Last Week in Event SPACE - Sanyo Special, Celltrion, Broadcom, Wynn, MSCI, CCASS

Last Week in Event SPACE ...

Embracing Sanyo Special Steel Co Ltd (5481 JP)'s complicated arbitrage; CFIUS dings Broadcom Limited (AVGO US) but questions remain as to how serious were their intentions; even more downside in Celltrion Inc (068270 KS) following the completion of the KOSPI 200 inclusion and ION's placement; iKang Healthcare Group (ADR) (KANG US) finally receives an official offer; nicely played as Wynn Resorts Ltd (WYNN US) settles long-standing litigations; an MSCI re-balance in Japan is likely offset by an ex-dividend big buy; and why large CCASS moves matter.

Sanyo Special Steel Co Ltd (5481 JP) (Mkt Cap: $868mn; Liquidity: $4.5mn)

Nippon Steel & Sumitomo Metal Corp (5401 JP) announced late Thursday a desire to make its specialty steel business global by integrating more fully the business of Sanyo Special Steel Co Ltd (5481 JP) with its own internal businesses. The proposed ownership level is "envisaged to be greater than 51%", up from 14.5% currently. Separately NSSMC said it would be acquiring Swedish engineering specialty steel maker Ovako (for "several tens of billions of yen" according to the Nikkei) by Sep 2018. SSS closed at ¥2744 on Friday, up 14.67%.

• Travis Lundy, in his detailed insight, believes it will come down to a Tender Offer above ¥3000, with a higher price - say 6.5x EBITDA - a reasonable expectation given the expected multiple for Ovako and the multiple paid for Nisshin in 2017.
• With bearing steel produced by the electric arc furnace method for both Ovako and Sanyo Steel, Mio Kato believes the sharing of know-how between the companies could provide strong synergies. NSSMC's financial heft should also help realise more of both companies' potential.
• This is not a big deal - to get to 51% from 14.5% means a purchase of 12.2mm shares, which at ¥3,000/share would be ¥36.6bn.
• It will also take time. It is 5+ months until an announcement and ~10+ months until the tender commencement. However, the minimum pro-ration is high. The arithmetic minimum is 45%. The practical minimum is 65%.
• How To trade this? A partial tender is a partial put option, and managing path dependency to the end is key. Embrace the complication for the arbitrage (read Travis' piece).

links to:
Travis' insight: Nippon Steel Aiming at Partial Tender of Sanyo Special Steel?
Mio's insight: Nippon Steel to Raise Stake in Sanyo Specialty to 51+% - Japan Steel Consolidation Kicking Off?

Celltrion Inc (068270 KS)(Mkt Cap: $38bn; Liquidity: $702mn)

Celltrion Holdings (96.99% held by Seo JungJin) announced a ₩200bn CB, divided into ₩94bn to be converted into common shares at ₩22,750,569; and ₩106bn to be converted into RCPSs with voting rights, at the same price of ₩22,750,569. That backs out a value of ₩6.825tn for Celltrion Holdings compared to its ₩8tn stake in Celltrion Inc. Furthermore, Celltrion Healthcare (091990 KS) shares have been pledged to these CBs. Clearly, the holder of the CBs is after Healthcare stock.

• Ultimately Seo needs to bump his holding in Celltrion Inc from the current (indirect) 20.09% stake. Of note, Celltrion's share price will be used in the re-fixing calculation for the conversion price. Basically, the lower Celltrion's share price becomes, the more Celltrion Holdings shares the investor takes.

• What to make of all this? Celltrion has been heavily shorted after the KOSPI 200 inclusion, yet according to Sanghyun Park’s stock borrow analysis, there’s more to come.

(link to Sanghyun's insight: Celltrion Holdings' ₩200bil CB with Celltrion Healthcare as Pledged Article - Questions to Ask)

Softbank Group (9984 JP) (Mkt Cap: $89.6bn; Liquidity: $443mn)

Softbank Group (9984 JP) announced it holds 5% of Charter Communication (CHTR US). Pelham Smithers views a bid for Charter is the obvious consequence of the failure to merge Sprint (S US) with T Mobile US (TMUS US).

• There are bundling synergies and benefits to be had here for Sprint’s mobile customers and Charter’s broadband patrons. It’s a smart way to eliminate landlines, for those who haven’t already, and opt for VoIP.

• The pushback is on pricing. Charter’s market cap is US$95bn and a US$173bn enterprise value, with EBIT and EBITDA of US$5bn and EBITDA is US$16bn. Liberty Media (LMCA US) is unlikely to sell its stake for less than a 50% premium - neither would chief executive Thomas Rutledge on account of his compensation package - or a very rich EV/EBITDA of 13.8x.

(link to Pelham's insight: SoftBank (9984 JP) - Still Going After Charter (CHTR US)?)

SK Discovery Co Ltd (006120 KS) (Mkt Cap: $436mn; Liquidity: $11.4mn)

Sanghyun revisits the swap price determination period for SK Discovery, which will occur during Mar 19-21. The swap price for SK Chemicals Co Ltd/New (285130 KS) was finalized previously at ₩110,701 with a target offering of 3.5mn shares.

• Chey Chang-won, the major shareholder of both entities, ideally wants a stronger price for SK Chemicals and a weaker price for SK Discovery during the Mar 19-21 price determination period. And Discovery keeps heading south. Using SK Chemicals' finalized swap price of ₩110,701, and SK Discovery's current price ₩43,150 (as of Friday) gives a swap ratio of 2.56x, or a 12.8% increase from one month ago (2.27x on Feb 12).
• Buying Chemicals and shorting Discovery has worked out well. Is there more to go? Borrowed shares for SK Discovery exceeded 27% of outstanding issued shares earlier this week, up from 3.59% on Feb 22. Sanghyun estimates only a small portion of those borrowed shares have been used to short Discovery, indicating a pick-up in shorts before Discovery’s price determination.

(link to Sanghyun's insight: SK Discovery & SK Chemicals Tender Offer - Arb Yield Calculations & Situation Update)

BGF Co Ltd (027410 KS)(Mkt Cap: $429mn; Liquidity: $7.1mn)

At the close of the swap results, 4,417,687 BGF Retail shares were tendered, resulting in 63,105,460 BGF shares offered, below the initial target of 74,080,686 shares, or a less than impressive tendering rate of 85.18%.

• Hong Seok-jo, BGF Retail’s largest shareholder, tendered 3,456,582 BGF Retail shares, or 78.24% of all shares tendered shares, but only 62.90% of his total 5.49mn BGF Retail shareholding. Hong Seok-jo now holds 62.53% in BGF, a 30.73% ppt increase from before the tender; and 11.8% in BGF Retail. BGF is the new major shareholder of BGF Retail with 25.56% stake.
• BGF’s shares popped after the completion of the swap, however for Hong Seok-jo to minimize the inheritance tax for his two sons, a low BGF price is optimal.
• Interestingly, BGF stock borrow balance continues to grow. Although BGF will be subject to a KOSPI (& KOSPI 200) re-balance to reflect the share swap, Sanghyun believes the downward price pressure will outweigh re-balance buying by the local pension funds.

(link to Sanghyun's insight: BGF Stock Swap Results & Post Swap Market Movement Analysis)

Lotte Himart Co Ltd (071840 KS)(Mkt Cap: $1.6bn; Liquidity: $4mn)

Lotte announced a ₩303.6bn exchangeable bond (EB) Issuance with Lotte Himart. Lotte Shopping Co (023530 KS) owns a 65.25% stake (15,403,274 shares) in Lotte Himart. These EBs account for 14.98% of the total shares and 22.96% of the shares owned by Lotte Shopping. The maximum number of Himart shares that can be borrowed is 7.49% of the total number of issued shares and 11.48% of the shares owned by Lotte Shopping, according to Sanghyun.

• The EB mirrors that of Lotte’s EB in Jan 2013. Back then, Himart reacted with a 4.78% immediate decline, but pretty much traded sideways despite strong short selling. Similarly, in Kakao’s EB issuance with Loen in 2016, Loen dropped 6.8% immediately but also moved sideways thereafter.

• Himart declined 4.32% on Thursday and 0.42% on Friday. Not too dissimilar to the 2013 EB. There may be further downside as borrow is taken down; however, precedents do not indicate a material downside from here.

(link to Sanghyun's insight: Lotte Shopping ₩303.6bil EB Issuance with Lotte Himart Stock Lending Condition)

Very, very briefly ...

Television Broadcasts Ltd (511 HK)’s results are due out (aftermarket) on Wednesday. There is speculation of a special dividend following the collapse of its buyback. At the very least, the historical final dividend ($2/share) should be restored.

Broadcom Limited (AVGO US) (Mkt Cap: $105bn; Liquidity: $917mn)

On the recommendation of The Committee on Foreign Investment in the United States ("CFIUS"), President Trump blocked the Broadcom Corp Cl A (BRCM US) / Qualcomm Inc (QCOM US) deal. “The proposed takeover of Qualcomm by the Purchaser is prohibited, and any substantially equivalent merger, acquisition, or takeover, whether affected directly or indirectly, is also prohibited”.

• ANTYA Investments Inc. is not surprised with the outcome, having cited in Broadcom Limited - Staring at Defeat that culturally the two companies were unlikely to be compatible given different histories and approach to business development, product design and delivery and access to intellectual property. Broadcom's violation of CFIUS’ Interim Order also placed a question mark over the seriousness of its offer.
• Arun George discussed a WSJ report that Intel Corp (INTC US) was weighing up a possible bid for Broadcom. He views the offer as unlikely on account of limited cost synergies, pricing (Broadcom currently trades at an FY18 EV/Sales multiple of 5.5x vs. 4x for Intel), and regulatory uncertainty.
• In addition, Paul Jacobs, the former executive chairman (whose title was stripped a week ago) and son of the founder of Qualcomm, has started looking around for investors to support an MBO/LBO.

links to:
Antya's insight: Broadcom Limited – Undone by Its Conduct
Arun's insight: Intel: Broadcom Rumoured Bid Is More Bark than Bite

iKang Healthcare Group (ADR) (KANG US) (Mkt Cap: $1.3bn; Liquidity: $4.5mn)

After a bidding war stretching back to August 2015, Yunfeng Capital (Jack Ma's PE firm) and Alibaba Group Holding Ltd (BABA US) have tabled a proposal to acquire iKang’s Class A shares, Class C shares, and ADSs in an all-cash transaction for US$20/ADS (or US$40/share). The announcement indicates a possible option for investors to roll over their stakes in iKang.

• The offer implies an 18x FY18 EBITDA multiple according to Pranav Rao, which is on the low side versus a key precedent, but that might be appropriate on account of the corporate governance issues highlighted by Kemp Dolliver, CFA in his numerous insights.
• This transaction is by no means done, but a confirmed proposal is positive. It is now in co-founder Zhang’s court as to the next move.

(link to Pranav’s insight: iKang: The Limbo Ends)

ING Life Insurance Korea Ltd. (079440 KS) (Mkt Cap: $3.5bn; Liquidity: $8.2mn)

Local media are reporting that ING Life Insurance Korea Ltd. (079440 KS) is up for sale and that Kb Financial Group Inc (105560 KS) and Shinhan Financial Group Ltd (055550 KS) are both conducting their final due diligence.

• Douglas Kim believes the acquisition of ING Life Insurance Korea would provide an accelerated expansion of the non-banking insurance business for both KB or Shinhan and enable greater economies of scale.
• ING Life, which is 59.7% owned by MBK partners, posted stellar results in 2017, with operating profit up 39.9% to ₩3tn. With a market cap of ₩4.1tn, a final price tag may be north of ₩5.1bn inclusive of a 25% control premium.
• Other insurance companies potentially for sale include KDB Life Insurance Korea, Hyundai Life Insurance, and MG General Insurance. This is partly driven by pressure to abide by the IFRS17 additional capital requirements, which go into effect on January 1st, 2021.

(link to Douglas’ insight: Korea M&A Spotlight: ING Life Insurance Korea (KB or Shinhan?)

On the 9th of March, MSCI announced that i) stakes of above 2% held by insurance companies in securities included in the MSCI Japan Equity Universe will be treated as non-free float. The threshold was previously set at 5%; and ii) stakes held by Sovereign Wealth Funds in securities classified in a domicile country of such fund will continue to be treated as non-free float. For shareholdings in securities classified in a non-domicile country, stakes of SWFs of above 7% will be treated as non-free float.

• The MSCI will implement the changes in the MSCI Global Investable Market Indexes in its May 2018 Semi-Annual Index Review or at end-May. Travis estimates the implementation will involve a large sell of ¥300-400bn, slightly smaller than the ¥500bn quoted in the media.
• For some of the sells, it could be 2-3 days of volume. That might be worth pre-preparing or running a basket.
• However, there is a net BUY of Japanese stocks of even larger size to be executed on the last Tuesday of this month, to account for a very large chunk of Japan which goes ex-dividend. All told, Travis expects a US$8-10bn buy for pure passive funds on the close of March 27th.

(link to Travis' insight: MSCI Rule Changes - ¥500bn Net Sell of Japan in May. Or Not..)

Hyosung Corporation (004800 KS) (Mkt Cap: $4.2bn; Liquidity: $23.8mn)

Reportedly the Korea Exchange has approved Hyosung Group's plans for the split-off of Hyosung Corporation (004800 KS). This spin-off involves splitting Hyosung Corp into Holdco (Hyosung Corp) and four other operating companies. Douglas discussed the split in his earlier insight: Hyosung's Transformation into a Holdco + Four Subsidiaries (Part 1).

• The split-off of Hyosung Corporation is expected to be completed by June 1st and the shareholders' meeting to vote on this matter will be held on April 27th. The newly formed companies will start trading on July 13th.
• On the positive front, Chairman Cho Hyun-Joon has been buying up Hyosung Corporation (004800 KS) shares. On the negative side, Cho was indicted in January on charges of embezzlement and breach of trust.
• There is value to be unlocked in Hyosung through the split-off process, however, the company's corporate governance and potential accounting irregularities have push down the share price.

(link to Douglas’ insight: Hyosung's Transformation into Holdco + Four Subsidiaries (Part 2): A Lot of Controversy)

Wynn Resorts Ltd (WYNN US) / Wynn Macau Ltd (1128 HK)

The WYNN and Universal Entertainment Corp (6425 JP) announced/settlement obviates the expected April start to a trial which has been in the pipeline since 2012 when WYNN forced the redemption of Aruze's 24.5mm shares in WYNN at a 30% discount. The timing of the Universal/Aruze settlement is clear management simply wanted to put this (litigation) behind them - it looks like Aruze settled for 60-70cts on the dollar.

• Kazuo Okada was ousted from WYNN's board in 2012 over a breach of fiduciary duty. Okada was similarly ousted from Universal's board in June last year, shortly followed by his removal as a director of Okada Holdings Limited (a Hong Kong-based company), the largest shareholder (67.9%) in Universal.
• Okada holds 46.4% in Okada Holdings, and has submitted a filing to Hong Kong's High Court which could decide next month whether to re-instate Okada's control over Okada Holdings and in turn, potentially Universal. Okada has denied any wrongdoing leveled at him by WYNN and Universal. The dropping of all charges by WYNN earlier this week will lend support to his case.

• What to do? The momentum and newsflow is with the parent. Howard J Klein views the "shares slowly becoming more bullish and evident in direct relationship of the steady fading of bearish news about the mounting headwinds associated with Mr. Wynn". The stock is off ~9% from its recent high in late Jan, a level slightly above the street consensus.

(link to my insight: StubWorld - Wynn, Wheelock)

Large moves in CCASS holdings (> 10%) are often outside normal market transactions. These may be indicative of share pledges. Unfortunately, such pledges are not required to be disclosed. So I looked at thousands of such moves over the last couple of years and the results are interesting.

• Around two-thirds of stocks demonstrating a large CCASS movement (>10% of issued shares) underperformed the HSI on a 3, 6 & 12-month time frame after the share transfer.
• The number of stocks underperforming marginally declines as the market capitalisation of the company increases. When combining the % CCASS change and market capitalisation, only stocks with a market capitalisation in excess of US$500mn at the time of the shares transferred displayed a reduced tendency to underperform.
• This analysis is not absolute and each large CCASS movement needs to be assessed on its own merit and in context with the company's history. Large moves can foreshadow a takeover offer, of which a number occur in my analysis.

(link my insight: CCASS: Why Large Moves Matter. Read more)