Last Week in Event SPACE: Softbank, Reliance, Metlifecare, Sony Financial, Towngas, United Spirits

• Mio Kato is bearish. He believes Softbank is likely more liquidity-constrained than it tries to project and will remain so until it can demonstrate more skill with its investing. Then there are the governance concerns, not just for Softbank but also for Alibaba, and if something is amiss, the recent jawboning on US capital going into Chinese companies without proper accounting oversight should concern you. And there is the propensity for not just Softbank but for Son to borrow against the assets that they hold. Put together that is a volatile mix. One that can be rewarding to back in bull markets. Not so much if we enter a bear market.
• For Travis Lundy, we have clarity on some of the capital raise from asset sale. We await more clarity on TMUS. We also have some clarity on the next $7bn of buybacks which should take us a few months. If one models this out, assuming an end-state discount to NAV of 50% and a roughly 5% buyback of remaining shares in each stage of the buyback, one is left with net accretion of about 20%, and net share price increase of 32% but that model reduces Real World Float by about 50% over the next year. If the shares go up more because the impact is large, accretion will be a bit smaller, and the reduction in Real World Float will be smaller, which means less impact, but it leads to a higher price more quickly which is a high-quality problem.
• Travis reserves judgment on the "Asset Side" of the balance sheet. He thinks ARM is a good asset; and permanently reserves judgment on BABA because of the opacity of its metrics and accounting. Private company valuation marks, including ARM are questionable, to Mio. In his "plausible" downside case, he reckons ARM is worth half its listed US$25bn number. He also assigns zero for SVF, plus an assortment of other haircuts, and backs out a Holdco discount of ~29%. For a company with Softbank’s governance and transparency issues, the current discount doesn't appear egregious to him.
• Softbank Group announced towards the latter part of the week a sale of 240mn shares of Softbank Corp (9434 JP) - roughly 5.0% of shares outstanding - at a price of ¥1,306.5-1,320/ share (a discount of 4.0-5.0% to the close today of ¥1,375. Travis suggested a tilt to buying it for a short-term trade. It ended up pricing at ¥1,320/share.

Reliance announced further details of its Rights Offering. These rights are, in effect, in-the-money call options, providing a long maturity levered position for long holders. That means you can think of them as levered shares with an out-of-the-money put option embedded. They may trade cheap. The fact that they may not will likely flummox arbitrageurs. This is a BIG issue. The rights themselves will mean a total eventual weight increase in MSCI India of almost 1% of the index. The Reliance Rights Issue is more than twice as large as last year's Bharti Airtel (BHARTI IN) rights issue, and it is almost twice as large as the mammoth Singapore Airlines (SIA SP) rights offering taking place right now.

• The flip of the long/short dynamic of this rights issue is NOT like the Singapore Air Rights Issue discussed in Singapore Air Rights Entitlements - Flow Dynamics. In this case, there was almost no mechanism for a short squeeze, and relatively little near-term delta effect from a sell-down in terms of impact per market cap.
• Travis expects the Additional Equity Rights subscription will be of limited benefit to arbs who did not own the shares for the Record Date, but if you can avail yourself of the option because you already owned them, you should do so. He expects most market participants will.
• If the shares trade down sharply in the next ten days to about ₹1257/share, then it may look like there is no reason to exercise the rights, but you would be wrong. If you exercise the rights and the shares trade at exactly that price, you will own something which will have an intrinsic value of ₹314.25/share PLUS equity optionality above and beyond that. If you are agnostic on which one you hold, but you do not wish to increase your exposure, if the rights are trading expensive, sell those. If the shares are trading expensive to the rights, sell the shares and buy the rights.
• In the very short-term, Travis expects a little pressure on the shares as rights get sold by those who do not want to exercise their rights and prefer just getting the cash. The Reliance Rights are in effect, a US$2bn equity offering to the public. This is a very short-term call - a matter of a week or so.

Coming with a Sony Corp (6758 JP) Corporate Strategy Meeting, there was an announcement of a couple of Executive Changes based on a New Organizational Structure which, for strategic reasons, means that Sony is obliged to announce a Tender Offer to take full control of Sony Financial. So.... Sony takes out Sony Financial. This is an event which special situations investors/analysts/traders have speculated on for years, but this takeover is extremely opportunistic. The 60-page document and proliferation of parties ready to declare this deal "fair" will not please many holders. But it is at least better than the first offered price.

• This deal requires that 1.62% of shares outstanding tender in. That is about 2 days worth of ADV and two-thirds of that can be found at two friendly holders. It is a big deal. Minorities own roughly ¥400bn of shares or about 152mm shares. Roughly 40-50 million of those shares are passively-held. When the passive holders sell for index deletion reasons, there will be a big trade.
• If you are an arbitrageur, note the longer-than-normal tender offer. It is a full two months from Start Date to Cash Receipt. It will trade on 20 May 2020 just after 9am local time. There should be blocks available from time to time. If you are a long-only holder, figure that the discount to terms multiplied by 6 is the annual return you are giving up. You are replacing that annualized return by going long something else you think will outperform that number. If you are bullish the market, sell quickly and move on. If you are quite bearish the market in the next two months, hold on.
• The most interesting trade related to this will be the Nikkei 225 replacement trade. Something will go in. Early speculation is on SBI Holdings (8473 JP), Seven Bank Ltd (8410 JP), or Japan Post Insurance (7181 JP). Of these three, JPI is the big winner in terms of impact as far as Travis can tell. He'd own some borrow right now on principle. Watch also the possible early results of the Extraordinary Replacement Rules of the Nikkei 225 which was launched last week. If they arrive at an early result, it is possible that they change the rules by the time the Tender Offer is finished. In that case, watch for a VERY rapid change in the Nikkei 225 Average which would advantage owners of Japan Post Insurance even more.

• At current market prices, Diageo would need to pay minority shareholders £2.11bn. At a price of INR 700 a share (near the highs over the last 5 years, decent premium to VWAP over multiple periods, and close to the INR 693.25 that Diageo paid for 0.7% of the company in February 2020), the cash outlay would be £2.425bn. Diageo can fund the buyout through a reduction in or cancellation of its final dividend or an increase in its debt that would still be manageable at 3.6 times EBITDA.
• The delisting would occur via a reverse book building process with the clearing level being the price where Diageo crosses 90% ownership of the company. Any residual shareholders have 12 months from de-listing to tender their shares to the promoter at the clearing price.

At a 29.7% discount to NAV for Naspers, and a 24.2% discount to NAV for Prosus, I estimate the Naspers look-through at a 46%. On the 7 April, Naspers announced it had completed a ZAR 22.4bn share purchase program, acquiring, since 12 January, 9.156mn Naspers N ordinary shares, or around 2.06% of shares out. On the 22 January, Naspers sold 22mn N ordinary shares in Prosus or ~1.4% of the issued Prosus N ordinary shares, generating proceeds of ~€1.5 billion for Naspers or ~ZAR 29.8bn. At the time, Naspers agreed to a 90-day lock-up period with respect to its remaining interest in the Prosus N ordinary shares. That has now expired.

• The Naspers/Prosus spread is wide at ~30%, mindful that 99% of its NAV is in one holding. The Prosus/Tencent spread has narrowed to ~24%, but a level one would call tight - 88% of its NAV is in one holding. The discount is roughly back to where it was before Prosus launched a bid for Just Eat PLC (JE/ LN) on 21 Oct.

• Prosus is likely going up due to its inclusion in the Eurostoxx at month-end.

• There are just eight months to go (March 2021) before Prosus can sell down its stake in Tencent. It is questionable whether Prosus will self-impose another 3-year moratorium on selling shares. The current level suggests buying Naspers vs Prosus (or Naspers vs Tencent), although this is a somewhat low conviction trade as this is more premised on a range trade idea, as opposed to a hard catalyst.

STOXX will announce the results of the June review of the DAX equity indices on 3 June. The constituent changes will be effective from 22 June and the rebalancing trades will need to be done at the close on 19 June. In DAX Index Rebalance Preview - Checking Out of Lufthansa Brian sees a high probability of Deutsche Wohnen Ag (DWNI GR) being included in the DAX index and of Deutsche Lufthansa Ag (LHA GR) being excluded. There have been rumours of Vonovia SE (VNA GR) attempting a takeover of Deutsche Wohnen Ag (DWNI GR) but those have since been shot down by Vonovia.

When Stocks listed on JASDAQ, MOTHERS, and the Second Section of the Tokyo Stock Exchange aim at the big leagues and apply for reassignment to the First Section of the Tokyo Stock Exchange, when accepted, it causes significant events to occur.

• The reassignment to the First Section of the TSE triggers inclusion into the TOPIX Index which means passive funds tracking TOPIX need to buy on an inclusion event. This sounds minor, and technical, and horribly un-fundamental, but making money in the markets is often about choosing price and time and liquidity. These events present several interesting trading opportunities.
• In Historical TOPIX Inclusions: What Flavor Performs Best?, Janaghan Jeyakumar provides a thematic guide to help investors understand how the index inclusion parameters influence stock returns. In addition he provides opinions on how to use inclusion parameters to identify situations with above-average return/risk characteristics.