Last Week in Event SPACE: Sembcorp, Cathay, Nichii Gakkan, Unilever, Just Eat/Grubhub

Last Week in Event SPACE ...

• A glorious mess amidst Sembcorp Industries (SCI SP) / Sembcorp Marine (SMM SP) rights/ in-specie restructuring, with minorities footing the bill.
• Cathay Pacific Airways (293 HK) is a sell. Its market cap is up HK$22.2bn since the bailout, yet HK$27.3bn of the HK$40.95bn rescue package is from prefs and a bridging loan, both of which will likely be materially depleted by year-end.
• Somehow the Independent Board members of Nichii Gakkan Co (9792 JP) used the conflicted Board's conflicted financial advisor's work based on conflicted management's profit forecasts to deem the conflicted Insiders' Offer for Nichii Gakkan Co (9792 JP) fair.
• Unilever NV (UNA NA) / Unilever PLC (ULVR LN)seeks to abandon its DLC, again. Favouring a London -based company may help this attempt over the line.
• With a bid on Grubhub Inc (GRUB US) on the tape, will Prosus (PRX NA) spoil the dinner party?

• Plus, other events, CCASS movements and Mood Spins.

Sembcorp Industries (SCI SP) / Sembcorp Marine (SMM SP)

SMM is conducting a 5:1 Rights Offering at a 29-35% discount to TERP at S$0.20/share vs last at S$0.85 and recent VWAP average of S$0.74/share in order to pay down debt and have more working capital in the COVID-19 downturn to both demand and ability to work. After this, SMM will pay back debt owed to its parent SCI (offsetting SCI's rights outlay). After that, SCI will spin out all its shares held in SMM. SCI is injecting capital - in effect a debt for equity swap - to get it back, then spin off the shares for good. It is a transfer of substantial control to Temasek, leaving Temasek owning a just-under-50% stake in SCI, and a stake in SMM which could vary significantly from about 30% to about 59%.

• You could also think of SMM as a short, because a lot of the SCI holders - 30-35% of SCM post-capital raise - will be happy to realise the value of the SMM shares they receive, and get out as soon as they possibly can. They'd get out sooner, but there is almost no stock borrow on SCM for them to hedge.
• You could think of SCI as a spin-off trade, extracting value. The nature of the relative valuations (high multiples at SMM and low multiples at SCI) and the accounting for higher EBITDA lower net income companies like SCM means that the accounting optics to SCI shareholders are fantastic. SCI holders who get SCM then sell it are effectively buying (owning) SCI cheap, and selling SCM expensively. SMM is being cast adrift.
• If this is great for SCI shareholders (the liquidation of Holdcos almost always extract value at the parent level), that means it is either bad for Temasek or for minority holders of SMM. One might say both, but there has long been speculation that Temasek would try to merge the beleaguered SMM with Keppel, upon which it is now in the process of trying to conduct a Partial Offer.

Links to:
Travis Lundy's insight: SembCorp Marine and SCI - A Gloriously Messy Recap and De-Merger - Big Win for SCI.
Travis' insight: Sembcorp Marine Rights Offer - Cast Away
my insight: StubWorld: The Liquidation Of Sembcorp's Holdco
Ke Yan's insight: SMM Rights Issue & Demerger Is One Step Closer to Keppel O&M+SMM Merger

Cathay Pacific Airways (293 HK) (Mkt Cap: $4.3bn; Liquidity: $5mn)

Cathay's rescue package was inevitable. Having the Hong Kong government stump up ~67% of the $40.95bn package did come as a slight surprise. The government backstop suggests this was a matter of expediency on Cathay's part as opposed to desire. This also appears a "kicking the can down the road" scenario.

• The Hong Kong government is not in the business to run an airline. Just like in China, the government does not directly run airlines. As Cathay will want to (or should) refinance the pref shares in the next two to three years owing to the onerous coupon step-up, the Hong Kong government will also be happy to exit. One possible option could be to transfer the pref shares to Air China at some later date.
• For Swire, when shares were suspended ahead of the announcement, this appeared an ideal time to unshackle itself from the inevitability of exiting its position. Injecting HK$5.3bn to maintain a largely similar stake in a heavily debt-laden operation, when the likelihood of necessary refinancing/rights issues possibly 2-3 years out, does not, to me, warrant a narrowing in the discount NAV.
• For SIA, which already had direct government interest, its reorganisation package, though heavily dilutive, provided long-term funding and clarity on its shareholder structure. This package for Cathay falls short on clarity and gives the impression of an interim fix or a compromise.
• My back of the napkin calcs estimates Cathay could burn through the entire pref share proceeds by year-end. Cathay may well need to go around cap in hand again, and sooner than the market thinks. The TERP price of $7.20 provides an indicative price level, as the name implies, and I see no reason why shares should trade at a significant premium to this price. SIA, using Friday's close is trading 5% below its announcement-date TERP.

links to my insights:
Cathay Pacific's Government Stop Gap
Cathay Pacific: A Bonfire For Money

Unilever NV (UNA NA) / Unilever PLC (ULVR LN)

UNA announced plans to unify its Group legal structure under a single parent company, ULVR. They've attempted a unification back in 2005 and 2018. Conditions required are approvals of shareholders in Unilever NV and Unilever PLC in EGM; consultations with employee representative bodies, and applicable regulatory consents.

• UNA shares were (at the time Jesus Rodriguez Aguilar's insight) trading at a discount of 2.2% to ULVR. That discount should close as a result of the merger. That's not a lot of skin in the game for a transaction expected to close in 4Q20.

(link to Jesus' insight: Unilever's DLC Unwinding)

Nichii Gakkan Co (9792 JP) (Mkt Cap: $1bn; Liquidity: $5mn)

(link to Travis' insight: An Activist Appears in Nichii Gakkan (9792): Good!)

• Hexaware Intimation of Board Meeting regarding the Delisting Proposal was differently phrased than either Vedanta Ltd (VEDL IN) or Adani Power Ltd (ADANI IN)'s. The document says in #5 that it shall appoint a Merchant Banker. It does not specify it will do so at the meeting.#6 talks about the contents of the Board Meeting and says that it will consider the proposal for voluntary delisting but does not mention the Merchant Banker.

• Travis' concludes the Merchant Banker appointment has not been made, and the Board Meeting this Friday the 12th will not be able to see a Board Resolution to support the Delisting Proposal, and to proceed.

• Travis recommends being long Hexaware now and buying on any dips. IF Hexaware shares dipped sharply on Friday after the "Outcome of Board Meeting" announcement release is posted, and some early buyers take profits, he recommend using that opportunity to buy more.

• UPDATE: Hexaware 's Board Meeting Outcome out as expected. The company took on the Delisting Proposal, appointed ICICI as Merchant Banker, and authorized personnel to do the back check on insider activity. And the shares did not dip.

In Facebook Enters into a Licensing Deal with Saregama to Further Expand Its Foothold in India, Shifara Samsudeen discussed Facebook Inc A (FB US) entering into a global licensing deal with India’s Saregama India (SARE IN). The two companies have not disclosed any details regarding the deal such as the pricing or terms of the deal. In mid-March, Spotify Technology SA (SPOT US) entered into a licensing deal with Saregama where about 100k songs from Saregama’s catalog will be added to Spotify’s streaming platform.

With Hanwha Group's initial investment in Nikola Corp (NKLA US) up 16x since November 2018, Douglas Kim discusses in A Surge in Value of Nikola Corp - 'Tesla' of Hydrogen Trucks: A Merger of Hanwha Corp & H-Solutions? the possibility of a merger of H-Solution and Hanwha Corporation (000880 KS), which could reduce the long-awaited risks about the transfer of the ownership of the Hanwha Group from the Chairman to his sons and also improve the overall transparency of the Hanwha Group.

Sanghyun Park discusses Mirae Asset Daewoo (006800 KS)'s latest buyback in Mirae Asset Daewoo Buyback & 2PB Dividend Play. It plans to buy back a total of 16mn common shares from June 8 to September 7. It is 1.97% of the total shares out and 2.43% of the ordinary shares. This buyback brings up the total treasury shares from 17.16% to 19.59%.

• The Acquirers are co-founders of the company and they currently hold around 39.17% of total shares which also equate to 39.17% of voting power. The other directors and executive officers held another 3.56% (as of Jan 2020) which means the total insider holding (together with the Acquirers) could be around 42.73% The second largest shareholder, YM Investments controls another 19.1%. This is the controlling shareholder of Orchid Asia Group. It is possible YM Investments is in negotiations with the Acquirers.
• Janaghan Jeyakumar considers this Offer to be light. The Offer comes 66.1% below the all-time high of US$26.78. The Offer Price translates to a premium of 25.8% to the undisturbed price and is 24.4%, 26.3%, and 23.9% higher than the 1-month, 3-month, and 1-year VWAPs respectively. Considering how far the stock has dropped from its all-time high, these numbers seem slightly weak. The Offer translates to EV/Revenue(LTM) and EV/EBITDA(LTM) multiples of 1.25x and 5.70x, respectively, which are both far below the peer medians of 3.52x and 18.83x respectively.
• Janaghan recommends waiting for a binding proposal to be announced. If this does not result in a Binding Offer and if the stock reverts back to its pre-announcement level of US$7.22, this would be a 12.1% drop from the current trading price. However, the drop could be much larger than this - the stock almost plunged close to US$6.00 in the first week of April 2020 and momentarily traded below US$6.15 as recent as 14th May 2020. A fall to US$6.00 would translate to a loss to 26.9%. Until a Binding Offer is announced, expect the stock to trade with a lot of noise.

(link to Oshadhi's insight: Japan Convenience Store Pair Trade: Long Lawson/Short Seven & I)

FTSE Russell has announced the results of the June index review for the FTSE TWSE Taiwan 50 Index. The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As Brian expected (in FTSE TWSE Taiwan 50 Index Review - Expensive Inclusion, Cheap Exclusion), there is one addition Wiwynn Corp (6669 TT) and one deletion Pou Chen (9904 TT) in the review. Brian estimates 0.24 days of ADV to buy on Wiwynn and 0.88 days of ADV to sell on Pou Chen. Short interest has been rising on both stocks, though short interest is 4% of free float on Wiwynn.

Provided Wheelock (20 HK)'s privatisation is successful, as discussed by Brian in Wheelock Privatisation - Impact On Wharf Holdings (4 HK) & Wharf REIC (1997 HK), there will be small passive buying from the FTSE and MSCI trackers on Wharf Real Estate Investment (1997 HK) due to an increase in the free float while there will be net selling on Wharf Holdings (4 HK) across the MSCI Hong Kong/ MSCI China trackers. WREIC could see around 19m shares of buying at the Hong Kong Hang Seng Index (HSI INDEX) September rebalance due to an increase in the free float.

Quiddity M&A: Australia Foreign Investment Reforms

On the 5 June 2020, the Treasury of the Australian Government released a 34-page document titled Foreign investment reforms, outlining the "most comprehensive" reform to Australian foreign investment review framework since the Foreign Acquisition and Takeovers Act (FATA) was introduced in 1975. The new powers afforded the government - a draft legislation for consultation will be released next month - will primarily address new national security test, streamlining the approval processes for certain privately controlled institutional investment funds that hold purely passive foreign government funds; and Stronger penalties and enforcement powers.

• What can and cannot pass muster under the government's purview is long overdue. But I doubt the new foreign investment framework will provide granularity for transactions such as CK Infrastructure Holdings (1038 HK) / APA Group (APA AU) - and whether it has government backing. Still, ensuring greater compliance with conditions placed on foreign investors is not a bad thing.
• Most investors undertake investments in non-sensitive areas, therefore the introduction of the new national security test should not affect how they interact with the foreign investment review framework. If an investment was previously exempt from screening, it will remain exempt - unless the investment raises national security concerns and falls below existing monetary thresholds.

• Full details will be known next month - and there is still work to be done as to what exactly constitutes a sensitive national security business - but it largely appears business as usual under the guise of a better organised foreign investment framework. I don't subscribe to the notion this reform will materially raise transaction costs, eliminating marginal transactions. The pushback is that the existing foreign investment system has a tendency to be arbitrary and opaque; and that the new reforms may only serve to add more opacity.

(link to my insight: Quiddity M&A: Australia Foreign Investment Reforms)

• Bitauto Holdings Ltd Adr (BITA US) agreed to be taken private by an investor group backed by Tencent Holdings (700 HK). Bitauto shareholders will receive $16/share, representing a premium of nearly 12% to its closing price on Thursday.

• Metlifecare Ltd (MET NZ)shareholder meeting to vote on the litigation will be held n the 10 July. This is a special resolution - therefore requires 75% or more of the votes cast must be voted in favour.

• Taiwan Fair Trade Commission has asked for public submissions in their review of the Qisda deal for Alpha Networks (3380 TT). The submission deadline is the 16th.

• Pentwater now has 9.9% in Huadian Fuxin Energy Corp (816 HK) according to SFC filings, buying in at $2.43-$2.435. Separately, Cape Ann Asset exited altogether its 2.37% stake.

• On 8 June, Upsilon Investment extended their Tender Offer for Sawada Holdings (8699 JP) yet again. It is now at 82 days. The filing now extends the deadline to 29 June.

• The Bidder's Statement has been issued - Infigen Energy (IFN AU)'s board recommends shareholders take no action. And UAC bump stake to 13.4% (from 12.82%). UAC stresses that the bid is not 'hostile'.
  
• A Reporter on Deals reports that Glass Lewis has backed Wheelock (20 HK)'s Offer.

• In its monthly update pursuant to the Takeovers Code, Soho China Ltd (410 HK) said there has been further information to report.

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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.