Last Week in Event SPACE: Takeda, Graincorp, Alps, Hopewell, Renesas, Toshiba, Red Hat, Renault

Last Week in Event SPACE ...

• Takeda Pharmaceutical (4502 JP) is a significantly interesting trade still, but there are path, borrow, settlement, index provider, and TSE transparency risks.
• With a "well progressed" portfolio revamp, LTAP may need to sweeten its offer to persuade Graincorp Ltd A (GNC AU)'s board.
• A crime of stewardship for everyone involved - EXCEPT for Alps Electric (6770 JP) - after Alpine Electronics (6816 JP) shareholders approved the merger between the two.
• The Offer for Hopewell Holdings (54 HK) feels like a dangerous trade.
• Once inventory adjustments are complete, investors should become significantly more comfortable reassessing Renesas Electronics (6723 JP) on the long side.
• There may be a dip to buy in Toshiba Corp (6502 JP), but it's lower than here.
• Buying/holding Red Hat Inc (RHT US) at current levels is still recommended, but investors must be willing to live with the volatility an extended antitrust review will bring.
• Visceral anger on the part of Nissan Motor (7201 JP)'s management likely played a major role in the ousting of Ghosn.

(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: $27bn; Liquidity: $276mn)

On December 5th, Takeda shareholders approved the agenda items required to approve and complete the Scheme with Shire PLC (SHP LN). Shire shareholders followed suit in London time.

• The expected plan for the index inclusion events may create a squeeze. MSCI and FTSE should include Takeda on January 4th at the close, Tokyo time. TOPIX and JPX Nikkei 400 index treatment is still up in the air. We do not know when it will be included (or even announced). "Normal" expectations would be for January 9th. That would create a squeeze too.

Your Shire shares may not be long-sellable until January 10th though Travis mentions in the Discussion Posts (it is often worthwhile checking the Discussion Posts of insights you have liked and read (if you "Appreciate" the insight, the fact that someone comments will show up in your notifications (the bell icon at the upper right))) that the "risk" to the idea that the New Takeda Shares may not be long-sellable until the 10th is that the TSE will want the brokers to take care of everything. The TSE doesn't want to be "responsible" for making sure there are no settlement problems - that is a broker's problem. So if the broker tells you that you can sell it, then you can sell it. Even if they cannot absolutely guarantee that your trade will settle correctly.

• No matter when the Takeda inclusion, there is a big funding sell trade. At the current Takeda price, there is $6.5bn of MSCI Japan, FTSE Japan, TOPIX, and similar to sell on their respective Takeda inclusion dates. Every dollar needed to buy the Takeda upweight in an index comes from selling something else.
• There is something of an "air pocket" for arb between 28 December and 4 January because there is no trading in Japan between the close of the 28th and the open of January 4th. Depending on your position, there are a couple of ways of dealing with this, and ways to think about the trading of Takeda and Shire before the Shire deletion, after, and then following the New Takeda Share listing.

(link to Travis Lundy 's insight: Takeda/Shire VI: Now For The Real Fun)

Graincorp Ltd A (GNC AU) (Mkt Cap: $1.5bn; Liquidity: $6mn)

Almost five years to the day since then-treasurer Joe Hockey shot down Archer Daniels Midland Co (ADM US)'s $12.20/share Offer ($13.20/share including dividends), Aussie bulk-grain handler GrainCorp is back in the spotlight after it announced a non-binding, indicative proposal from Long-Term Asset Partners Pty Ltd (“LTAP”), via a scheme, for a cash consideration of A$10.42/share, a 43% premium to GrainCorp’s undisturbed and around a five-year high.

• Management generally has a suitable read as to a company's fair value, and simultaneously announced its portfolio review is "well progressed". By not having "formed a view on whether the price offered ... is at a level which it is prepared to recommend to shareholders", it probably indicates the headline number offered by LTAP is close, but may need a nudge to get management on board.
• Time is really on GNC's side here. The review allows others the time to think about what they want to do. And the portfolio revamp is precisely because the market is not giving credit or value to what is there now, and the company wants more.
• How much of a bump? Goldman + Westbourne are providing upwards of $3.6bn to LTAP. With net debt of A$930mn, this feasibly provides a maximum market cap of $2.67bn or $11.69/share, ~12% above the current indicative price. Coincidentally, ADM's accepted offer was ~12% above its initial proposal.
• Potential competing suitors include Perth-based CBH Group - which would have its eye on the east coast grain ops - Bunge Ltd (BG US), Cargill, or even the return of ADM.

(link to my insight: Graincorp Redux: LTAP's Offer May Necessitate A Bump)

Alps Electric (6770 JP) (Mkt Cap: $4.4bn; Liquidity: $65mn)

Alpine Electronics (6816 JP) shareholders approved the merger with Alps. One cannot help but despair at the state of corporate governance at both Alps and Alpine. This deal was wrong at the outset. There has been bad arithmetic, bad corporate finance understanding, a lack of understanding of the fairness of pricing in future contribution of benefits, and Alpine directors in particular have shown zero understanding of the value of their assets. This after Alpine effectively proposed to shareholders a week-plus ago that the fair price of their shares was 50% higher than the highest close in the last month - at ¥2,895/share or 4.4x EV/EBITDA. If that is the valuation methodology investors are happy to accept for their investments in companies, one wonders why they would buy stocks. Or even show up to work...

• Putting all that to one side, Alps is a buy here. They have just de-levered themselves somewhat, and have promised to buy some shares. That will get them some benefit, and some benefit of doubt while questions about the future competitiveness of their actuator and components/parts business (or worse, their erstwhile actuator and parts customers' business) remain.

• Assuming the synergy promises are in any way likely, the pro-forma EBITDA just on existing business in 2-3yrs looks like there is substantial growth available which could offset any existing business weakness.
• Longer-term, Alps is probably still just an Apple play with a car audioinfotainment business on the side unless the future HMI/CASE business is more promising than the existing Alpine business (in which case the deal done is even worse than most complaints about it).
• The fall in Alps and Alpine shares after the vote is probably due to investors who need to flatten their risk hedging out Alpine with Alps.

(link to Travis' insight: Alps/Alpine: And... That's A Wrap)

Red Hat Inc (RHT US) (Mkt Cap: $31bn; Liquidity: $478mn)

Red Hat filed its Form PREM14A preliminary merger proxy statement with the SEC for the purpose of calling a shareholder meeting to vote on items related to the company’s acquisition by IBM for $190/share in cash. The proxy is on track to be cleared as early as mid-December with no SEC review, or more likely, during January with an SEC review. A shareholder meeting to approve the merger seems likely in February, and John DeMasi expects shareholders to overwhelmingly approve the deal.

• The deal price of $190 per share appears fair, coming in above all value ranges in DCF analyses, values implied by comp trading multiples, and Wall Street equity research price targets. It also sits in the upper end of the range of comparable M&A EV/Revenue multiples for RHT’s 2020 base case forecast.
• The U.S. HSR waiting period expires on December 21^st, so we’ll know in a few weeks whether the FTC/DoJ issues a second request, which would slow the timing considerably. Similarly, the EU competition filing, which hasn’t been made yet, will take 25 to 35 working days before it is known whether the deal goes into a Phase II review.
• Red Hat’s repeated attempts to have a regulatory termination fee included in the merger agreement, along with IBM CEO Ginni Rometty’s threat to shut talks down if Red Hat pushed the issue, makes John a little more bearish about the prospects for quick regulatory reviews with no second request/Phase II.
• While returns are still fairly attractive at the current price level, the prospect of a closing centered around Q2/3 2019 seems more likely. This high single/low double digits annualized rate of return is still attractive, just not as attractive now that the perception of antitrust risk may have gone up a notch.

(link to John's insight: Red Hat (RHT US) Files Preliminary Merger Proxy for Its Acquisition by IBM (IBM US))

Hopewell Holdings (54 HK) (Mkt Cap: $3.7bn; Liquidity: $3mn)

Hopewell announced a privatisation offer by way of a Scheme, at $38.80/share, a 46.7% premium to last close. The Offer Price is final. The Wu family and connected parties (the Offeror) control or beneficially own 350.97mn shares or ~40.41% of shares outstanding, therefore disinterested shares total 59.59%, which implies a blocking stake is ~5.96% of shares out, or US$222mn if using the last closing price. Southeastern Asset Management holds 6.99% of shares out.

• $38.80 backs out a 36% discount to NAV, or ~41% discount if including the "hidden value" as discussed on page 8 of the 2018/2019 interim report. Optically, that's probably enough to get it over the line - it is 11% above the highest closing price in the past ten years - but not exactly a knockout when compared to Hong Kong-listed precedent property transactions.
• The average discount to NAV for Hong Kong-listed property companies (primarily PRC property plays) subject to privatisation in the past 10 years is ~27%. The average successful privatisation discount is 22%; while the closest comparable transaction that I can find was the privatisation of Wheelock Properties (49 HK) - a (mainly) Hong Kong investment property play, similar to Hopewell - by Wheelock & (20 HK) in 2010, which was completed at a 12.1% discount to NAV (& a 143.9% premium to last close).
• Trading at $33.50 - after an unsettling 3% decline on Friday - or a gross/annualised (4 months) spread of ~16%/56%. This is a high-risk trade.

links to my insights:
Hopewell: A Compelling Offer, But Compelling Enough?.
Hopewell Holdings To Be Privatised.

Toshiba Corp (6502 JP) (Mkt Cap: $18.5bn; Liquidity: $104mn)

Toshiba has bought back ¥257.7bn of shares through end-November., or ¥15bn or 4mm shares worth on-market after the third ToSTNeT-3 purchase. Assuming the company limits themselves to 25% (so as to not be seen to be manipulating) of the long-term average of volume of say 2mm shares a day, that would mean they could buy another 67.5mm shares by end-June 2019 which would be - assuming a gentle rate of appreciation of 20% per annum - another ¥250bn between now and then. That would get them done just over ¥500bn of the ¥700bn in the buyback plan. Presumably, the company will reload next shareholder year to complete the ¥700bn.

• Travis continues to think that the foreseeable future of trading opportunities around the Toshiba Next Plan and its execution are idiosyncratic, and that the strong results of the past 12-18 months enjoyed by many funds will not be as easily attainable over the next 12-18 months. For that he thinks the reward/risk ratio of holding the shares is lower than it was.
• There are a LOT of foreign holders who hold this because of the event, the buyback, the perceived squeeze. Many have deemed themselves "strong hands", but eventually, strong hands become weaker hands and it is not clear who the marginal buyer is. For the moment, it is the company but once the company is done buying, foreign active holders will still hold a LOT of the company.

(link to Travis' insight: Toshiba Buyback Update - Not Banging Down Doors To Get Stock Yet)

Renesas Electronics (6723 JP) (Mkt Cap: $8bn; Liquidity: $45mn)

Renesas got a boost after a positive interview with its CEO Bunsei Kure was published in the Nikkei, directly suggesting that the share price seemed cheap relative to competitors, illustrated the positives for Renesas, and also hinted at his understanding of international M&A.

• Renesas' competitive dynamic leads LightStream Research to be positive on the IDT acquisition despite its expense. While the timing of the acquisition could be questioned, the strategic balance is such that losing out on the acquisition could have had a far more negative impact on long-term shareholder value than an expensive acquisition.
• Once Renesas changes its reporting to IFRS (the tanshin for 2018 will be on JPGAAP but the Yuho will be presented on an IFRS basis) about ¥20.8bn in amortisation costs from the Intersil acquisition are likely to be removed from the P&L.
• Adjusting for this and the IDT acquisition puts consensus EPS at about ¥68 for 2019 which would put Renesas on just 8.9x PE. For comparison ST Microelectronics is at 10.8x, NXP is at 9.6x and Infineon is at 16.2x.
• Lightstream argues the recent stock move, while possibly retail-driven, is an indicator of the oversold nature of the stock and that the change in accounting, while not representing a change in business conditions, should help illustrate the cheapness of the stock.

(link to Lightstream's insight: Renesas: Surges 10% on Positive Nikkei Interview with CEO Suggests Solid M&A Knowhow)

Ito En Ltd (2593 JP) (Mkt Cap: $4.8bn; Liquidity: $9mn)

Ito En announced Q2 results in the year to end-April 2019, marking revenues 3.6% higher year-on-year, but OP down 8.9% yoy at ¥13.2bn, and NP down 5.9% at ¥8.69bn; and also announced a buyback of the Class 1 Prefs - buying up to 400,000 shares and spending up to ¥1bn to do so, between December 6th 2018, and February 22nd, 2019, inclusive.

• One can expect this buyback will follow the pattern of other buybacks of the Itoen Pref. That suggests on-market and 25-30% of volume traded. The last few buybacks have not had a significant impact. This should not have a huge impact either. It should tighten the spread, but it requires that current holders be willing to sell into excess volume if they are looking for the liquidity.
• If Travis were obliged to hold ItoEn, he'd rather hold the prefs. Historical analysis has shown that the spread contracts when the common shares fall. Unfortunately, the prefs are effectively orphaned and illiquid. It would be a great idea for ItoEn to buy back all the prefs at a huge discount. It would be good financially and good in terms of governance. Butr he has seen nothing from the company which would suggest they will do the right thing.
• For those who trade in relatively small size, there could be a trade to buy now against ItoEn and hope for a tightening of the spread for a few percent, with an exit trade several weeks and a few percent tighter from now. It is not that large or exciting an opportunity in reality.

(link to Travis' insight: Ito-En Prefs (25935 JP): A New Buyback Much Like the Last Few)

Shanghai/Shenzhen Connect

Ke Yan, CFA, FRM discussed the flow of northbound trades via the Shanghai Stock Connect as well as Shenzhen Stock Connect.

• In the large-cap space (>USD5bn market cap), in the past one week, northbound money has gone into buying Qingdao Haier Co Ltd A (600690 CH), China Int'L Travel Service (601888 CH) and Aier Eye Hospital Group (300015 CH); while there has been selling in Jiangsu Yanghe Brewery A (002304 CH),CSC Financial Co Ltd (601066 CH) and Zhejiang Dahua Technology A (002236 CH).
• The top three stocks owned via stock connect in the large-cap space are Founder Securities Co Ltd A (601901 CH) which has 68% of its free float owned by northbound investors, Shanghai International Airport Co, Ltd. (600009 CH) which has 65% of its free float owned by northbound investors, and China Int'L Travel Service (601888 CH).

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

In an actionable thinkpiece, Travis summarised the recent events surrounding the ousting of Carlos Ghosn, and what were the likely triggers. The simple takeaway is that the French state remains the biggest potential wrench in the works.

• If the French state owns 15% of Renault, and deliberately keeps Nissan's 15% stake non-voting, that is tantamount to interference. If Renault owns 43% of Nissan and wants to control it, and wants to make sure that Nissan does not exercise its own judgment to defend itself via the capital markets, it seeks not partnership but dominance. That will not fly well going forward.
• For Travis, the BEST solution is Nissan buys up to 24.9% (once it got over 25% of the vote, Renault's votes in Nissan would become invalid) and Renault lowers its stake in Nissan to below 33.4%. This is quite similar to what SC Capital proposed in Nissan Motor--What Happens if Nissan & Renault Both Owned 25% Stakes in Each Other?
• The best trade here is probably still to be long Renault for a short-term trade, expecting to see the possibility someone comes in to buy a large block of Renault above market. Since first recommended at €59 several trading days ago, at time of writing Renault was up ~6%, Nissan similar, and Peugeot is unchanged. While uninclined to trade the Renault/Nissan ratio, if obliged, Travis would be long Renault short Nissan, but he is more inclined to be long Renault outright.

(link to Travis' insight: Nissan/Renault: French State Intervention)

First Pacific Co (142 HK) (Mkt Cap: $1.6bn; Liquidity: $2.9mn)

Following my insight StubWorld: First Pac Craters on Downgrade; Great Eagle at Extreme Levels the prior week, Curtis Lehnert similarly tackled First Pac's wide discount to NAV. Curtis backs out a NAV 12% below mine after making adjustments to the NAV numbers (which I used) lifted from First Pac's 1H18 presentation. He likes the stub business and does not see the recent selloff as justified given the increasingly strong performance at the unlisted businesses. Previously the CEO stated an intention to dispose non-core assets as a means to reducing the discount to NAV; while reducing net debt by a third.

(link to Curtis' insight: TRADE IDEA - First Pacific Stub (142 HK): Taming the Beast)

BGF Co Ltd (027410 KS) (Mkt Cap: $679mn; Liquidity: $1.6mn)

Sanghyun discussed BGF's simple holding structure, wherein its 30% stake in BGF Retail (282330 KS) accounts for 70% of NAV and 80% of total holdings assets. Stub assets comprise South Springs, a golf resort, one of the largest in Korea; an in-house ad agency; and Hello Nature, a fresh food delivery startup. The NAV discount is ~46%, higher than the local industry average, while a simple price ratio is around its lowest inside a year. Liquidity is an issue though.

(link to Sanghyun's insight: BGF Holdco Trade: Time to Stub Trade, Below -1 σ Wouldn't Last Long as It Used To)

HDC Holdings (012630 KS) (Mkt Cap: $862mn; Liquidity: $10mn)

Sanghyun also tackled the HDC holdco, wherein the simple price ratio - parent/sub - is around a one-year low. It's a weak-ish stub, with the 32.99% stake in HDC Engineering & Construction (294870 KS) accounting for ~33% of NAV. Other listed holding add to 8.36%, therefore, unlisted ops - a big chunk comes from brand royalty - account for 58%.

(link to Sanghyun's insight: HDC Holdings Holdco Trade: Long Holdco/Short Opco as Owner Buying Should Be Over)

Nexen Corp (005720 KS) (Mkt Cap: $266mn; Liquidity: $0.1mn)

Nexen Corp is trading "cheap" to 43.2%-held Nexen Tire Corp (002350 KS) after the latter's share price received a boost after securing a tire supply contract for Volkswagen Jetta. Nexen Tire accounts for 75% of Nexen's NAV. Liquidity is an issue. But borrow on Tire wouldn't be a challenge.

(link to Sanghyun's insight: Nexen Holdco Trade: Opportunity of Stub Trade Has Come)

• Trade Me (TME NZ). On 5 December 2018, Hellman & Friedman bid NZ$6.45/share trumping Apax Partners' earlier NZ$6.40/share tilt. That marginal bump would indicate we are approaching full value, a conclusion reached by Arun George in his note Trade Me (TMZ NZ): A Bidding War Unlikely to Result in a Material Bump.
• Cityneon Holdings (CITN SP). West Knighton has, through acceptances or otherwise, succeeded in owning, controlling or agreeing to acquire more than 90% issued shares (93.28%) of Cityneon. Therefore, the free float requirement is not satisfied. This does not (yet) entitle West Knighton to compulsorily acquire shares. However, this does enable the company to take steps towards delisting Cityneon at the close of the Offer. The Offer will remain open for acceptance until the 12 December 2018 or such later date(s) as may be announced.
• Propertylink Group (PLG AU). PLG's directors have just announced that they have accepted ESR's offer of an off-market takeover at A$1.20/share. The offer will remain open until 31 January 2019.

• Mitula (MUA AU) will see its vote done tomorrow. The minimum terms are A$0.80. The scrip terms are worth more like A$0.85 with the first 9 days of the 10-day vwap period averaging more like 0.888 as far as I can tell. The stock was trading A$0.76 and closed Friday there. It may be illiquid but the 10-day VWAP is that much higher. As a post-Friday close update, Mitula confirmed Friday that the cash top-up offer was not applicable as the shares

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.