Last Week in Event SPACE: Sharp, Toshiba, Idemitsu, MKIF's Activism, APN, CJ Corp

Last Week in Event SPACE ...

• Nothing to cheer about as Sharp Corp (6753 JP)'s offering is canceled, but the C Pref conversion goes ahead
• A resounding "maybe" the TSE allows a backdoor TSE1 relisting for Toshiba Corp (6502 JP)
• Idemitsu Kosan Co Ltd (5019 JP)& Showa Shell Sekiyu Kk (5002 JP) - together at last?
• Platform Partners targets Macquarie Korea Infra Fund (088980 KS)'s management compensation
• APN Outdoor Group Ltd (APO AU) agrees to JCDecaux SA (DEC FP)'s bumped offer after oOh!Media Ltd (OML AU) locks up Adshel
• CJ Corp (001040 KS) is at a good level to start accumulating with the implied stub nudging a six-year low.

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

Sharp Corp (6753 JP) (Mkt Cap: $12.2bn; Liquidity: $128mn)

Sharp announced Friday that it will cancel its public offering of new shares (which were intended mostly to buy back pref shares that carried high dividends and affect a large dilution if converted). However, the plan for the partial acquisition of its Class C pref shares by July 23rd will still go ahead.

• As noted in Travis Lundy's insight, The Curious Case of $3bn of Sharp Shares Sold to Hon Hai Execs & Employees, these C prefs probably belong to Hon Hai management and the fact that they are being converted quite rapidly hints that they may be planning to exit in the near term. That does not indicate any great confidence in Sharp's prospects or a long-term commitment.
• Both LightStream Research and SC Capital agree that after Sharp's 15.19% increase on Friday, this is a selling opportunity. The stock may have been squeezed due to relief over the cancellation of the $2bn public offering, however as Travis noted in his insight SHARP Capital Restructuring Announcement - Some Interesting Implications, the deal would've been positive, as it aimed to reduce potential future dilution.

links to:
SC Capital's insight: Sharp Cancels Its $2bn New Share Sale--Could Be Negative
Lightstream's: Sharp: Offering Cancelled but C Pref Conversion Going Through... This Is NOT a Positive.

Idemitsu Kosan Co Ltd (5019 JP) (Mkt Cap: $7.4bn; Liquidity: $54mn)

In a surprise media announcement, Idemitsu and Showa Shell Sekiyu Kk (5002 JP) will merge next spring after completing negotiations and holding extraordinary shareholder meetings. The Idemitsu family has, according to the Nikkei article, agreed to allow the merger to go through on condition that the family get to nominate two board members, including the eldest son of the family scion Shosuke Idemitsu.

• The deal looks done. It is the end of the fight for the Idemitsu family. They are trying to hold on to what they can while they can.
• Travis favours Idemitsu as the "fair value" DCF prepared by many Independent Financial Advisors severely undervalues net financial assets and therefore also overvalues equity which has significant debt.
• On an EV/EBITDA basis, the two are not that far off. Idemitsu is cheaper one year out. Showa Shell perhaps on par or a bit cheaper to March 2020 on a consensus basis. On a PER basis, Idemitsu is cheaper, and could easily be 10% stronger vs Showa Shell and still be "too cheap."

(link to Travis' insight: Idemitsu & Showa - Together At Last?)

Macquarie Korea Infra Fund (088980 KS) (Mkt Cap: $2.7bn; Liquidity: $10mn)

Reportedly Platform Partners, a Korean asset management company, has MKIF in its cross-hairs. Platform Partners wants to change the management team of MKIF as it believes the team received excessive compensation and have not been acting in the best interests of shareholders. MKIF is a leading infrastructure fund (& the only listed infrastructure fund) in Korea, with the largest portfolio of toll roads in Asia.

• Platform called for a general meeting of shareholders to dismiss Macquarie Asset Management and hire a different infrastructure asset manager, Koramco. Nonetheless, Platform would need to receive more than 50% approval of the total shares outstanding of MKIF. Platform has a 4.99% stake in MKIF. Of note, three employees at Platform all worked at Macquarie Asset Management.
• Douglas Kim's initial thoughts are that Platform Partners has a real case against MKIF. Although MKIF may have provided a 9.2% CAGR return since 2006, it could have provided a lot higher returns to its shareholders if the management's incentive schemes were better aligned with those of the investors.

(link to Douglas' insight: Platform Partners Goes Activist on Macquarie Korea Infrastructure Fund (MKIF))

Very briefly ...

Alpine Electronics Inc (6816 JP) (Mkt Cap: $1.3bn; Liquidity: $12mn)

Travis assessed the voting at Alpine's recent AGM and concluded the shareholder vote shows that a very large number of holders are not "with" management. The results suggest Alps and Alpine will have to do something else. This could be A Tender Offer or a revised ratio. If Travis had to bet either way, it would be a Tender Offer. If it is a Tender Offer, they have an incentive to do it quickly before the stock goes up too much. Activists have an incentive to push the stock up quite a bit more BEFORE a Tender Offer so Alps would have to pay even more. This stock should go up. It is fundamentally too cheap. The ratio is wrong.

(link to Travis' insight: The Alpine AGM Vote Results - What They Tell You)

Toshiba Corp (6502 JP)'s (Mkt Cap: $19.7bn; Liquidity: $37mn)

Travis addressed the question of whether there is a way Toshiba can get back into TSE1 earlier than 2022, and therefore TOPIX, which would lead to massive passive fund buying, which would, ceteris paribus, probably push the price up. Reverse mergers (where a small company 'takes over' a large company) are not prohibited in Japan, and Holdcos can be formed. But there is a catch in the TSE rules designed to block this. "Backdoor listings" are less welcome and there are specific rules against them and to deal with them. Travis would not count on the TSE allowing a backdoor TSE1 relisting for Toshiba's shares yet, but it looks possible.

(link to Travis' insight: Toshiba: A Possible Route to Early TSE1/TOPIX Inclusion?)

Cj Hello Co Ltd (037560 KS)(Mkt Cap: $718mn; Liquidity: $7.7mn)

CJ Hello goes on a tear ahead of the expiry (27th June) of the Pay TV Combined Market Share Special Act. From an M&A angle, this new regulatory environment simply gives Korean telcos (IPTV providers: SKT and LG Uplus) another strong reason why they should go after local MSOs, particularly CJ Hello. But a sale cannot occur until after July 18th, according to a regulatory filing from CJ Hello's major shareholder (53.92%) CJ Shopping.

(link to Sanghyun Park's insight: CJ Hello Sale to LG Uplus Backstory & Fore-story Checkup)

Orion Corp (271560 KS) (Mkt Cap: $5.3bn; Liquidity: $25mn)

On the 27th June, it was announced that the Orion Group Chairman Dam Chul-Gon transferred a major portion of his stake in Orion Corp worth ₩91.7bn to his son and daughter. Immediately following this news, shares of Orion Corp and Orion Holdings Corp (001800 KS) were up 2.4% and 7.0%. Typically, shares of Korean companies tend to rally post a major shares transfer (from the father to his children) since there are fewer concerns about the companies trying to intentionally lower their share prices in efforts to reduce the overall inheritance taxes.

(link to Douglas' insight: Orion Group Chairman Dam Chul-Gon Tranfers His Orion Corp Shares to His Children)

APN Outdoor Group Ltd (APO AU) (Mkt Cap: $791mn; Liquidity: $21mn)

APN announced it has entered into a Scheme Implementation Deed with JCDecaux SA (DEC FP), under which JCDecaux has agreed to acquire APN for an A$6.70/share in cash. This is a $0.18/share (2.8%) bump to last week's announced indicative and non-binding proposal of A$6.52/share.

• While APN compliments JCDecaux’s existing out-of-home (OOH) media assets in Australia; JCDecaux's last-minute move was also to thwart APN’s potential move into JCDecaux's bus-advertising turf via its tilt for Adshel. And if adhering to a script, oOh!Media Ltd (OML AU) inked a deal with Adshel.
• The key risk to the APN/JCDecaux & oOH/Adshel transactions is whether the regulator (ACCC) simply looks at the ad market share across the board for each merged entity. The two deals have an estimated 70%+ market share. Either transaction has a relatively good probability of receiving ACCC clearance; however, both deals concurrently?
• Morningstar estimates a combined JCDecaux/APN would have a 38% share of Australia's OOH, and as such sees little justification for the ACCC to get in the way of old media consolidation, even within a subsegment such as outdoor, in order to better compete against the digital behemoths. But that was also the same reasoning discussed in an earlier Smartkarma insight APO/ OML - Greater Outdoors. The spread widened to 7.8% from 5.8% (including the fully franked interim dividend) during the week.

links to:
my insight: JCDecaux’s Offer for APN Does Ad Up)
Morningstar's: Swift French Invasion as APN Outdoor Falls for AUD 6.70 Per Share
Morningstar's: OOhmedia Shells Out Even More as Adshel's Strategic Importance Rises On French Connection

iKang Healthcare Group (ADR) (KANG US) (Mkt Cap: $1.4bn; Liquidity: $16mn)

iKang simultaneously reported its March quarter results and filed the updated proxy for its privatization at US$20.60/ADS led by Yunfeng/Alibaba with management's support. 1Q18 results were very strong and support Kemp Dolliver, CFA 's contention that a fair offer should at least be US$24/ADS given the earnings recovery and the potential for "exchange arbitrage" in some form. That said, he does not expect an increase in the offer price.

• The company reached Kemp's EBITDA of US$90mn for the year ended 31 March 2018. The offer implies an equity value of US$1.4bn and an enterprise value of US$1.6bn (net debt of US$200mn). The resulting EV/EBITDA multiple is 18.2x. His prior insights referenced an EV/EBITDA multiple of 20-25x EBITDA based on precedents, which backs out a price range of US$24-30/ADS.
• Dissension looks doubtful here. The shareholder base includes the company's original investors (Goldman Sachs with 13%, GIC with 9%, Hillhouse with 4%, etc.) who have expressed views to the Special Committee, but otherwise remained passive throughout the process.

(link to Kemp's insight: Updated Proxy Filed and Q4 Results Released. Read more)

Red Star Macalline Group Corp Ltd (1528 HK) (Mkt Cap: $5.3bn; Liquidity: $6mn)

The sharp fall in RSM A-shares vs Hs has led to slight compression of the post-tender breakeven discount (H discount to As). At 50%, for an illiquid H/A, that is not bad, but it is not as wide as it might go.

• There could be a block to sell after the deal. If proration is 50%, Warburg Pincus could be in a mood to sell the other half (the part which comes back to them). That would be a block of 150mm shares.
• Someone who had excess stock borrow could tender that and be in a decent position to buy those shares back from Warburg Pincus. One can think of this as a "bearish" trade aspect but Travis is bullish on this tender opportunity on a post-tender breakeven basis (relative to the As and to the sector), and much more so if you have borrow.

(link to Travis' insight: Red Star Macalline Tender - Post-Tender Breakeven Lower, A-Shares Lower, Furniture Prospects Iffier)

CJ Corp (001040 KS) (Mkt Cap: $3.3bn; Liquidity: $8.6mn)

CJ Corp's discount to NAV has widened to 39%, a 12-month low; while the implied stub hit a six-year low.

• CJ Corp's subs have recently been in the spotlight: the ongoing merger between CJ O Shopping Co Ltd (035760 KS) & CJ E&M Corp (130960 KS); and CJ Cheiljedang Corp (097950 KS) potentially acquiring Schwan for US$2.8bn.
• The stub ops make up just 8% of CJ Corp's profit, although 6% is sourced from Olive Young (under the unlisted stub subsidiary, Olivenetwork) alone. After Shopping and E&M merge, it is speculated Olivenetworks may be used by the younger Lee generation to acquire shares in CJ Corp from the father. Olivenetworks needs to go up in value from here for any such transaction to occur. Or it gets an IPO'ed.
• CJ Corp does look attractive here and worthwhile getting involved. The company also trades at a 30% discount to the street target price (13 buys & 4 holds). Further catalysts/restructuring is possible after the completion of the Shopping and E&M merger.

(link to my insight: StubWorld: CJ Corp's Multi-Year Low Implied Stub)

SeAH Steel Corporation (003030 KS) (Mkt Cap: $400mn; Liquidity: $3mn)

SEAH recently became Korea's latest conglomerate to embark on a holding company conversion. The official spinoff date is Sep 1, 2018. Shares will be suspended for trade from Aug 30 to Oct 4, 2018. New shares will be re-listed on Oct 5, 2018. SEAH will be split into Holdco (SeAH Steel Holdings, surviving entity) and opco (SeAH Steel) based on a spin-off ratio of 0.5272833 to 0.4727167.

• SEAH's shares have been all over the map recently. Korean-made steel is one of the major products that the US administration has been targeting, impacting SEAH. Then the holdco conversion was announced in April, giving shares a temporary boost. SEAH subsequently mentioned the presence of its US factory which can (could) minimize the negative impact of the US steel quota. Shares peaked at ₩101,000 on June 7 before closing Friday at ₩76,100.
• There is also the issue over inheritance tax, and SEAH shares may be unloaded to fund such a tax. However, a stake transfer from Lee Soon-hyeong to his son Lee Joo-seong is unlikely to happen in the immediate future. Plus the total amount of inheritance tax that Lee Joo-seong may have to pay would be substantially lower than lower than what his cousin had to pay. It's a kinda wait-and-see approach for this event, but Sanghyun believes the current overhang on the stock is overdone.

(link to Sanghyun's insight: SeAH Steel Holdco Conversion Summary)

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.