Last Week in Event SPACE: Takeda, Delta, Nikkei 225, First Pac, Renault, Hyundai Heavy, Benefit One,

Last Week in Event SPACE ...

• There is more trading opportunity in the Takeda Pharmaceutical (4502 JP) shares on timing and directionality than just taking the spread.
• With Delta Electronics Thai (DELTA TB) and Delta Electronics (2308 TT) inextricably intertwined, the remaining anti-trust approvals should be forthcoming.
• Some are blaming BOJ buying of ETFs for a squeeze on low-float Nikkei names since August 31. A group of studies suggests it is NOT the case the low-float names are outperforming without Familymart Uny Holdings (8028 JP), which appears to be subject to its own drivers, not least of which is its own low-float problem
• First Pacific Co (142 HK)'s unwarranted mid-week collapse after a broker downgrade.
• A right-sizing of each company's stake in each other would be more beneficial to Renault SA (RNO FP) than Nissan Motor (7201 JP).
• Hyundai Heavy Industries Holdings (267250 KS) looks "cheap" after Hyundai Oilbank Co Ltd (1082Z KS)'s IPO is approved.
• Expect more analyst coverage and more attention, and longer-term, expect some shrinkage of the Pasona Group (2168 JP)'s Holdco discount after Benefit One Inc (2412 JP)'s TOPIX inclusion.
• It was the wrong outcome for the right people and the right outcome for the wrong people, as PAG's Offer for Spring Real Estate Investment Trust (1426 HK) lapses.

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

Takeda Pharmaceutical (4502 JP) (Mkt Cap: $28.7bn; Liquidity: $242mn)

The fact that former long time Takeda CEO and former Chairman Kunio Takeda is not supportive of the Takeda/Shire deal is, strictly speaking, not new news. It just "feels" that way because it is now "official". The objection appears to be more "business-like" and not quite as "nationalistic" as the objections that Kazu Takeda has been offering in the past months.

• In order for the deal to be voted down at the Takeda Meeting, it would require that the June 2018 blocking vote be 3.5x the size that it was then. It means that, if the same number of shares vote, 29.6% of those who voted AGAINST the proposal to change the Articles of Incorporation would have to effectively change their mind and vote AGAINST the merger. That would be 142mm shares. It would require a significant push by active investors and individual investors against the prior pattern and the June objections to see this deal blocked.
• 142mm shares changing their mind is 20% of the register. There were something like 100mm shares borrowed as of the 19 October record date, while market sources now say closer to 160mm shares are borrowed. Somebody has bought the dip and bought the shares the arbitrageurs have shorted. Based on Takeda's confidence about the deal and the reaction Travis Lundy have seen to the TTBF commentary, meetings, etc, it is difficult to imagine that all of these buyers have spent $8bn or so in order to block a deal which does not, a priori, look like it would be blocked.
• Travis personally sees more opportunity in getting the timing right on buying Takeda than trying to capture the potential merger arb profit through Shire shares. He remains bullish on the prospects of the deal going through and bullish on the medium-long-term prospects for Takeda shares.
• Travis also thinks Index inclusion and borrow matter more than people think. Borrow cost is less important than availability. He also points out there are "tricks" in the indicative schedule, which is available in Takeda/Shire IV: Making Drug Deals.

(link to Travis' insight: Takeda/Shire V: Tradition vs the Next Generation, Former Chairman Doesn't Support But....)

Delta Electronics Thai (DELTA TB)(Mkt Cap: $2.6bn; Liquidity: $1.7mn)

On 1st August 2018, Delta Electronics ("DET") announced that Delta Electronics International (Singapore) (a wholly-owned subsidiary of Delta Electronics (2308 TT)) had made a conditional voluntary tender offer (CVTO) to acquire 100% of DELTA at Bt71/share, a 1.79% premium to last close (28% above its recent low), in a US$2.1bn deal. Delta currently holds 20.93% in DET.

• The CVTO is subject to pre-conditions, including merger control clearance from the US' FTC and DoJ, the EU and China's SAMR. These approvals are expected to be received within 6 months, or within two months from now. The European Commission's approval was granted on 24th October.
• DET was established in 1988 as a production base for Delta. The two companies remain close, from an intercompany business point of view, through to management and stakeholders. Secret squirrels abound on the shareholder registries, but my understanding is that the founding family owns ~42% of DET and is also the major shareholder of Delta. Because Delta and DET are intertwined - yet there are limited horizontal overlaps and vertical links - the remaining regulatory approvals should not pose a significant risk.

(link to my insight: China/US Trade War Spurs Delta To Buy Thai Associate)

Eclipx (ECX AU) (Mkt Cap: $586mn; Liquidity: $4mn)

On the 8th November Mcmillan Shakespeare (MMS AU) and Eclipx agreed to merge pursuant to a Scheme Implementation Agreement, wherein Eclipx shareholders will receive 0.1414 MMS shares plus A$0.46 cash for each Eclipx share, or $2.85/share based on the (then) closing price of MMS on the 7 November, or a 33.2% premium to Eclipx’s undisturbed share price. MMS' share price has since declined 16%, equating to a consideration for its scrip/cash deal of $2.46, or ~14% below the initial indicative offer price. To put that in context, Sg Fleet (SGF AU)'s rejected cash/scrip Offer in August currently equates to $2.43/share.

• The rumour mill suggests SGF is piecing together an equity raising to shore up funding to reload an offer for ECX. SGF's prior proposal already had a game plan for the $2.00/share cash portion, which may well have involved a one for two (or three) rights issue, which could have raised one-third (or more) of the deal value. That game plan now requires an extra boost. A higher cash component will likely win out here, plus the lower dilution - in terms of the scrip issuance to ECX - should help mitigate some of SGF's downside, should it reload.
• ECX is trading through MMS' terms by 1.5% (0.3% when incorporating dividends) and SGF's prior proposal by 2.7% (using SGF's current price). I would look to enter around these levels. Either MMS sweetens terms and/or SGF returns to the well with a superior offer.

(link to my insight: Expect SG Fleet To Revisit Eclipx As Mcmillan Falls)

Hyosung Corporation (004800 KS) (Mkt Cap: $559mn; Liquidity: $8mn)

Hyosung Corp, also referred to as Hyosung Holdings, previously announced a four-way tender offer for four of its subsidiaries: HyosungTNC Co Ltd (298020 KS), Hyosung Heavy Industries Corp (298040 KS), Hyosung Advanced Materials C (298050 KS) and Hyosung Chemical Corp (298000 KS).

• This is for completing Hyosung's holding company conversion after the demerger. Tendering will begin from Nov 28 and run until Dec 17. New Holdings shares will be listed on Jan 4 next year. All swap prices are now fixed.
• Heavy, which is pegged to the Holdco price, has not been gaining as much, providing a small arb spread of ~3.81%.

links to Sanghyun Park 's insights:
Hyosung Tender Arb Trade: Spread at 3.81% & Proration Risk Still Seems Low
Hyosung Tender Offer: Arb Trading Status

Nikkei 225

There have been suggestions the high weight Nikkei 225 names, or high weight-low float names were getting squeezed by BOJ buying or by a short squeeze on the short basket which had been proposed by a number of sellside brokers after the BOJ dropped its Nikkei 225 buying.

• Since the end of August, indeed the Top 50 Nikkei 225 weighted names (as of 31 August) as an average-weighted basket have outperformed the Bottom 50. That is "proof" at least one high-weight basket has outperformed. However, without Familymart Uny Holdings (8028 JP), the outperformance is ~50bp.
• The Top 10-weighted Nikkei 225 names have UNDER-performed the Bottom 10 in that same period, by ~4%. The Top 20 ex-FamilyMart have UNDER-performed the Bottom 20 by 2.9% since 31 August.
• Travis developed a new Proposed Nikkei 225 Average Methodology in February called the Minimum Deemed Shares Outstanding Nikkei 225. That proposed lowering the weight of low-float names, which would automatically lift the weight of many others. Since 31 August the top 50 low float "reduction names" have UNDER-performed the top 50 upweight names by 5.8% on average. That is despite FamilyMart's impressive performance adding 1.4% to the total.
• WHAT IT MEANS: FamilyMart and to some extent Fast Retailing have driven performance of low-float Nikkei 225 baskets vs others. A basket of low-float names has in fact largely UNDER-performed.
• WHAT IT ALSO MEANS: FamilyMart is being driven by something else, which in particular looks like a technically-driven short squeeze (lack of float, significant holdings and flow driven by systematic momentum funds). Subsequent price action suggests such.

(link to Travis' insight: Is It a Nikkei BOJ Squeeze on Nikkei 225 Low Float Names? Or Just FamilyMart Being FamilyMart? and The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?

Briefly ...

Samsung Electronics (005930 KS) announced it will cancel all of the remaining treasury shares. This represents 7% of total common and 8.94% of total pref. Sanghyun would close the current long/short position, and recommend a short common/long pref.

(link to Sanghyun's insight: Samsung Electronics Share Class Trade: Share Cancellation Reverses the Tide)

First Pacific Co (142 HK) (Mkt Cap: $1.6mn; Liquidity: $3mn)

First Pac declined 11% on Wednesday, ostensibly on the back of a downgrade from one broker - only two appear to cover the company. The discount to NAV of 58% compares to the one-year average of ~50% and the ten-year average of ~48%, and is around an eight and a half year low.

• That downgrade was largely premised on a weaker peso and rupiah, and a target price change to one listco. There were no negative comments specific to the stub ops. In the 1H18, stub/unlisted investments (FPW, FPM, FP Natural) recorded a 8.6% increase yoy in the first half of 2018; while expenses at the head office reduced by ~16%.
• There is a modicum of correlation between the NAV discount and the movement in the rupiah, and perhaps the peso, but nothing obvious to draw a strong conclusion. I cannot pinpoint a specific catalyst at the stub level. If indeed the downgrade is premised on weakening emerging market currencies, that would suggest that conclusion is largely invalidated as the opposite is occurring. Plus First Pac is currently offering an attractive 4%+ yield.

(link to my insight: StubWorld: First Pac Craters on Downgrade; Great Eagle at Extreme Levels)

Hyundai Heavy Industries Holdings (267250 KS)(Mkt Cap: $5.7bn; Liquidity: $13mn)

Hyundai Oilbank Co Ltd (1082Z KS)'s IPO has received approved by the FSC and the IPO book is expected to be submitted around mid-Dec with an aim of completing the IPO by the end of Jan.

• The local street consensus assigns a value of ₩10tril for Oilbank, >70% of HHIH's GAV. At an Oilbank value of ₩10tril, HHIH is at a ~44% discount to NAV and ~55% to GAV. And HHIH's dividend payout/yield of +70%/+5%, are above Korean Holdco averages. Sanghyun would recommend simply going long HHIH.

(link to Sanghyun's insight: Hyundai Heavy Holdco Trade: Long Holdco on 6% Potential Yield Amid Oilbank IPO)

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Following Ghosn's ignominious exit, the most likely scenario, as detailed by Travis Lundy (here), is a right-sizing of each company's stake in each other. SC Capital believe this could very likely involve Nissan raising its stake in Renault from 15% to 25%, while Renault reduces its stake from 43% to 25%, allowing both car makers to have equal stakes in each other. Such an event may be more favorable to Renault shareholders.

• Nissan has generated 82% of the cumulative net profits generated by The Alliance over the past 5 years and arguably deserves a larger stake in the Alliance. By raising its stake in Renault from 15% to 25%, Nissan would be able to eliminate Renault's voting rights under Japanese Corporate laws.
• Renault would generate ~$6.6bn from selling down its stake from 43% to 25%, boosting net cash by ~200%, lowering the EV/EBITDA multiple significantly, but net profit would decline by roughly 16%.
• Renault would be deleveraging Nissan at the peak of the demand cycle, while Nissan is increasing exposure to Renault's risky emerging market exposure. Nissan would in practice be shelling out roughly $2.1bn to have a greater say in things with little impact on earnings, while Renault would collect ~$6.6bn (33% of its market cap) in cash at the peak of the cycle without relinquishing any benefits from future synergies.

(link to SC Capital's insight: Nissan Motor--What Happens if Nissan & Renault Both Owned 25% Stakes in Each Other?)

NTT (Nippon Telegraph & Telephone) (9432 JP) (Mkt Cap: $78bn; Liquidity: $171mn)

After NTT's strong rally, narrowing the NAV discount to ~19% from ~26%, Curtis Lehnert recommended closing out the set-up trade. There was no fundamental change in the stub, but purely market mispricing due to a shock rate cut announcement.

(link to Curtis' insight: NTT (9432 JP) Stub: The Catalyst Has Come, Close the Trade)

Softbank Group (9984 JP) (Mkt Cap: $91bn; Liquidity: $747mn)

A popular narrative seems to be that the upcoming Softbank Corp (9434 JP) IPO (the price was announced on 30 November - ¥1,500 as expected - followed by the final price on 10 December) should narrow Softbank's discount. The logic is that with the listing of SoftBank Corp, investors should be able to determine the underlying value of SoftBank (on a NAV basis) with more precision.

• However, Arun George disagrees and contends that the SoftBank Corp IPO is unlikely to meaningfully narrow SoftBank’s current discount. His base-case SoftBank NAV is ¥15tn, implying a theoretical 35% upside to the current market cap. But on the assumption that the “right” conglomerate discount for SoftBank is 30%, a SoftBank Corp IPO at ¥1,500/share implies a modest 5% upside.

(link to Arun's insight: SoftBank Group (9984 JP): Don't Hold Your Breath on SoftBank Corp IPO Closing the Holdco Discount)

Great Eagle Holdings (41 HK) (Mkt Cap: $2.8bn; Liquidity: $1mn)

Not a memorable month for GE, down 11.2%, a 19% swing vs. the HSI, while Champion REIT (2778 HK) and Langham Hospitality Inv Ss (1270 HK), which together comprise 110% of GE's market cap, are flat to positive on the month. GE's discount to NAV of ~55% vs the one-year average of ~46%, is an extreme outlier.

• Stub assets include investment property (primarily comprising the Great Eagle Centre [company headquarters]), hotels (eleven hotels across Europe, North America, Australia/NZ & China) and property development projects (located in China, Hong Kong, Japan and the States). I cannot find any specific news to suggest or indicate a material change in the value of any of these stub segments. The diversification alone should help limit any material downside.
• From a pure implied stub perspective (41 HK - (5.5072 x 2778 HK) - (1.863 x 1270 HK)), the current level is around the lowest since LHI was listed in 2013.

(link to my insight: StubWorld: First Pac Craters on Downgrade; Great Eagle at Extreme Levels)

Briefly ...

SK Telecom (017670 KS) and SK Innovation (096770 KS) each comprise about 24% of SK Holdings (034730 KS)'s GAV. SK Holdings' own operating assets (including IT services - formerly SK C&C) account for nearly 30% of GAV. Among the unlisted holdings, SK E&S is the largest at 10% of GAV. The discount to NAV is ~6% discount, a level Sanghyun does not consider 'undervalued'.

(link to Sanghyun's insight: SK Holdco Trade: Initiate Long Position on Higher Dividends)

Benefit One Inc (2412 JP) (Mkt Cap: $2.4bn; Liquidity: $7mn)

On 21 November, the TSE announced that it was reassigning then TSE2-listed Benefit One to the TSE's First Section and the company confirmed the news. Exactly 3 months prior to that, the company had announced that it had applied to the TSE for such reassignment. This was after a May 7th announcement accompanying its FY2017 results that it planned to apply for such reassignment. If the company enters TSE 1 in November an inclusion event can be expected at the end of December 2018 (the close of the 27th).

• The index inclusion is about US$120-145mm based on the last traded price, depending on how many shares the TSE decides are actually float. The inclusion event is likely to be 4.5mm shares ±300,000 shares. That is ¥14bn ±¥1bn, at the close of November 27th.
• The existing holder's list is full of people who seem to Travis to be the type who might stay in the stock even if it is TSE1. They are growth fund managers. For that Travis thinks the practical float is lower than the measured float.
• The stock is the expensive "half" of a Holdco trade which is currently at its cheapest level. The holdco trade means two things. There will be people looking to short Benefit One as it goes up, and they will buy Pasona Group (2168 JP), and once the stock gets into TOPIX, there will be a lot more borrow available. Near-term, Travis expect the stock to do well during the inclusion event.

(link to Travis' insight: Benefit One (2412 JP) : Big TSE1 Move and TOPIX Inclusion)

Infocom Corp (4348 JP) (Mkt Cap: $1.1bn; Liquidity: $5mn)

On November 21st, Infocom announced (J-only) that the TSE had approved its application to move from JASDAQ to the First Section of the TSE as of the 28th of November 2018. If the company enters TSE 1 in November an inclusion event can be expected at the end of December 2018 (the close of the 27th).

• This is a reasonably large (& well-flagged) TOPIX inclusion. It will see buying of $60mm+ based on the current price.
• There is about 7-12 days of ADV to buy, and Travis expects that the first few days' worth of "loose hands" can be cleared quickly or already has been cleared. The day after the TSE1 transfer day was up on lower volume. There has been no profit-taking.
• Momentum has been fabulous (9 straight up months). When the momentum stops, this could get hit. For the moment though, Travis thinks there is still more squeeze upwards left in it.

(link to Travis' insight: Infocom (4348 JP) TOPIX Inclusion - Larger Than You Think)

• Spring Real Estate Investment Trust (1426 HK). PAG fell short in its tilt for Spring, securing 41.5% of shares out, including self-owned shares. Shares tendered will be returned within 10 days - on or before the 10 Dec. For minority shareholders, this is not a great outcome and clearly, there were considerably more "connected" parties to the Manager who opted not to tender. I'd be very interested to hear the IFA, and the Manager's response, to the fact the shares are now trading at a 34% discount to the Offer price, a price that was not considered fair and reasonable.

• Sinotrans Shipping (368 HK). 3.07% of shares out have mysteriously moved outside of CCASS recently. Sinotrans is HK incorporated so this is not headcount related like the infamous PCCW case back in 2009. It may be some Offeror led initiative. It could be the Offeror's shares being taken outside of CCASS so they cannot be short sold, although a shareholder should be able to tell its broker not to lend out shares. Either way, the market is getting antsy on this deal. A blocking stake at the Scheme meeting on the 13 December is 3.13%. Shares closed Friday at $2.55, the lowest level since the offer was announced.

• Qantm Intellectual Property (QIP AU) rejects Iph Ltd (IPH AU)'s conditional offer and recommends merging with Xenith Ip (XIP AU).

• Intu Properties (INTU LN). Citing "uncertainty around current macroeconomic conditions” - or Brexit concerns if various media reports (& intu itself) are to be believed - Brookfield abandoned its takeover bid. In April, Hammerson also abandoned a £3.4bn. A 9% decline in the property valuation in the first nine months of 2018 clearly did not help.

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.