Last Week in Event SPACE: Sanyo Special, Fast Retailing, Danamon, BTPN, Fairfax, Hankuk

Last Week in Event SPACE ...

• The results of the discussions between Sanyo Special Steel (5481 JP) and Nippon Steel & Sumitomo Metal (5401 JP) are something of a disaster from a Corporate Governance perspective
• Familymart Uny Holdings (8028 JP) and Fast Retailing (9983 JP) are still squeezy, after the BOJ announces it will buy less (but not zero) Nikkei 225 ETFs
• Mitsubishi Ufj Financial (8306 JP) receives approval for Step 2 (of a 3-step process) from the FSA to increase its investment in Bank Danamon Indonesia Tbk (BDMN IJ) to 40% at a chunky premium to Step 1
• Bank Tabungan Pensiunan Nasional (BTPN IJ) is a good stock to buy on weakness, indeed perhaps at the current level if you think that the deal with SMBCI is likely to go through
• Pricing looks full for Fairfax Media (FXJ AU) after Nine Entertainment Co Holdings (NEC AU) bounced off a post-announcement low earlier in the week
• Hankuk Glass Ind (002000 KS)'s privatisation trades tight on speculation of minority pushback

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

Sanyo Special Steel (5481 JP) (Mkt Cap: $744mn; Liquidity: $44mn)

Sanyo Special Steel (SSS) has announced that it will issue 24.0125mm new shares (a 72% increase in shares outstanding) in a 3rd party allotment, placed with Nippon Steel & Sumitomo Metal (5401 JP), at the price of ¥2800 apiece. This will take Nippon Steel from a holding of 15.3% to 51.5%. The funds raised will then be used to purchase all of the shares of Ovako AB from Nippon Steel, which Nippon Steel just purchased in March (with the close occurring in Q2). It is not clear what Ovako's balance sheet looks like.

• Travis Lundy views this as a highly disappointing conclusion. Companies moving from a position of non-control to control should - in absence of serious distress on the part of the target - pay a control premium. It is not clear a control premium is being paid.
• The amount being paid by SSS to purchase Ovako (¥67.2bn) being almost exactly the amount (¥67.2bn) that SSS is raising in order to deliver Nippon Steel an increase in position from 15.3% to 51.5% (i.e. just over 50%) seems to be an awfully convenient coincidence.
• Unfortunately, there will be a fair bit of confusion among SSS shareholders trying to figure out what is what. And that could lead to share price falls because many - including Travis - had expected this deal to be done as a partial tender offer. Given SSS's relatively low net debt/EBITDA level, plans for synergies, decent EBITDA at the Ovako entity this year, it would seem a better transaction would have been a partial tender offer to buy SSS from minorities, then a cash transaction selling Ovako AB to SSS.
• As expected, SSS fell on Friday, down 11.21%, but probably shouldn't fall much further. On a pro-forma basis, it is going to be cheap, and bigger, which may get it more analyst coverage at some point. Longer-term, this appears to be an OK deal.

(link to Travis' insight: Sanyo Special Steel Special Deal with NSSMC - A Steal? Or Stolen?)

On Tuesday the Bank of Japan issued a Monetary Policy Statement which, as widely expected, addressed its Qualitative and Quantitative Monetary Easing policies with Yield Curve Control. The BOJ also amended its ETF purchasing allocation policy, in a separate release.

• The BOJ will buy less Nikkei 225 ETFs, but not zero. The amount is effectively cut in half to about ¥650-700bn per year. The new rate is the equivalent of purchasing about 1,130 Nikkei 225 baskets per year (or 1.1mm shares of each stock with a ¥50 deemed par value), a derisory amount of JPNK400 ETFs, and ¥5tn of TOPIX ETFs.
• What does all this mean? Familymart Uny Holdings (8028 JP) and Fast Retailing (9983 JP) are still squeezy, but not as much as before. Longer-term, the Nikkei structure is untenable. The BOJ's action today is a temporary fix. Travis still thinks the Nikkei will need to adjust the methodology of the Nikkei 225 as discussed in his recent insights The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?; Fast Retailing: Still Squeezable & JAPAN PASSIVE: The BOJ and Japan ETFs

(link to Travis' insight: JAPAN PASSIVE - Dovish Meeting; BOJ to Buy Less Nikkei 225)

Bank Danamon Indonesia Tbk (BDMN IJ) (Mkt Cap: $4.4bn; Liquidity: $2.3mn)

Mitsubishi Ufj Financial (8306 JP) received approval from the Financial Services Authority (FSA) of Indonesia to increase its investment in Bank Danamon Indonesia Tbk (BDMN IJ) to 40% from 19.9% (Step 2 of a 3-step process), with a view to reaching a minimum stake of 73.8% in BDMN (Step 3). This week also saw the announcement (see Travis' insight summary below) of Sumitomo Mitsui's intention to make a share purchase offer for Bank Tabungan Pensiunan Nasional (BTPN IJ), which may indicate the FSA is receptive to foreign investors taking a majority stake in domestic banks.

• 1.8bn shares crossed on Friday @ IDR 8,921/share implying a Step 2 P/B of 2.2x vs 2x for Step 1.
• MUFG/BDMN's 3-Step structure is not a mandatory tender offer (MTO), as stipulated on page 5 of the Dec 26 2017 announcement. However, a formal agreement or "agreements in recommended bids" can exist between the bidder and target. This allows for a cash offer to be made to all shareholders not part of the existing shareholder/bidder terms. That cash offer may match the terms paid for 72.8% of the company.
• Currently trading at 1.6x P/B, in line with its peer group average. However, BTPN's announcement may lend credence towards MUFG receiving approval to take its stake above 50%, and in turn, table a cash offer to minority shareholders. 2.2x P/B under Step 2 is a positive surprise. BDMN looks like a trading buy here.

(link to my insight: MUFG/Danamon: Two Down, One (Possibly) To Go)

Bank Tabungan Pensiunan Nasional (BTPN IJ) (Mkt Cap: $1.6bn; Liquidity: $4mn)

Travis provides an excellent recap of Indonesia's banking sector (foreign transactions, the regulatory approval process) before addressing the BTPN-SMBCI merger announced in Bisnis Indonesia. The key condition to the merger is obtaining an effective statement from the FSA. The merger is planned for 1 Jan 2019, and would mean BTPN remains listed on the IDX after the merger. It would be highly likely in Travis' opinion that the sounding out of the FSA and other regulatory authorities has already taken place and at this point it is more a matter of box-ticking.

• The BTPN / SMBCI merger "makes sense" from an Indonesian regulatory perspective because it creates a "single entity" presence, which is required under Indonesian law. SMBC clearly wants to expand in Indonesia, offering more services to more people. The regulators like that. And Japan is not out of favour with Indonesia at the moment.
• Assuming this deal has earned the approval of authorities, the Standby Purchasing Agreement (SPA) has an 18.6% annualised return for shareholders with the price today at IDR 3,990. That's a decent return. This is a good stock to buy on weakness.
• It is important to note, that the SPA is a put option, only available if the merger is approved and goes through - not dissimilar to Step 3 of MUFG/BDMN. Shareholders do not have to sell.

(link to Travis' insight: SMBC Merging Indo Unit with BTPN, Results in Cash Put for Shareholders)

Fairfax Media (FXJ AU) (Mkt Cap: $1.5bn; Liquidity: $13mn)

Nine Entertainment Co Holdings (NEC AU)'s scrip/cash offer premium for Fairfax all but disappeared earlier in the week as its share price rolled over after the merger announcement. The implied price for Fairfax was A$0.875 at the close Friday, a ~4% premium and compares to my NAV (including a 20% premium for Domain Holdings Australia (DHG AU)) of A$0.83/share.

• Neither Fairfax nor Nine is heavily indebted with net gearing of 18% and 5% respectively, opening the possibility of an improvement in terms, such as a bumping the cash portion of the offer.
• A counter from Seven West Media (SWM AU) is possible, although it has been argued it neither has the size nor the valuation multiple to make a tilt. News Corp (NWS AU) is probably out of the running unless it discards its 61.6% stake in REA Group Ltd (REA AU), or Domain, neither of which appears likely.
• I would look to buy both Nine and Fairfax as the cost savings and the synergistic benefits of a tie-in are reiterated and elaborated upon, elevating Nine's share price and in turn the implied price for Fairfax.

(link to my insight: Nine's Premium Fades, But Pricing for Fairfax Remains Full)

Tobu Store (8274 JP) (Mkt Cap: $223mn; Liquidity: $2mn)

Tobu Railway (9001 JP) announced that it was launching a Tender Offer to purchase the shares it does not own in Tobu Store at a price of ¥3,939/, which is a relatively low 12.7% premium to close, but is an 18.54% premium to the one-week average, and a 23.75% premium to the one-month average trading price pre-announcement.

• This is basically a done deal. While it is not a great 1-day premium, it is an OK premium to the one-month average.
• It is highly unlikely to be blocked. It is a small deal, likely to be finished quickly. If 73.2% of non-Tobu, non-Marubeni minorities tender, the squeeze out will be short-form rather than requiring a shareholder vote.
• Travis expects it to trade tight to terms immediately, and with little liquidity.

(link to Travis' insight: Tobu Rail (9001 JP) To Take Out Tobu Store (8274 JP))

Hankuk Glass Ind (002000 KS) (Mkt Cap: $481mn; Liquidity: $2mn)

Cie De Saint-Gobain (SGO FP), Hankuk's largest shareholder with 80.5%, is taking the company private. This targets 1,968,174 common shares @₩54.300 (22% premium) and 454,767 preferred shares @₩41,925 (30.6% premium). The tender offer starts on July 31st and ends on August 31st, 2018.

• Shares closed Friday at ₩53,900. That's tight. Douglas Kim is hearing a few minority shareholders want a price > ₩60k. Potentially another Atlasbx Co Ltd (023890 KS) in the making, whose privatisation failed in 2016 due to pushback from minorities in pricing.

(link to Douglas' insight: Hankuk Glass Is Going Private)

Minor International (MINT TB) (Mkt Cap: $5.3bn; Liquidity: $19mn)

Athaporn Arayasantiparb, CFA discussed the comprehensive 100-page opinion by MINT's Financial Advisor (FA) on the acquisition of Nh Hotel Group Sa (NHH SM). MINT controls 29.8% of NH Hotels and is requesting permission from shareholders to make a tender offer for the remaining 61.8% at €6.3/share (cut from €6.4 due to a €0.1 dividend payment).

• MINT actually just wants 51-55% of the company (effective control), but Spanish regulations require they make a tender offer for the whole thing. But if their stake in NHH reaches 60%, MINT said that it would breach its debt covenant, which limits gearing to 1.75x. As such, it would have to explore one of the three options, namely: 1) finding a strategic partner; 2) doing a rights offering to boost equity; or 3) issue a perpetual bond. They could probably do a combination of these.
• Reasons supporting the deal includes synergies and geographic diversification since NH Hotel's locations are heavy on Europe and Latin America rather than MINT's original Asian turf. This helps if natural disasters or political problems crop up in Asia. In addition, an expanded global network increases bargaining power when dealing with global suppliers. Like MINT, NHH is quite asset light.
• Negatives seen by the FA include the fact that Europe's economy, NHH's home turf, is much weaker than Asia, where MINT is primarily exposed at the moment. Yet the FA's peer comps support the €6.3/share acquisition price and also noted the average price target on the Street for NHH is €6.83. Athaporn remains positive on the deal.

(link to Athaporn's insight: Mechanics and Details of the MINT-NHH Deal in Spain)

Briefly ...

The Scheme Booklet for Lone Star's proposed acquisition of Sino Gas & Energy Holdings (SEH AU) has been registered with the ASIC. The Independent Expert concluded the Scheme Offer of A$0.25/share is fair. The implied 2P+2C multiple of the Offer of ~A$7.9/boe compares favourably with both the average 2P multiple for comparable companies of A$6.6/boe; and the implied EV/(2P+2C) multiple of A$6.6/boe for the most relevant precedent transaction. This looks like a done deal. Currently trading at 4.2%/37.3% gross/annualised return, which is okay.

(link to my insight: Sino Gas' Scheme on Track. IE Concludes Offer Is Fair)

Ihh Healthcare (IHH MK) should complete its investment into Fortis Healthcare (FORH IN) in the next 60 days. The EGM is the 13 August, with the offer expected to open on 7 Sept and close 24 Sept. IHH's management has stated previously that they do not expect to gain a majority stake, but rather 31-34% (based on their discussions with other shareholders). Yes Bank Ltd (YES IN) owns 15% while other lenders such as Axis Bank Ltd (AXSB IN) own smaller (1-2%) stakes. There are reports of last-minute jockeying by YES Bank and others for a higher price in the Open Offer, but IHH appears willing to stand its ground here.

(Link to Kemp Dolliver, CFA 's insight: Fortis Healthcare: It's All About the Occupancy)

Briefly ...

SK Hynix Inc (000660 KS) announced it will buy back ₩1.83tn worth of its own shares (22mn shares at the July 26 closing price of ₩83,100) openly from the market over the next three months from July 28 to Oct 27. Expect these shares to be cancelled, elevating SK Telecom (017670 KS)'s stake to 21.38%, which means SKT will still have to buy an additional 8.62% in Hynix stake, or 30%, to meet the soon-to-be enacted affiliate stakeholding requirement. Sanghyun Park also expects SKT - another candidate subject to the 30% requirement - to cancel its treasury shares, elevating SDK Holing's stake to 28.84%.

(link to Sanghyun's insight: SK Hynix Share Buyback & Potential Impact on SK Telecom)

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. 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.