Last Week in Event SPACE – SK Telecom, Tabcorp, Hyundai Livart

This week, amidst a muted impact from regulatory intervention, SK Telecom (017670 KS)'s extreme discount to NAV should not be ignored; the odds on a successful merger between Tabcorp Holdings Ltd (TAH AU) and Tatts Group Ltd (TTS AU) are lengthened; Energy Development Corp (EDC PM)’s partial is done, now what?; and Hyundai Livart Co Ltd (079430 KS)’s merger with H&S makes operational sense.

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

Stub/Holdco

SK Telecom (017670 KS) (Mkt Cap: $17.7bn; Liquidity: $39.8mn)

SKT is up 12.5% YTD against 86% (& a 17-year high) for SK Hynix Inc (000660 KS). That has resulted in extreme 12-month lows for SKT’s NAV discount and implied stub.

• Sanghyun Park mentioned there is talk about SK Siltron's possible IPO as early as next year; and speculation that subsequent to this IPO, there will be a SK restructuring involving SK Telecom (017670 KS)'s spinoff and SK Hynix Inc (000660 KS)'s becoming SK Holdings Co Ltd (034730 KS)'s direct subsidiary. This possible restructuring is probably the main reason why local institutions aren't yet taking profits on Hynix.
• Separately New Street Research discussed telco regulatory intervention, and how it impacts SKT’s stub ops. A year ago, regulators declared they would be hands-off, but recent news only suggests a more amplified interference.
• The proposed changes, encompassing monthly discounts for underprivileged subscribers, increasing the discount to re-contracting subscribers, a subsidy cap, and fixed data plan, will impact SKT as it derives most of its revenues from the mobile business. Nevertheless, the ramifications are expected to be modest with New Street lowering FY18 revenue and EBITDA by around 3% and 5% respectively.
• SKT is New Street’s preferred pick in the Korean telco space. The prospects of potential adverse corporate action are not entirely without merit. But SKT looks cheap at these levels after Hynix's move.

(link to insight: Regulatory Risks Rising for Korean Telcos)

M&A

Tatts Group Ltd (TTS AU) (Mkt Cap: $4.8bn; Liquidity: $9.5mn)
Tabcorp Holdings Ltd (TAH AU) (Mkt Cap: $2.9bn; Liquidity: $18.2mn)

Eleven months after the merger agreement was first announced, we may finally obtain regulatory closure next week. Or not. Below is a brief rep-cap of events to bring readers up to speed:

• Australia’s Federal Court sided with one of the contentions in ACCC/CrownBet’s applications – the “substantial lessening of competition in a market and its relationship with competitive detriment".
• Justice Middleton, who presided over the ACT’s judgment in June, has requested written submissions by next Monday (25^th), with an “endeavour to make a new determination” by Sept 28 if the issues in contention are of a “small compass”. That would still allow the Tatt shareholders vote to go ahead on the Oct 18 and the merger to be completed before year-end.
• That looks optimistic. Middleton may opt to establish a hearing/trial (the words are interchangeable here), wherein the two economists (Messers Latta & Abraham), who presided over the earlier June decision would be called back in. As and when available.
• I side with Morningstar where the “best-case scenario … would be a delay, while the worst case is the deal falling through.”

(link to insight: Another Spanner Thrown in the Works for Merger Between Tabcorp and Tatts)

Events

Toshiba Corp (6502 JP) (Mkt Cap: $11.7bn; Liquidity: $138mn)

Andrew Lu discussed what appears to be the final deal for the Toshiba’s memory chip sale with the board choosing the consortium (named Pangea) led by Bain Capital. Toshiba will sell all shares (standard shares, convertible preference shares) to the group at ¥2tn or US$17.95bn and then Toshiba will buy back 17.5% of TMC shares (¥350.5bn). Japanese state-backed institutions INCJ & DBJ will join the consortium after the legal action with Western Digital is resolved.

• That arbitration may still scuttle this proposed transfer of Toshiba’s flash JV interest to Pangea. Western Digital Corp (WDC US) is not impressed and finds it “troubling that Toshiba would pursue this transaction without SanDisk's consent” and that it “remains confident that SanDisk will succeed on the merits of its arbitration requests”.
• Andrew summarised the current and past bids:

(link to insight: Toshiba Memory Corp Sales Back to Bain: Is This the Final One?)

Hyundai Livart Co Ltd (079430 KS) (Mkt Cap: $343mn; Liquidity: $2.1mn)

Hyundai Livart Co Ltd (079430 KS) popped 11% to ₩23,700 after it announced earlier in the week that it will merge with Hyundai H&S. Shares closed Friday at ₩22,500. Pricing for H&S looks inexpensive at 6.5x EV/EBITDA and 6x P/E. Douglas Kim discussed the key terms of the merger.

• Hyundai H&S is mainly involved in the B2B distribution of construction and industrial related materials and was spun off from Hyundai Greenfood Co Ltd (005440 KS) in 2009.
• Hyundai Greenfood currently owns a 100% stake in Hyundai H&S and a 28.5% stake in Hyundai Livart. Hyundai Greenfood will remain the largest shareholder after the merger.
• Hyundai H&S's furniture construction management, overseas raw materials sourcing, and interior related businesses appears to fit nicely with Hyundai Livart's core furniture and lifestyle-related products. Plus it should enhance Livert’s liquidity.

• In terms of valuations, Livaret’s 9x FY18 PER compares to market leader’s Hanssem Co Ltd (009240 KS) 22x. “This deal should help Hyundai Livart to further narrow this valuation gap.”

(link to insight: Hyundai Livart Announces a Merger with Hyundai H&S)

Lotte Shopping Co (023530 KS) (Mkt Cap: $6bn; Liquidity: $23.5mn)

September 18th was the last day for the shareholders of the four Lotte affiliates (Shopping, Lotte Confectionery Co Ltd (004990 KS), Lotte Chilsung Beverage Co (005300 KS) and Lotte Food Co Ltd (002270 KS)) before the stocks suspend on September 27. Sanghuyn discussed the theoretical price upside in the merger/spin-off process.

• Based on the share prices as of Sep 18, each share of Shopping traded at a massive 317.3% premium to the current share price. Or 56% when comparing the opco value based on the consensus vs. opco based on the current market cap. Do check out Sanghyun’s calculations and tables as to how these numbers are fleshed out.
• And Shin Dong-bin's Shopping stake will eventually be swapped with the holdco shares. This would suggest that Shin Dong-bin will “be highly incentivized to boost Shopping's share price in the near term”.
• Conversely, Ally Park discussed Shopping’s potential sale of Lotte Mart’s operation in China. A sale removes a material uncertainty – Ally sees the exit not only due to current geopolitical risks but also structural operational issues as well.
• Ally believes Shopping's share price largely reflects the impact of the holding company structure. Instead, she sees more value upside in 93.78%-held Lotte Cards.

link to insights:
Sanghyun's: Lotte Group Restructuring Part 7 - Theoretical Calculations of Price Upside Potential
Ally's: WWH Series-Lotte Shopping(023530.KS): Potential Sale of Lotte Mart Operations in China)

Japan Post Holdings Co Ltd (6178 JP) (Mkt Cap: $56bn; Liquidity: $42.1mn)

According to Bloomberg, Japan Post Holdings’ retail book was fully covered. This follows on from the overseas portion being fully covered on the first day.

• Travis Lundy briefly noted the shares of Japan Post would go into TOPIX on the close of Sep 28th. This is 3 days after the expected pricing and could create a weird bottleneck in terms of shares and delivery.
• And for those who doubt the influence of social media on markets, Mio Kato, CFA also touched on "famed" day-trader cis (who you can read about here), whose comments appeared to trigger Firday's 2.5% intraday drop in JPH.

(link to insight: Japan Post Holdings: For Those Who Doubt the Power of Japanese Day Traders....)

M&A

Energy Development Corp (EDC PM) (Mkt Cap: $2.6bn; Liquidity: $2mn)

Proration was 85%, a little under my 90% estimate, but more in line with Travis’ expectations. The shares closed at PHP7.07 on Friday after briefly (and unexplainably) touching an intra-day high of PHP8.90 on Wednesday. The offer price was PHP7.25 (~PHP7.21 inclusive of sales charges), while the unaffected price is probably closer to PHP6. Scaled-back shares will be returned on or around the 25 September.

• The question is when the delisting offer for EDC will be implemented, with speculation that it may take place later this year.
• In the interim, EDC may not necessarily be kicked out of the PSE composite index in the next recompositing. One of the index requirements is a 12% free float, but that is based on common shares, not inclusive of preference shares. That being the case, 12.5% of EDC's shares still remain in public hands at the close of this partial tender. Liquidity is expected to decline after the merger, although it is discretionary on the PSE management committee's part whether to delist EDC on this basis.

(link to EDC's PSE announcement: http://edge.pse.com.ph/openDiscViewer.do?edge_no=e696ee5bea8e40f63318251c9257320d#sthash.g6ea3O7q.dpbs - you then need to select an Attachment, then download)

Pepper Group Ltd (PEP AU) (Mkt Cap: $513mn; Liquidity: $0.5mn)

Pranav Rao was prescient in his initial note the offer from KKR was not a knock-out. Since the initial announcements, Perpetual, the second largest shareholder, filed a change of interest notice on 29 August 2017, upping their stake to 14.91% from 12.40%.

• This happened amidst apparent opposition to the transaction from Perpetual, who according to The Australian (paywall), "flagged it was unlikely to vote its 14.9% stake in favour of the deal".
• Should others on the registry follow Perpetual’s lead, it wouldn’t take much to break the deal.
• KKR has not declared the deal price final. Nevertheless, any prospect of a bump needs to be mindful of Pepper's need for A$150mn in equity capital.

(link to insight: Pepper Group: Perpetual Hostility)