Last Week in Event SPACE – Santos, Qualcomm, Wharf, Sina, AVIC

Last week, the future's a gas as Harbour Energy circles Santos Ltd (STO AU); proxies to take up the fight as Qualcomm Inc (QCOM US) predictably rejects Broadcom Corp Cl A (BRCM US)'s offer; Wharf Holdings Ltd (4 HK) divorces Wharf Real Estate Investment (1997 HK) and looks more worse for wear; Sina Corp (Class A) (SINA US) is a laggard after its one-two minority shareholder punch; counter-intuitively, Avic International Holdings Ltd (161 HK) has further to run after doubling in the past month.

(Market cap and liquidity noted below are in US$. Liquidity is assessed on a 3-month average)

M&A

Santos Ltd (STO AU) (Mkt Cap: $7.9bn; Liquidity: $40mn)

Both Morningstar and I addressed Harbour Energy’s rejected non-binding offer for Santos; and whether the PE-backed outfit will reload.

• As Morningstar correctly puts it, Harbour Energy/EIG are not some tin-pot cobbled-together outfit, and it is quite possible a formal offer could be tabled soon. But a buyer group like Harbour Energy is not likely to overpay.

• A $5.30/share rumoured bid looks more reasonable, but that’s only a 9% return on ENN’s 18-month old investment. And Santos Chairman Peter Coates, who has previously rejected loftier offers, will probably side with ENN on this one. Morningstar’s fair value is A$5.75, with a “Hold or 3-star zone” value of $6.60.

• Alternative bidders? Woodside is favoured, having previously targeted PNG LNG player Oil Search – and failed. A Woodside/Santos would create an Aussie energy powerhouse- and neatly preserves Australian operatorship while still driving value for shareholders, an outcome clearly favoured by South Australia's treasurer Tom Koutsantonis.

• Santos looks a buy at these levels

links to insights:
Morningstar's: Santos Rejects AUD 4.55 Overtures From Harbour, But It’s Unlikely to Be Over Yet
Blenner's: Santos – Harbour Energy Back to the Well?

Qualcomm Inc (QCOM US) (Mkt Cap: $97.5bn; Liquidity: $627mn)

In one of the least surprising M&A announcements, Qualcomm’s board of directors unanimously rejected Broadcom Limited (AVGO US)'s unsolicited proposal due to the low-ball valuation and significant regulatory uncertainty.

• Andrew Lu previously argued a $80/share handle against the rejected $70/share, to satisfactorily narrow the valuation gap between the two companies.
• Broadcom's CEO Hock Tan is expected to initiate a proxy fight after gaining the support from the majority of Qualcomm's shareholders who are also Broadcom's major shareholders - over 50% of Broadcom shareholders (within the top 15) also own over 35% of Qualcomm. In other words, we can easily see over 50% of Qualcomm owned also by Broadcom's shareholders.
• Though smaller in market value, Qualcomm/NXP is a much strong and larger fabless design house than Broadcom. Just that Qualcomm’s share price has been impacted by the recent legal battles on antitrust cases with Taiwan FTC, Europe FTC, US FTC, and Apple, some of which relate directly to the NXP purchase. Nevertheless, Qualcomm's major shareholders have a justifiable case to ask for much more in a merger.

(link to insight: Qualcomm Says “NO” To Broadcom; Raise Price with a Proxy Fight?)

RHT Health Trust (RHT SP; "RHT") (Mkt Cap: $0.5bn; Liquidity: $0.8mn)

Fortis Healthcare has made a non-binding proposal to buy all the assets of RHT Health Trust for INR46,500 Mn and entered into exclusive talks with the Trustee-Manager for 60 days.

• Optically the ~ S$0.92/share should be welcomed by unitholders, but the lingering malaise between Daiichi Sankyo Co Ltd (4568 JP) and the Singh brothers' portfolio could torpedo the deal.
• That is, if Daiichi previously prevented the brothers from selling Fortis, they may also intervene in Fortis raising equity/debt to buy RHT.
• With an estimated August 2018 distribution, Pranav Rao believes the risk/reward is not apparent at the current price of S$0.86.

(link to insight: RHT Health Trust: Will Daiichi Sankyo Be Hospitable?)

Japan Senior Living Investment (3460 JP) (Mkt Cap: $111mn; Liquidity: $0.4mn)

Travis Lundy discussed the absorption-type merger of Kenedix Residential Investment (3278 JP) ("KDR") and Japan Senior Living Investment (3460 JP) ("JSL"), with a targeted merger date on March 1st 2018.

• Travis would want to be long JSL. The dividend yield is good and agitation by shareholders – the offer is too cheap - would only be positive. That said, the deal will probably get done at the current ratio.

(link to insight: Small J-REIT Merger - Small Guy Gets The Stick. Again..)

Very briefly...

Tabcorp Holdings Ltd (TAH AU) / Tatts Group Ltd (TTS AU)

The Aussie Competition Tribunal has, for a second time, given the Tabcorp-Tatts $11bn merger the go ahead - provided Tabcorp sell its Odyssey Gaming business in Queensland.

• The Tribunal will publish its decision on the 22 Nov. The scheme meeting for Tatts to vote on the transaction is scheduled for 30 Nov. Tabcorp still intends to implement the merger prior to the end of 2017.

Events

Avic International Holdings Ltd (161 HK) (Mkt Cap: $1.5bn; Liquidity: $3.2mn)

AVIC's yard sale has accelerated with the offloading of China Vanke, Guangdong Investments and most recently its interests in Hangfa. And then there was last month's CSRC approval to list Shennan Circuit.

• That listing of Shennan Circuit is likely imminent with a roadshow understood to commence next month. Applying industry peer valuations indicate AVIC's direct holding in Shennan would exceed its own market cap by ~30%.
• Further restructuring is anticipated, including the sale of its trading/logistics arm; while the injection of military real estate into Avic Real Estate Holding A (000043 CH) have been rumoured.
• Concern over a possible 41% share dilution appears overplayed. The sale of assets has considerably bolstered AVIC's financials, paving the way for the outstanding perps - held by controlling shareholder AVIC International - to be bought back.
• Applying a 40% discount backs out a possible fair value of $13.70, or ~40% upside.

(link to insight: AVIC - Let’s All Go To The Yard Sale)

Sharp Corp (6753 JP) (Mkt Cap: $15.5bn; Liquidity: $47mn)

On November 13th after the market close, Sharp announced that a Hon Hai Group unit, SIO International Holdings, sold 5.4m shares of its Sharp holdings to Daiwa PI Partners. This amounts to 1.08% of shares outstanding, clearing the way for re-listing on the TSE-1, as its free float is now over 35%, the minimum required by the TSE. All other requirements for Sharp to re-list on the TSE-1 have already been satisfied.

• SC Capital estimates that with 94% stock borrow (19.3 days of ADV) utilized, there should be a significant short squeeze in Sharp's stock once the TSE announces that Sharp will be elevated to the First Section.
• Of course, it is possible that stock borrowed is not yet shorted. Moreover, Hon Hail could take this opportunity to exercise its class C shares, equivalent to 113mn shares or 22.7% of outstanding shares, with an exercisable price of ¥880/share vs. the last close of ¥3490 - there's a tidy profit to be had there.

(link to insight: Sharp (6753) Ready to List on TSE 1st Section--Could Get Squeezy)

Samsung Electronics Co Ltd (005930 KS) (Mkt Cap: $328bn; Liquidity: $476mn)

Sanghyun Park revisited SamE buying prefs faster than commons this year. One argument is that SamE may want to buy back more prefs as they are more accretive to common shareholders. Which makes sense.

• It has also been argued that SamE had internally set this common-pref spread target at 10%, meaning as long as the common-pref spread stays at higher than 10%, SamE will likely buy more prefs than commons. You'd expect if SamE buys back prefs faster than commons, there would be pressure on the common-pref spread to reduce. But if we look at this year’s monthly common-pref spread change, this hasn’t been the case throughout the year even though SamE has consistently maintained a 80:20 buyback ratio.
• Sanghyun still believes the Lee family is heavily incentivized to prevent SamE common price from going too high since Samsung C&T Corp (028260 KS) (and the Lee family) will likely come out and try to buy SamE shares from Samsung Life Insurance Co., Ltd (032830 KS) with Samsung Biologics Co., Ltd (207940 KS) and Samsung SDS Co Ltd (018260 KS) stake. But it just seems that SamE’s strong fundamentals are still playing the biggest role here and even suppressing the potential common-pref spread. It’s a riddle wrapped up....

(link to insight: Samsung Electronics - Dynamics Around Pref Being Bought Back Faster than Common)

Stubs

Wheelock & Co Ltd (20 HK) / Wharf Holdings Ltd (4 HK)

Wharf went ex the entitlement into Wharf Real Estate Investment (1997 HK) ("WREIC") on Thursday. WREIC lists on the 23 November.

• Wharf was adjusted by $46.10/share for WREIC – or $45.50 if looking at the opening print. A ~$46 handle for WREIC translates to a ~33% discount to book value, too wide in my opinion. 10-20% appears more reasonable.
• However ex-entitlement figures are not always representative of what the in-specie spin-off will open/trade. For Swire Pacific Ltd Cl A (19 HK) in 2012, it declined by $10/share (opening print), while Swire Properties Ltd (1972 HK)’s opening price was $16.80.
• For Li & Fung Ltd (494 HK), it shed $1.66/share for the entitlement in July 2014, however, Global Brands Group Holding (787 HK) opened at $2.09.
• This suggests to me there is more embedded value in WREIC, which is +ve for Wheelock, the largest shareholder. This is an in-specie - Wheelock will hold 60.9% in both Wharf & WREIC. It also suggests Wharf is fully priced – around 35% discount to book value - after Friday's 5.2% decline
• The in-specie distribution is a means to unlocking value, but the end-game, one would assume, is to benefit the Woo family's interest in Wheelock, which is where I would prefer to be aligned. I’d Long Wheelock & Short Wharf here.
• Note: Wharf was adjusted in the HSI after the spin-off; and in a forthcoming Index review will likely be removed outright. WREIC will, in turn, be added. However, the timing of its inclusion is indeterminate - the earliest possible inclusion is the quarter ending Mar-18, to be announced in May, and effective in June.

(link to insight: StubWorld - Set-Up & Unwind Extremes: Wheelock, JCNC, Swire)

Jardine Cycle & Carriage Ltd (JCNC SP) / Astra International Tbk Pt (ASII IJ)

Jardine Cycle & Carriage Ltd (JCNC SP) announced earlier this week it has further diversified away from its core-motor vehicle investments, by acquiring a 5.53% stake in Vietnam Dairy Products Jsc (VNM VN) for US$616.6mn. This is the second (large) non-MV listed-company acquisition after buying a 25% in Siam City Cement Pub Co Ltd (SCCC TB) back in 2015.

• A simple GRT of JCNC and ASII on Bloomberg illustrates we are at similar levels shortly after the investment in SCCC TB. And my own NAV looks attractive at a discount to NAV of 21% (vs. 12-month average of 14.6%), with ASII still accounting for 85% of the NAV.
• By going Long JCNC, Short ASII, you’re long the unlisted Sing/Malaysian/Vietnam auto franchises, which were down 21% yoy in the 3Q17 (page 4 of the results). Arguably an investment in Vinamilk helps moderate these poor direct MV ops.

(link to insight: StubWorld - Set-Up & Unwind Extremes: Wheelock, JCNC, Swire)

Very briefly...

Sina Corp (Class A) (SINA US) / Weibo Corp (ADR) (WB US)

Take that! Days after repelling a proxy fight from US activist investor Aristeia Capital, Sina opted to take the road less traveled- those proxy votes were clearly too close for comfort - and issued supervoting preference shares to chairman Chaim Chao, elevating his voting rights to 56% from 11% previously.

• But Sina's 52% discount to NAV, a 12-month low, reflects Weibo’s outperformance - indeed, shares for Sina have recovered from the initial fallout from the pref shares announcement.
• Weibo now accounts for 170% of Sina's market cap. Sina looks like an outright buy here.

Orion Holdings Corp (001800 KS) (Mkt Cap: $484mn; Liquidity: $5.1mn)

Sanghyun discussed how the Orion tender offer was surprisingly oversubscribed at 134.17%. As a result, the major shareholders will continue to retain a 7.95% stake in Orion Corp (271560 KS). The major shareholders' controlling stake in Orion Holdings Corp (001800 KS) will now amount to 63.80%.

• What would the major shareholders do with this remaining 7.95% stake in Orion? It seems that their controlling stake in Orion Holdings is large enough to get a firm grip on the entire group, but they won't need to maintain this much stake (7.95%) in Orion Corp. Potentially a dynamic exists for another interesting arbitrage trade event.
• Holdings discount has narrowed to 50% from 56% when I last touched on this holdco.