Last Week in Event SPACE – SK Telecom, Kuraray, Golfzon Newdin, Mandarin, TVB

This week, SK Telecom (017670 KS)'s anticipated restructuring moves up a gear; Golfzonyuwonholdings Co Ltd (121440 KS) chips in a JV with MBK; Kuraray Co Ltd (3405 JP) gets active with Calgon Carbon Corp (CCC US); no reservations are taken for Mandarin Oriental Intl Ltd (MAND SP)'s Excelsior; and Television Broadcasts Ltd (511 HK)'s intriguing judicial review gets underway.

Holdco/Stub/Event

SK Telecom (017670 KS) (Mkt Cap: $17.9bn; Liquidity: $37mn)

SKT announced it will acquire the 14.14% stake in SK Telink it does not own, for ₩270,583. Is this a pre-cursor to further restructuring?

• With the TMC deal done, SK can make a case that this restructuring (SKT split-up) is needed to allow SK Hynix Inc (000660 KS) to be active and flexible in M&A.
• Sanghyun Park believes SK restructuring is just a matter of time and it is likely to take place sooner rather than later, potentially resulting in a 'SKT-centered intermediate holdco' right under SK Holdco.
• The final outcome of any restructuring may benefit all stocks - SK Holdings Co Ltd (034730 KS), SKT and Hynix.
• As to SKT, the discount to NAV is around 21%, having bounced off a 12-month low of 25% last week, but still well off its 12-month average of 9.6%.

(link to insight: SKT & SK Telink Share Swap Deal - Summary & Ramifications)

Guoco Group Ltd (53 HK) (Mkt Cap: $4.9bn; Liquidity: $0.7mn)

This perennially “cheap” passive holdco registered a 30% gain in the past two months, sizeable (relative) volume, upwards of US$5mn on some days this week (~4-year high) vs its 3-mth ave of US$0.6mn.

• Guoco listing is unnecessary on account of its absence for the capital markets and illiquidity. It has thrice been subject to offers in the past 16 years, and when Leng Chan relinquished his chairman & board member positions last Sept, another tilt was on the cards.
• But to get Elliott (who blocked the 2012/2013 offer) over the line, an offer would probably need to be pitched at a 20-25% discount to NAV. I'd note a move from 40% discount to 25% discount would be a 25% move in the stock price. I'd also note that if they had a great quarter in their listed stock portfolio, the discount may be larger.
• The composition of Guoco is strikingly straightforward with stub assets consisting of a listed portfolio of liquid blue chips and net cash. There is very little unknown in Guoco's fair value.
• But the Queks are not known for overly generous offers. The current discount to NAV is 40% against 40% for the last offer. Recent trading indicates someone knows something. Or think they know something. But there may not be a lot more upside from current levels.

(link to insight: StubWorld - Set-Up & Unwind Extremes: Guoco)

Orion Holdings Corp (001800 KS) (Mkt Cap: $408mn; Liquidity: $8.8mn)

Douglas Kim looked at the tender offer and share swap involving Orion Holdings Corp (001800 KS) and Orion Corp (271560 KS) and believes there is limited upside for both companies.

• This is a share swap deal whereby Orion Holdings plans to conduct a rights offering issuing 42.59mn new shares at ₩22,660/share which would be worth ₩965bn and swap this for 10 million shares of Orion Corp.
• If the tender offer is successful, Orion Holdings would have a 37.38% stake in Orion Corp. The current Korean regulations require a holding company to have at least 20% stake in a publicly listed company. The higher level may be premised on the fact there are efforts underway in the Korean government to raise this limit to 30%, so perhaps Orion Holdings is shoring up long-term requirements.

(link to insight: Share Swap & Tender Offer Analysis of Orion Holdings and Orion Corp)

BGF Retail Co Ltd (027410 KS)(Mkt Cap: $3.6bn; Liquidity: $15.5mn)

Sewon Park is less than enamoured with BGF Retail splitting into two separate entities

• As of Jun 2017, BGF Retail’s convenience store business generates 98% and 92% of its total revenue and operating profits. Separating out the convenience store business, which was approved by shareholders on the 28^th, is unlikely to bring about material changes in business fundamentals to the holding company.
• Moreover, the split ratio of 65:35 between the holding and operating companies leaves shareholders with a greater stake in the company with less operating value but more uncertainty.
• Shares are down ~40% since the spin-off was announced in early June.

(link to insight: BGF Retail Spin-Off: For Whom the Bell Tolls)

Events

Golfzonyuwonholdings Co Ltd (121440 KS) (Mkt Cap: $196bn; Liquidity: $0.9mn)

Douglas discussed Golfzonyuwonholdings Co Ltd (121440 KS), also called "Golfzon Newdin", partnering with private-equity outfit MBK to consolidate and franchise golf courses in Korea.

• One should note that MBK is involved in the golf business through its ownership (through a MBO last year) of Accordia Golf in Japan, and its significant stake in still-listed Accordia Golf Trust (AGT SP).
• MBK acquired Accordia Golf in early 2017. “Accordia Golf has a proven experience of consolidating and operating golf courses in Japan and we believe that it can help MBK to capitalize its know-how and experience of turning around the golf course operations in Korea.”
• This JV is expected to raise ₩1tn (US$885 million) in an equity rights offering to acquire about 30 golf courses in Korea and franchise them. Douglas believes the deal will likely bring about a real positive catalyst to Golfzon Newdin shares, which are currently trading at a P/B multiple of 0.4x.

links to insights:
MBK Partners with Golfzon Newdin to Consolidate & Franchise Golf Courses in Korea.
Market Analysis of Golf Course Industry in Korea: Implications for MBK & Golfzon Newdin JV

Mandarin Oriental Intl Ltd (MAND SP) (Mkt Cap: $2.7bn; Liquidity: $2.3mn)

MAND announced proposals for the sale of the Excelsior have come up short, and that the company is continuing to review all options, including those that may result in redevelopment of the property into a commercial building.

• MAND doesn’t do commercial buildings – it has no such assets in its portfolio. Either this is a new business direction or perhaps, it may be offloaded within the Jardine Group. As an aside, Jardine Strategic Hldgs Ltd (JS SP) - the major shareholder of MAND - weakened against Jardine Matheson Hldgs Ltd (JM SP) following the news. The JM/JS ratio touched a 17-year low last week.
• The sale allegedly may have fallen foul of Beijing’s efforts to curb capital outflows a number of bidders were allegedly mainland property companies. The attraction was the site, not the hotel, but we probably won’t really know the true story.
• Not a great outcome for investors and the stock appropriately tanked below $2.00, but recovered to $2.18 later in the week. The stock is still cheap, but with the catalyst all-but gone, there’s no immediate news to close that valuation gap.

Toshiba Corp (6502 JP) (Mkt Cap: $11.8bn; Liquidity: $123mn)

SK Hynix Inc (000660 KS) was the first of the bidders to officially disclose how the Toshiba memory company deal was structured.

• Total capital to be injected is ¥1,985,500,000,000, with Hynix investing ¥395bil, via ¥129bil worth of CBs issued by the SPC led by Bain Capital, and ¥266bil to be used to buy the common shares of the SPC. As a result, the consortium that includes Hynix will own a 49.9% stake of Toshiba memory company, whereas Toshiba Corp (6502 JP) will own a 40.2% stake and Japan's Hoya Corp (7741 JP) will own a 9.9% stake.
• In terms of voting, the SPC comprising Bain Capital and Hynix will hold a 49.72% voting stake, whereas Toshiba + Hoyo Corp will own a 50.28% voting stake. Before the CBs are exercised.
• The word on the street is that Bain Capital will look to IPO Toshiba memory company as soon as possible, which involves the SPC selling its 49.72% common shares. But Hynix can convert its ¥129bn of CBs once Toshiba memory goes public, resulting in voting shares up to 15.27%. The deal also establishes a 15% cap on ownership for a period of 10 years.
• That not an immaterial percentage, but is it enough to access Toshiba's NAND technologies? Hard to say, says Sanghyun, but it may help to prevent Toshiba from pursuing additional patent lawsuits against Hynix in the field of 3D NAND.

(link to insight: Toshiba Memory Company Deal Structure Breakdown - SK Hynix Regulatory Filings)

Japan Post Holdings Co Ltd (6178 JP) (Mkt Cap: $53.1bn; Liquidity: $121mn)

Travis Lundy delved into the noise around this event because there are other inclusions and exclusion events for the Nikkei 225, and there are funding trades, which Travis discussed in JAPAN Quarter-End Fun And/-Ding Games : Sep 2017.

• There was $5-7bn+ of index risk to buy on the close of Sep 26th, and $4bn+ to sell on the 28th and 29th.
• The TOPIX inclusion announcement was badly handled by the TSE, first setting it to be October 30th, then September 28th.
• JPH closed at ¥1323/share on 83mm shares on Thursday (closing print 29.99mm shares, and only ~8mm shares in the 15mins of trading prior to close). This was a pretty awful inclusion for TOPIX and FTSE index funds. Shares closed at ¥1329 for the week on the MSCI and Nikkei 225 inclusion, jumping a full percent on the closing print of nearly 100 million shares.
• The discount to NAV is 21% (right on the -2STD line), slightly above the year low 22.7%, and compares to the 12-month average of 17%.

(link to insight: Japan Post: Offer Details, Surprises, and Fun And/-Ding Games)

Rio Tinto Ltd (RIO AU) (Mkt Cap: $85bn; Liquidity: $121mn)

Morningstar addressed Rio Tinto’s A$700mn off-market buyback of ASX-listed Rio Tinto Ltd (RIO AU) shares and how it impacts superannuation funds and individuals on a nil or low tax rate.

• Rio announced on the 22 Sept an additional $2.5bn buyback, bringing the 2017 total to $4bn. That balance of $1.9bn will be applied to on-market purchase of London-listed Rio Tinto PLC (RIO LN).
• Rio now trades ex-entitlement. The tender opens Oct. 11 and closes Nov. 10. The buyback price and scale back will be announced on Nov. 13 with payment on Nov. 20.
• Dependent on the in-price, "shareholders may generate a further capital loss by participating in the off-market buyback, which could be offset against other capital gains, such as in a superannuation fund, or be carried forward to offset against future gains". However, shareholders should consult their tax advisor as to how they may be affected.

(link to insight: Corporate Action: Rio Tinto’s Off-Market Buyback Benefits Super Funds and Lowly Taxed Investors)

Arbs

Kuraray Co Ltd (3405 JP) (Mkt Cap: $6.6bn; Liquidity: $23.8mn)

Pelham Smithers discussed Kuraray's (3405 JP)’s US$1.1bn tilt for Calgon Carbon (CCC US), which is involved in the activated carbon applications such as water purification.

• Kuraray’s shares fell as a result, not just the fact CCC's business is hardly riveting, but the fact CCC’s share price declined in August, amplifying the 12-month shares price premium Kuraray used. And more importantly, CCC’s apparent earnings decline in two of the past three years, as the US market for “mercury removal with activated carbon at coal-fired power stations have been in decline”
• Kuraray argued the carbon market will grow mid-single digits and CCC’s earnings are on the up.
• Kuraray gets the benefit of doubt as recent acquisitions (MonoSol soluble PVA business and the DuPont vinyl acetate businesses) panned out okay. Potential synergies with CCC are expected in production efficiency, global marketing and R&D. And activated carbon applications are present in water and air purification, foods, industrial plants, etc. The deal is subject to shareholder and regulatory approval.

(link to insight: Calgon Carbon Acquisition Looks Expensive)

Television Broadcasts Ltd (511 HK) (Mkt Cap: $1.4bn; Liquidity: $1.6mn)

I spent several hours earlier this week in the High Court listening to both sides argue the merits of the May decision by the Takeovers Panel, as the judicial review got underway.

• At the heart of the debate is whether the Panel circumvented existing law. The Broadcasting Ordinance is primary legislation and as such, should trump Codes and Practice Notes.
• However the BO does not address whitewash waivers, and the primary decision-maker of the waiver is the SFC based on the Code.
• But a whitewash waiver has never been granted without it being put to a shareholder vote. Historically, the offer and waiver have been joined at the hip. That is, the waiver is the condition on the vote. Here, the Panel is putting the offer to the vote, then will subsequently decide whether a waiver will, in fact, be given. In effect, standing the past industry practice on its head.
• And if it were put to a vote, section 19 of schedule 1 of the BO would be in force - a disenfranchising mechanism so HK residents (not an exclusive term) can exercise control.
• Personally, I consider the Panel erred in not adhering to the scaling back mechanism in the BO. If the judge rules as such – a ruling is expected next week – and it goes back to the Panel, then it is possible the Panel simply does not grant a waiver at all. Unlikely, but possible.
• If the buyback goes ahead, Silchester & friendly parties may try to block the vote for no other reason perhaps than they are got in higher.
• Nevertheless, while TVB's operations are hardly enticing, on balance, at current levels, a positive ruling by the High Court could give the stock support.

(link to insight: TVB - Designer Resolution?)

Energy Development Corp (EDC PM) (Mkt Cap: $2.1bn; Liquidity: $3.2mn)

Following completion of the tender offer – proration was 85% - MSCI announced on Monday that the shares would be deleted from the MSCI indices as of September 27th. That was shortly followed by FTSE announcing the deletion of EDC on the 28th. And rounding out the triple deletion, the PSE announced Robinsons Retail Holdings Inc (RRHI PM) would replace EDC in the Index, effective the 28^th.

• Shares cratered to Php4.80 on Tuesday after starting the week at Php7.07. The stock was a relatively clear buy below Php5 given the undisturbed price of Php6. The stock closed at Php5.62 on Friday.

Unilever NV (UNA NA) (Mkt Cap: $174bn; Liquidity: $205mn)

In what would be the largest M&A deal in the Korean cosmetics sector, Unilever will acquire 95% of Carver Korea for ₩3tn (US$2.7bn).

• Unilever paid about 24x P/E, using 2016 net profit of ₩132.4bn. The average P/E of Amorepacific Corp (090430 KS) and LG Household & Health Care (051900 KS) using their 2016 net profit is 23x.
• That 95% stake, according to Korean media, is 60% owned by the consortium including Bain Capital and Goldman Sachs, and 35% owned by Lee Sang Rok, the Chairman of Carver Korea.
• There are differing reports but Douglas Kim believes Bain Capital and Goldman Sachs paid about ₩430bn for a 60% stake in Carver Korea in 2016. Not a bad return.

(link to insight: Korea M&A Spotlight: Unilever Acquires Carver Korea for a Cool 3 Trillion Won)

iKang Healthcare Group (ADR) (KANG US) (Mkt Cap: $923bn; Liquidity: $3.3mn)

Management providing no new comments on the proposed privatisation which has been pending now for 2+ years.

• Kemp Dolliver, CFA says the “absence of progress on the transaction along with management's contentious relationship with investors increases our wariness.”

(link to insight: The Elephant in the Room)

Tabcorp Holdings Ltd (TAH AU) (Mkt Cap: $2.8bn; Liquidity: $18.2mn)

The Australian Competition Tribunal ACT said it will undertake further consideration of TAB’s existing application for authorisation and has allocated hearing dates on 24 & 25 October.

• As a result – and as flagged in last week's wrap -the scheme meeting has been postponed to the 30 Nov from 18 October.

Topix Inclusions!

Synchro Food Ltd (3963 JP) (Mkt Cap: $137.1mn; Liquidity: $0.9mn)

Travis places an avoid placard on this inclusion as it is expensive, was well-flagged, has zero coverage and illiquid.

(link to insight: Synchro Foods (3963 JP) TOPIX Inclusion Event)

Global Group Corp (6189 JP) (Mkt Cap: $171mn; Liquidity: $0.5mn)

Travis is more bullish here as the stock is not dramatically expensive (at 19x) while revenues are growing, which is not a bad thing for a simple business - nursery school services.

• The post-TOPIX-inclusion interest may not necessarily move the needle, but it is the kind of stock in which insurers and healthcare providers like to own small stakes.
• “The possibility of PM Abe talking about Third Arrow themes such as greater nursery care services rollout to enable women to enter the workforce is a non-negligible possibility. For that, I would want to buy any dip.”

(link to insight: Global Group (6189 JP) TOPIX Inclusion Event)