Last Week in Event SPACE: Spring REIT, Alps/Alpine, NTT, JCNC, Restaurant Brands, A/H

Last Week in Event SPACE ...

• A previously non-disclosed connected party tarnishes a property acquisition and bolsters PAG's Offer for Spring Real Estate Investment Trust (1426 HK).
• Go long Alps Electric (6770 JP) and Alpine Electronics (6816 JP) as this interesting trade just got interestinger.

• Ntt (Nippon Telegraph & Telephone) (9432 JP)'s buyout of Ntt Urban Development (8933 JP) is all over but the shouting. Even before it starts.

• As Ntt (Nippon Telegraph & Telephone) (9432 JP)'s stub vs market cap nears a 10-year low, you would want to be long NTT here and now vs NTT Docomo Inc (9437 JP) and vs its listco subs.

• Jardine Cycle & Carriage (JCNC SP) is a clear stub set-up on a discount to NAV and all-time low ratio to Astra International (ASII IJ).
• Finaccess orders a large portion of Restaurant Brands Nz (RBD NZ).
• Plus the latest round-up of A/H spreads

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

Spring Real Estate Investment Trust (1426 HK) (Mkt Cap: $617mn; Liquidity: $1mn)

Following the dispatch of the Response Document and the "not fair and reasonable" opinion by the IFA therein on PAG Real Estate's Offer for Spring REIT, I questioned when was the last time a takeover premium >60% was considered not fair and reasonable in Hong Kong. The application of only one precedent REIT takeover - not listed in Hong Kong - as a central argument against the offer, and the likelihood the Manager could extract the full value of the property portfolio (for minorities) made the IFA response a weak one. PAG argued along similar lines in a follow-up announcement.

• But then the EGM to vote on the Huizhou acquisition was postponed after it came to light the seller of the Huizhou properties was (from a conservative viewpoint) a connected person through the Trustee.
• The Manager of Spring stated it was not connected. This is significant, as Mercuria, the controlling unitholder of the Manager, provides management services to the RCA Fund, which in turn is Spring REIT's major unitholder.
• ISS and Glass Lewis both issued reports advising unitholders to vote against the Huizhou acquisition. The reasons cited include the dilutive nature of the transaction in terms of the NAV, Spring's disconcerting preference for strategically disparate arrangements, and providing the strategic optionality for independent unitholders to tender units into PAG’s Offer.
• These developments should support PAG Real Estate's Offer. The current upside to the $4.85 Offer price is 27% against a downside of 22%. That's a decent risk/reward. Tendering is currently estimated at 9.71% (PAG needs 35.2%) with the first closing date of 29 October.

links to my insight:
Negative IFA Opinion Compromises PAG's Offer For Spring REIT
Spring REIT's IFA Opinion Is Misleading
Spring REIT's EGM Suspension Is A Boost for PAG's Offer

Alps Electric (6770 JP)(Mkt Cap: $4.8bn; Liquidity: $68mn)

Last Friday if you bought shares in Alpine you could not vote those shares in the EGM to decide upon the merger between Alpine and Alps. Alpine shares were in a kind of 2-month limbo. If you bought the shares at 10% through scrip ratio terms vs Alps you were going to make back half the difference in the special dividend if the merger went through, but one's bet was almost explicitly that the merger would not go through.

• If you buy the shares now at ¥2020, vs Alps 8% lower, there are three possible outcomes:
  • Alpine shareholders vote through the merger. You get ¥100 and 0.68 shares of Alps, meaning at Friday's closing price you lose 2.4% vs Alps.
  • Alpine shareholders block the merger, and vote through the ¥300/share dividend (proposed by Oasis). If you buy at ¥2020 against Alps shares at ¥2753/share, you will still own one Alpine share but everyone who owned as of October 10th will get ¥300/share and you won't. Your Alpine shares are now worth 14.9% less. But Alps is the same (or better? it would have received ¥12+bn in cash).
  • Alpine shareholders block the merger and do NOT vote through the ¥300/share dividend. In this case, it is the same as you thought it was going to be the previous week. Merger blocked, and you still have all the value that a voting shareholder who owned October 10th has. And Alpine and Alps would have a future choice to make things better for minority shareholders.
• Is there another possible outcome? Do Alps and Alpine do to try to mitigate the effect on those who would trade the shares between now and then? Travis Lundy would still want to continue to be long both stocks.

(link to Travis' insight: Alpine Merger Situation Gets Interestinger)

Ntt Urban Development (8933 JP) (Mkt Cap: $4.9bn; Liquidity: $13mn)

Ntt (Nippon Telegraph & Telephone) (9432 JP) - which owns 67.3% of the real estate developer/leaser NTT Urban - announced (J) that it wanted to buy in the 27.7% it does not own through a Tender Offer to start October 16th and run 30 business days through November 27th.

• The price offered is ¥1680/share, which is a 29.8% premium to today's close (28.6% vs Friday), a 31.6% premium to the 1-month average, and 39.2% and 39.8% to the 3-month and 6-month averages to Friday. It is also a 5-year high price and other than a single day May 13th 2013 (just before the first 'Abenomics bubble' burst a week later) - where the shares closed at ¥1688 - the Tender Offer Price is at 10-year high.
• The deal is subject to a 'two-step' process whereby after a tender offer, NTT will seek to squeeze out minorities. If NTT gets to 90%, there will be a share cash-out demand by NTT to NTT Urban, who will then oblige remaining minorities to sell their shares. If at the end of the tender, NTT owns more than two-thirds of the shares outstanding but less than 90%, NTT will call for Urban to hold an EGM to vote on a consolidation (reverse share split) of shares where odd lots get cashed out.
• The trick here is that NTT already owns more than two-thirds so this is a fait accompli.

(link to Travis' insight: NTT (9432 JP) Buyout of NTT Urban (8933 JP). FINALLY)

Restaurant Brands Nz (RBD NZ) (Mkt Cap: $694mn; Liquidity: $1.5mn)

RBD announced the receipt of a non-binding indicative approach from Finaccess Capital, S.A. de C.V. (“Finaccess”) to acquire up to 75% of RBD’s shares by way of a partial takeover Offer at NZ$9.45/share, in cash. The proposal is pitched at a 24% premium to the undisturbed price and values RBD at NZ$1.18bn.

• Assessed on precedent partials of 70%+, shareholders who do not tender should be aware of the reduced liquidity and free float, should the Offer be successful. And possibly a (reduced) takeover offer at a later date, leading to delisting.
• If the Offer becomes binding, a lifetime high price with a 24% premium to last close is probably enough for the deal to get up. However, mindful of the reduction in liquidity, the potential delisting of the company, and a 16% premium to the most recent high of $8.15 (in June), management may hold out for a bump.

(link to my insight: Finaccess Serves A Partial Offer for Restaurant Brands)

Briefly ...

Investa Office Fund (IOF AU) announced it considered Oxford's binding $5.60/unit proposal to be superior to Blackstone's $5.52/unit offer. It appeared unlikely Blackstone would match or outbid Oxford and sure enough, Blackstone subsequently pulled out of the race. The Scheme meeting is expected to be held on the 6 December with expected implementation on the 24 December. (link to my insight: Oxford's Tilt For Investa Office Looks A Done Deal)

The Daeduck merger (Daeduck Electronics Co (008060 KS) and Daeduck GDS (004130 KS)) spread has risen to a 6+% level. With short selling balance/loaned stock balance ratio of 14.58%, which is substantially lower than the market average of 23.75%, borrowing shouldn't be difficult, according to Sanghyun Park. (link to Sanghyun's insight: Daeduck Merger Event Back in Action: Spread Is at a 5~6% Level)

Capio AB (CAPIO SS) (Mkt Cap: $909mn; Liquidity: $5.4mn)

The French Competition Authority has given the green light to Ramsay Generale De Sante (GDS FP)'s Offer for Capio. The outstanding condition to the Offer is for 75% (down from 90% initially) of Capio's shareholders to accept the Offer. Swedbank Robur, R12 Kapital and AP4, who collectively hold 24.7% of shares outstanding, are in favour of the Offer.

• The Offer is open and closes on the 25 October. Settlement is expected to commence on or around the 7 November. This is a done deal. Should RGdS obtain more than 90% of Capio, it will initiate a compulsory buy-out for remaining shares and promote the delisting of Capio.

(link to my insight: Ramsay Generale's Offer For Capio Is All Stitched Up)

H/A Share Spreads

Travis looked at recent changes in H-Share/A-Share spreads, Southbound flow and impact, and where the spreads are trading within their own historical ranges.

• Generically, H/A spreads are still trading just off their tightest levels in a year. Spreads which are closer to the wide end of their 52-week range include Citic Securities (H) (6030 HK), Sinopec Shanghai Petrochemical (338 HK), Shanghai Fosun Pharmaceutical (Group) (2196 HK), with the most dramatic being China Shipping Container H (2866 HK). The two biggest net Southbound flows this past week in HKD terms were both buys - Hsbc Holdings (5 HK) again leading the top inflows and Geely Automobile Holdings (175 HK) seeing even stronger inflows than last week, with 16% of Hong Kong volume covered by southbound net buying.

(link to Travis' insight: H/ A Share Spreads & Southbound Flows [Week to 19 Oct 2018])

Briefly ...

On 16 October 2018, a US Court overturned the order blocking Fujifilm Holdings (4901 JP)'s proposed transaction (announced on 31 January 2018) to combine Fuji Xerox and Xerox Corp (XRX US). Arun George believes that the biggest hurdle to overcome before reaching a deal is the valuation. Xerox is unlikely to agree to the terms of the January proposed transaction. Fujifilm's (previous ousted Xerox board) illustrative value of the proposed transaction to Xerox shareholders was around $44/share. This valuation was hopelessly optimistic. (link to Arun's insight: Fujifilm (4901 JP): Favourable Ruling but a Much Better Offer Required to Complete Xerox Transaction)

Ntt (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

NTT on a parent-ex-listco market cap basis is at the lowest percentage of NTT consolidated market cap in years - not quite Q4 2013 lows but not far off. NTT on a parent-ex-listco subs OP basis is just below the highest percentage vs consolidated OP that it has seen in 15yrs. That means NTT on a parent-ex-listco subs Price/OP ratio is as low as it has ever been. And on an EV/EBITDA basis is trading at 3.5x with a falling-costs-leads-to-rising-cashflow-creates-tailwind-and-virtuous-circle story ahead.

• And NTT probably still needs to buy back more shares from the market before buying stock back from the government again, and after it buys back stock from the government again, it would have to buy back another ¥600bn of shares before it could buy another tranche from the government after that.
• Travis is not necessarily bearish NTT Docomo, but he is bullish the NTT/Docomo ratio.

(link to Travis' insight: NTT Stub Vs MktCap Near 10yr Lows, Stub Earnings Vs Total Near 10yr High)

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

Curtis Lehnert suggests setting up a long JCNC stub position at current levels which are in excess of -2 Standard Deviations below the long-term average, while JCNC is trading at 20% discount to NAV. On a simple ratio (JCNC/ASII), it has never been lower. I thought JCNC looked cheap back in February, with no apparent news to exact a reduced stub valuation.

• Curtis discusses how the volatility of the core business performance at the parent level - car sales in Vietnam and Malaysia were weak, causing a large decline in Direct Motors segment performance in 2017 - was the major reason the discount to NAV widening through much of 2017.
• This trend seems to be reversing as 1H18 Direct Motors' underlying profit is +18% YoY driven by a rebound in Vietnam car sales and Honda motorcycle sales in Indonesia via Tunas Ridean. The Singapore C&C business and Other Strategic interests has been steady, posting moderate growth in underlying profit since 2016.

(link to Curtis' insight: TRADE IDEA - Jardine Cycle & Carriage (JCNC SP) Stub)

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, 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.