings Inc (3105 JP)'s merger with subsidiary New Japan Radio Co Ltd (6911 JP) does not get done
• As the share prices for the acquiror (Lotte Holdings (004990 KS)) and both targets (Lotte Confectionery Co Ltd (280360 KS);Lotte Chilsung Beverage Co (005300 KS)) decline, the arb trade is getting interesting
• Takeda Pharmaceutical Co Ltd (4502 JP) & Shire PLC (SHP LN)'s rumored, approached, rejected, re-offered and rejected twice more, then agreed .... and now official drug deal

Samsung Biologics Co., Ltd (207940 KS) (Mkt Cap: $24bn; Liquidity: $254mn)

Sanghyun Park brings readers up to speed on Biologics' accounting fraud case being reviewed by the FSS (Financial Supervisory Service), which in turn, tables its findings to the FSC (Financial Service Commission). There are two scheduled meetings - May 17 and either May 23 or June 7 - before a decision is handed down by the FSC's Chairman.

• The case centers on whether BioLogics deliberately overstated its profit and valuation prior to listing in 2015 by shifting the status of Samsung Bioepis from "subsidiary" to "affiliate", therefore booking a substantial equity-method profit by changing the accounting standards for Bioepis from book value to market value.
• The current consensus, from an accounting perspective, is that BioLogics didn't commit an accounting fraud, and Biologics is expected to win the case provided no firm evidence is presented there was a deliberate act of conspiring and committing an accounting fraud. Certainly, the local market is giving the company some benefit of doubt, with the stock gaining 10.5% in the earlier part of the week, after shares tanked 29% last week following the FSS' (inadvertent?) disclosure of a possible breach in accounting rules.

(link to Sanghyun's insight: FSS Vs. Samsung BioLogics - Latest Situation Update)

Lotte Holdings (004990 KS) (Mkt Cap: $6.5bn; Liquidity: $11mn)

There is no financial incentive for shareholders of either Confectionary or Chilsung to tender based on the current swap ratio. However, with the share prices for the acquiror and both targets falling, the arb trade is getting interesting.

• As Sanghyun points out, the swap price of Holdings has yet to be finalized (the determination period is May 24-28), and on the assumption the swap price of Holdings is finalised at the current share prices, the current yield is 2% and 0.17% respectively, but touched 5.79% and 4.30% mid-week. Sanghyun favours Chilsung over Confectionary as he believes it may be subject to harsher short selling, based on the current short position relative to the stock borrow balance.

(link to Sanghyun's insight: Lotte Holdings Tender Offer Event)

Mitula Group Ltd (MUA AU) (Mkt Cap: $117mn; Liquidity: $0.3mn)

Mitula announced it had entered into a Scheme with LIFULL Co Ltd (2120 JP) of Japan. The deal is interesting and highly unusual, and the spread is likely to remain wide-ish because of its cross-border nature. Therein lies opportunity.

• The initial terms are that Mitula shareholders will receive 0.0753 LIFULL shares for each Mitula share they hold, or A$0.85 at the time of the announcement, an 88.9% premium to the May 8th close. Mitula shareholders can choose to receive A$0.80 in cash for the first 20,000 shares they own or receive only shares.
• The terms also have a slope to Mitula investors from the next 12% of combined downside from weakness in the yen, or in LIFULL's share price. In addition, Mitula shareholders can enjoy an upside of up to 8% in the AUD-equivalent price of LIFULL shares, up to a value-equivalent of A$0.918/share. Above that and the exchange ratio is lowered to cap the delivery value at A$0.918/share.
• Too hard? Travis Lundy believes buying the growth of LIFULL at a forward PER of 25x (which is the equivalent of buying Mitula at $0.74) is an attractive idea. The lower the price of LIFULL goes - and the stock is down 15.5% since the announcement - the more attractive it is just to buy LIFULL outright.

(link to Travis' insight: LIFULL and Mitula - A Really Interesting Little Deal)

JSW Steel Ltd (JSTL IN) (Mkt Cap: $11.6bn; Liquidity: $23.6mn)

According to both industry and company sources, India’s biggest steelmaker, JSW Steel Ltd (JSW) has currently submitted bids for three steel manufacturing companies, namely Bhushan Steel Ltd, Bhushan Power & Steel Ltd, and Monnet Ispat & Energy Ltd (MISP IN). In addition, the company is planning to enter into a partnership with VTB Capital to acquire Essar Steel.

• LightStream Research discussed JSW's recent acquisition of Monnet Ispat & Energy Ltd (MISP IN) and believes it will positively benefit both JSW and Monnet in the long term. It expects Monnet's top line to increase three-fold by FY03/23 and projects a target price above INR100 when referenced to the current EV/Ebitda of 11x for the Indian steel industry, while JSW is trading at 8.6x.

(link to Lightstream's research: JSW Steel: Acquisition of Monnet Ispat Looks Attractive)

Takeda Pharmaceutical Co Ltd (4502 JP) & Shire PLC (SHP LN)

The agreed deal is that Takeda will acquire Shire, with Shire shareholders receiving US$30.33 cash AND either 0.839 new shares of Takeda, or 1.678 US-listed Takeda ADSs. This deal is likely to get done in Travis' opinion. The deal is at a nice premium (+64%) compared to where it was pre-announcement. If Shire shareholders reject this, the shares go back down. There was ample room for this bid to be competitive, and it wasn't.

• The deal price of ~£48/share of Shire is still 20% short of where the consideration package (0.839 shares of Takeda and US$30.33/share) was trading at end-December. That means even more possibility.
• Travis believes Shire represents good value at the current price assuming a relatively high probability of the deal getting done, and if not, a relatively significant cash flow supporting the shares in the next few years. As confidence in the likelihood the deal gets done builds, attention will turn to the future Takeda-Shire dividend.

(link to Travis' insight: Takeda/Shire I: On Drug Deals and Deckchairs)

Nisshinbo Holdings Inc (3105 JP)/ New Japan Radio Co Ltd (6911 JP)

Nisshinbo announced it and subsidiary New Japan Radio had agreed to merge as of September 1st this year. This was expected at some point. New Japan Radio has growth. Nisshinbo has assets. And lots of treasury shares it can use to deliver shares.

• It's not really a fair deal. On a net basis, Nisshinbo is quite cheap. But for NJRC holders, it is OK. It is heavily asset and EBITDA accretive to NJRC holders, and it is PER accretive to Nisshinbo holders.
• But the deal will get done. Buying this deal at 1%+ spread is probably about as good as it is going to get. If you can get more, this is a good, easy, low-risk risk arb trade.

(link to Travis' insight: Nisshinbo/New Japan Radio Merger - Quick & Easy)

Pasona Group Inc (2168 JP) / Benefit One Inc (2412 JP)

Benefit announced earlier this week it will apply for reassignment to the TSE1. It was also announced it will cancel 10.07% of its shares on the 18 May. Shares popped 8.7% on Tuesday, and a further 3.9% today, taking the stock to a 52-week high. Pasona is down 4.2% since the announcement.

• Following the cancellation, Pasona will hold ~55% in Benefit One. The company could easily place out ~4mn shares, maintaining its majority shareholder vote, and helping to improve liquidity.
• The current discount to NAV of 55% compares to the 52-week average of 54%. Benefit One looks a little dangerous to short right now and a simple ratio (Pasona over Benefit) may continue to narrow from here.

(link to my insight: StubWorld - Pasona, Swire, Jardine, Rusal)

Japfa Ltd (JAP SP) / Japfa Comfeed Indonesia Tbk Pt (JPFA IJ

Johannes Salim, CFA discussed JAP's 49% discount to NAV and estimates 47-56% upside potential from current share price.

• Stripping out its 51% holding in JPFA, the key stub asset is its 100% stake in AustAsia, an upstream dairy farming in China, which JSAP recently acquired the remaining 38% stake it did not own for US$263mn.
• The low-end of Johannes' upside potential comes from assigning a 25% Holdco discount; while 56% is derived from assigning JAP a 10x peak earnings as fair valuation.

(link to Johannes' Ltd: Substantially Undervalued from Stub Valuation's Perspective)

Very Briefly ...

Sohu.com Inc (SOHU US). CEO Charles Zhang bought 100k shares in SOHU at an average price of $35.34/share, marginally raising his holding to 7.951mn shares or 20.43%. Sohu's discount to NAV of 38.3% compares to its 12-month average of 44%. It recently bounced off off its 12-month low of 57.% late April. I briefly covered this Holdco in my insight StubWorld - Sohu, Yue Yuen/Pou Sheng, Rusal.

United Co Rusal Plc (486 HK). Late last month, my CCASS analysis indicated 20.45% of Rusal had moved into Citibank from UBS. Only Oleg Deripaska (48.13%) and Viktor Vekselberg (26.5%) held positions this large. This week, 26.3% (presumably Vekselberg's stake) has moved out of Citibank into HSBC. I have a current discount to NAV for Rusal of ~70% vs. a 12-month average of 35%. (Vekselberg's name did feature elsewhere this week.)

My ongoing series flags large moves in CCASS holdings over the past week or so (~10%), moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers.

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.

I've mentioned Rusal above. I have no clue what is going on with Jinchuan Group Internationl Rsrcs Co Ltd (2362 HK). SD Hi-Speed Investment HK Limited's (under Taikang Asset Management, page 80 of the 2018 AR) 10% holding moved into CCASS in June 2017 after the placement, and since then, has moved out of CCASS thrice, and as of this week, back in additional three times. Five moves alone in the past month. Always cycling through Haitong. I'd welcome any thoughts on this.