Last Week in Event SPACE – SK Holdings, Sharp, Bharti, Rusal

This week, SK Holdings Co Ltd (034730 KS)'s unexpected bond issuance adumbrates SK Group's restructuring; Sharp Corp (6753 JP) could get squeezy towards the end of next week; Bharti Airtel Ltd (BHARTI IN) is gifted Tata’s mobile asset; United Co Rusal Plc (486 HK)'s metal is tested as major shareholders exit or reposition; and lest we forget, Minato Bank Ltd/The (8543 JP), the most interesting arb in the world.

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

Event

SK Holdings Co Ltd (034730 KS) (Mkt Cap: $18.4bn; Liquidity: $27.6mn)

Sanghyun Park searched for meaning in SK Holdings Co Ltd (034730 KS)'s ₩300bil bond issuance, shortly after opting for a total return swap ("TRS") for a stake in SK Siltron ("SKS").

• For those late, SKH acquired a 51% stake in SKS from LG Corp (003550 KS) for ₩620bil in Jan this year. In May, SKH acquired an additional 19.6% stake from KTB Private Equity for ₩160bil. And in Sept, SK Group’s Chairman Chey acquired the remaining 29.4% stake from Vogo Fund's creditors (led by Woori Bank (000030 KS)) for ₩253.5bil. Both the 19.6% and 29.4% stakes were done on a "TRS" basis.
• Chey’s TRS arguably makes sense – he just didn’t have the cash on hand. But SKH, which subsequently follows up with a bond issuance?
• Sanghyun’s read-through is that:
  • SK Holdings will eventually make contributions in kind to Hynix with its Siltron stake.
  • As Siltron's 29.4% shareholder, Chairman Chey will get a significant portion of Hynix shares and he will then swap his Hynix shares with SK Holdings shares through a tender offer in an effort to increase his shareholding in SK Holdings from 21-22% to whatever he can get.
  • It ain’t pretty and arguably exploits legal/regulatory loopholes.
• A bond issuance to buy back the Siltron stake in preparation for a Siltron IPO is further evidence, in Sanghyun's view, of an imminent SK restructuring.

(link to insight: Correlation Between SK Holdings’ ₩300bil Bond Issuance & SK Siltron TRS Deals)

Sharp Corp (6753 JP) (Mkt Cap: $15.8bn; Liquidity: $47.6mn)

With Sharp's Q2 results on October 27^th coinciding with an announcement Sharps stock may be elevated from the TSE-2 (Tokyo Stock Exchange Second Section) to the TSE-1 (Tokyo Stock Exchange First Section), SC Capital forecasts a possible short squeeze.

• It’s challenging to pin down exact figures, but SC estimates the current short interest in Sharp is around 20 days its average daily trading volume, with 93% of the borrow utilised.
• Passive funds would need to buy around $500m or 15 days of volume if Sharp is elevated from TSE-2 to TSE-1, creating a significant short squeeze.
• On the earnings front, SC believes Sharp will only just make its Q2 target, which would mark the first quarterly consensus miss since Hon Hai took control in August 2016.

(link to insight: Sharp (6753)--Potential Short Squeeze Ahead)

SK Telecom (017670 KS) (Mkt Cap: $18.9bn; Liquidity: $37.8mn)
Kt Corp (030200 KS) (Mkt Cap: $6.9bn; Liquidity: $21.4mn)

Reportedly the Carlyle Group is planning to sell its stake in ADT Caps, the second largest security service (alarm monitoring) company in Korea after S 1 Corporation (012750 KS). The sale of ADT Caps could be one of the biggest M&A deals in Korea in the past two years.

• How big a deal? Douglas Kim believes if you use the base case equity valuation of ₩95tn for ADT Caps and attach a 30-50% management premium, this backs out an implied equity valuation of ₩2.5tn to ₩2.9tn. Local media figures similarly range from ₩2.5tn to ₩3tn.
• There are various potential acquirors of ADT, such as MBK, KKR, CVC Capital, and TPG private equity firms, as well as SK Telecom, KT Corp, and the Lotte Group. Acquiring ADT Caps would allow the major telcos (SKT and KT) to bundle security services with their telecom services. But that’s a hefty price tag for bundling, about the same coin to roll-out a 5G network nationwide. That looks a stretch for either telco.

(link to insight: Who Will Buy The Carlyle Group’s ADT Caps? At What Price? - Impact on SK Telecom & KT)

Samsung C&T Corp (028260 KS)(Mkt Cap: $24.5bn; Liquidity: $48mn)

Sanghyun discusses how the court ruling on the Samsung C&T-Cheil merger may attenuate the charges against Lee Jae-yong.

• 5 charges were filed against Lee Jae-yong. On the primary bribery charge, the court found it was not fully substantiated.“The court specifically said that it couldn't accept the prosecutors' claim that Lee had made illegal requests to former President Park in relation to Samsung succession. “
• As the courts found the Samsung C&T-Cheil merger was legal, that judgement could influence the legal grounds proving Lee to be not guilty of bribery. The other charges against him may be then automatically dropped and Lee set free early next year.

(link to insight: Samsung C&T-Cheil Merger Trial Outcomes - Ramifications)

M&A

Minato Bank Ltd/The (8543 JP) (Mkt Cap: $758mn; Liquidity: $0.7mn)

Travis Lundy's entertaining synopsis discussed the mélange of events surrounding Minato Bank, which (very) briefly, involves two listed banks joining with an unlisted bank; two tender offers, and a pair of share exchange ratios. And an as yet unconverted pref share. Some accounting gymnastics and an illiquid arb. Plus Dos Equis.

• The partial offer is not particularly enticing, unless you can borrow shares and tender.
• Minato and Kansai Urban are getting the short end of the stick and should complain. "The advisors did not create share exchange ratios between Minato Bank and Kansai Urban Bank and the Holding company including the Pref Shares of Kansai Urban. This is ludicrous as a calculation methodology.”
• It is, indubitably, the most interesting arb in the world. Stay thirsty!

(link to insight: Kansai Mirai: The Most Interesting Arb In The World)

Television Broadcasts Ltd (511 HK) (Mkt Cap: $1.5bn; Liquidity: $1.8mn)

In my latest TVB iteration, I view the SFC waiver as being all but assured after the Executive previously highlighted the Panel's disregard for the BO provisions, and how the Ruling was inconsistent with the unambiguous terms of section 19.

• And concern over Young Lion's shareholding structure – in regards to new information procured by the Takeover’s panel - appears overplayed as the Communication Authority/Government previously approved/accepted Li Ruigang, Charles Chan and Thomas Hui are disqualified persons.
• The buyback does not appear to be priced into TVB's shares. A resolution, no matter what form it takes, should be positive. And should the offer lapse on account of the 23 Jan 2018 drop dead date, the buyback is a management-led initiative premised on excess cash on the balance sheet, and the company can revert to its $2.60/share dividend policy and/or pay a special dividend.

(link to insight: TVB - Normal Programming Will Resume Shortly)

Bharat Financial Inclusion Limited (BHAFIN IN) (Mkt Cap: $2.2bn; Liquidity: $34.4mn)
IndusInd Bank Ltd (IIB IN) (Mkt Cap: $15.6bn; Liquidity: $30.6mn)

The long-awaited merger between BHAFIN and IIB materialised via an all-stock Composite Scheme of Arrangement

• Pranav Rao believes BHAFIN shareholders will be supportive; IIB shareholders less so. IIB's largest shareholder (after the promoter), BNY Mellon Asset Management, make kick up some fuss, but they’ll need more aggrieved shareholders in situ to derail/influence the vote.
• Regulatory approvals should not be an issue amidst the absence of surplus market power gained by the merged entity.

(link to insight: BHAFIN/IIB: Microfinance Deal Materializes)

China National Building Material Co Ltd (3323 HK) (Mkt Cap: $4.6bn; Liquidity: $31.3mn)
China National Materials Company Limited (1893 HK) (Mkt Cap: $2.5bn; Liquidity: $5.9mn)

Mark A. DeWeaver, PhD, CFA addressed the CNBM/Sinoma merger and analysed what the cost reduction would need to be undertaken in the cement segment to offset the premium paid under the 0.85 exchange ratio for Sinoma.

• Mark backed out a cost reduction RMB23.0/ton for the cement segment, a magnitude that should not be too difficult to accomplish. And that there are likely synergies across other divisions for both companies, suggesting both companies should do okay out of the deal. Not to mention CNBM is up 27% since the September announcement - 14% this week alone.

(link to insight: China National Materials / China National Building Materials: Chinese Cement Consolidation)

Bharti Airtel Ltd (BHARTI IN) (Mkt Cap: $29.1bn; Liquidity: $31.5mn)

Christmas (or should I say Diwali) came early for Bharti Airtel (BHARTI IN) as it is expected to acquire the Tata Mobile business, some spectrum liabilities and other ongoing spending, but none of the debt.

• Via a press statement Bharti is being gifted Tata’s mobile asset, Tata Teleservices (including Tata Teleservices (Maharashtra) (TTLS IN), in exchange for taking on a small portion (perhaps $3-400m) of Tata’s remaining spectrum liability, but none of its $5bn debt, which remains behind with the Tata Group.
• New Street Research believes that Tata’s spectrum to be valued at $2.2bn and synergies (in mobile) to be worth a further $1.9bn. If just $3-400m of the spectrum liability, this equates to only 1-1.5x FY18 EBITDA, (and sub-1x historic FY17 EBITDA). Little wonder Baharti popped 7.66% on the news the previous Friday; and bolted on a further ~10% this week.

(link to insight: Ta-Ta Tata. Bharti Airtel Gets Tata Mobile For a Song. Highly Accretive)

Stubs/Holdcos

United Co Rusal Plc (486 HK) (Mkt Cap: $10.1bn; Liquidity: $16.4mn)

I viewed Rusal as the most interesting holdco in my weekly after Glencore Plc (GLEN LN) announced it will swap its 8.75% position for a stake in En+ Group, Rusal's major shareholder. Upon completion of the swap, En+ Group will hold 56.88%, up from 48.13%.

• This announcement comes a few days after Russian tycoons Mikhail Prokhorov and Viktor Vekselberg sold a 3% stake in Rusal via an accelerated book building for $315mn earlier this month.
• And the stake swap was then followed by news that Glencore will take a direct stake in the Mykolaiv plant, Rusal's second largest alumina asset.
• Rusal has been on a tear (+100% yoy) after the aluminium price per tonne gained ~30% during the same time frame;
• Rusal doesn't look overly demanding with a FY18E PER of 5.7x and 30% upside to the $6.63/sh consensus target price.
• But the sell down of shares by major Russian players; and the reallocation of Glencore’s position – and a taking a direct stake in specific asset – suggests the discount to NAV (which touched a 12-month high at the end of Sept and remains narrower than its one-year average) could widen from here.

(link to insight: StubWorld - Set-Up/ Unwind Extremes: Rusal, PCCW, Kingboard)