Last Week in Event SPACE - Toc, Interflex, Dialog, Uniper, Samsung Heavy

Last week, Toc Co Ltd (8841 JP) appears all stitched up after a bigly buy-back; arbitragers and/or a defect incident send Interflex Co Ltd (051370 KS)'s shares crashing; investors may have been too hasty dumping Dialog Semiconductor Plc (DLG GY) after the Apple Inc (AAPL US) supply cut; arguing the case for Fortum OYJ (FUM1V FH) to bump its offer for Uniper SE (UN01 GR); and what's the deal with Samsung Heavy Industries (010140 KS)'s massive rights issue?

Events

Toc Co Ltd (8841 JP)(Mkt Cap: $1.2bn; Liquidity: $1.2mn)

Toc, a real estate company, fitness club impresario, and operator of laundry and linen supply, announced it will buy back up to 20mn shares (@ ¥920/share) – or ¥18.4bn, whichever comes first. This compares to Toc’s market cap of ~¥108bn and is 16.38% of the 122.08mn shares outstanding (ex-treasury shares). So it’s a big deal.

• The buyback is largely funded by the sale earlier this year of its Minato Mirai property for ¥66.5bn, generating a one-time net profit of ¥20bn.
• Effissimo is selling its 18% voting stake in the company. Mizuho, along with a few other banks, are also selling. So someone is not going to be able to sell all the shares they want to.
• After the buy-back, ex-treasury shares, the family will hold a minimum of just under 50%, and cross-holders another 29%. That gets "family & friends" to 77% of voting rights, which is a clear super-majority. And at 1x BVPS. That makes the company ripe for a friendly takeover or MBO, according to Travis Lundy.

(link to Travis' insight: TOC’s (8841 JP) BIGLY Buyback)

Samsung Heavy Industries (010140 KS) (Mkt Cap: $2.7bn; Liquidity: $43.8mn)

Without proffering much information, Heavy announced it would raise a total of ₩1.5tril through a rights offering in an effort to improve its financial soundness. The rights offering should complete by May next year.

• Why now and in such size? Shortly after the rights announcement, Heavy said in a separate regulatory filing today that it would have an operating loss of about ₩490bn this year and a further loss of about ₩240bn next year. This reflects potential (or hidden) losses from projects according to Sanghyun Park.
• However, the ₩1.5tn rights still looks excessive. Sanghyun has his theories – it MAY be related to Lee Jae-yong's ongoing trial - which suggests the actual situation may not be as bad as it appears. That is, we may have some interesting trade opportunities.

(link to Sanghyun's insight: Summary of Samsung Heavy’s Projected Earnings Adjustment & Rights Offering)

M&A

Dialog Semiconductor Plc (DLG GY) (Mkt Cap: $2.1bn; Liquidity: $34.7mn)

Dialog confirmed an earlier Nikkei article (and discussed in Andrew Lu’s insight Nikkei Said Apple Cuts Dialog on Power ICs Supply; We Highlighted This in May and More to Come) that Apple could potentially design in-house power management IC for iPhones in a few years. But there would no risk to existing supply deals in 2018. Taking advantage of Dialog’s share price decline – having shed a third in value since that Nikkei report - Tsinghua Unigroup bumped its take to 7.15%.

• Andrew views Dialog as the next Imagination Technologies Group (IMG LN) or a Chinese acquisition target for China, following Canyon’s tilt for Imagination (discussed here: From Lattice to Imagination; Canyon Bridge Is Desperate). But while Dialog will lose 40% of its business over the next few years, unlike Imagination, this is not being lost to competitors, and there still remains entry barriers to design power management IC.
• To get to 100% of Dialog, Tsinghua might need to table a US$40/ADS offer. That backs out a US$3.1bn market capitalisation (27% of which is net cash), 3.8x 2019E sales (assuming 40% of sales is gone), 38x 2019E EPS (assuming 50% of EPS is gone because of lower sales but relatively higher operating expenses), 2.3x 2019E P/B at ROE of 6%, and FCF margin >15%.
• This compares to Imagination's 4.2x in 2019E sales, > 50x 2019E EPS, 4x 2019E P/B at an ROE of 20% and negative FCF. These numbers suggest Dialog is a superior target in term of industry position and financial prospects.

(link to Andrew's insight: Dialog Might Become the Next Imagination; A New Acquisition Target for China)

Uniper SE (UN01 GR) (Mkt Cap: $10.7bn; Liquidity: $40.5mn)

Fortum OYJ (FUM1V FH) is buying 46.65% of Uniper from E.ON SE (EOAN GR), triggering a General Offer ("GO") for Uniper shares. Uniper is now trading 13.8% above the €22/share voluntary offer price, and the question is whether Fortum will increase the offer to build a higher stake. Roderick Manalo believes the company has clearly stated its ambitions and enthusiasm. Fortum's CEO, Pekka Lundmark, said Uniper is a prime strategic investment and an “excellent match”. This would suggest Fortum may be compelled to bump.

• Uniper’s businesses are complementary and close to the Fortum’s home Nordic markets. The companies are also joint owners of nuclear power plants in Oskarshamn, Sweden. As the energy grids of Nordic regions and European markets become more integrated, a tie-in presents competitive advantages.
• Fortum has also been looking for a deal since selling its power distribution grids in 2014-15. A transaction would deliver on Fortum’s capital redeployment strategy and this strategic stake at only 6.2x FY18E EBITDA compares to its own 11x multiple. Uniper’s scale in gas, nuclear and hydro generation facilitates Fortum’s clean energy strategy.
• Uniper’s businesses are also highly cash-generative with FY18E EBITDA of €1.53bn and dividends of €263m in 2018. Those dividends would help de-lever Fortum’s balance sheet and in turn shore up its ability to pay dividends or make investments in renewables and other ventures.

(link to Roderick's insight: Uniper/ Fortum: Fortum’s Stance - Weighing Patience and Discipline with Additional Benefits)

Interflex Co Ltd (051370 KS) (Mkt Cap: $956mn; Liquidity: $32.4mn)

Ugly week for Interflex, down 26% to ₩47,700, having recovered from a mid-week low of ₩45,200. Various media outlets reported that Apple had launched a quality investigation into Interflex’s FPCBs. Sanghyun’s inquiries indicate there has been a defect incident at Interflex, but was not able to quantify the impact.

• Interflex is Korea’s largest FPCB (flexible printed circuit board) manufacturer and Samsung Electronics’ largest FPCB supplier; but it has served other device makers (including Apple) over the recent years.
• There may be a “classic arbitrage” at work, pulling down Interflex’s shares as this coming Monday is the subscription day for a new rights offer. The price determination day was the 6^th Dec, wherein Interflex dropped 6.39%.
• But wait, there’s more. Short trades surged on Nov 27, peaking at 17.04% (4x the usual level) on Nov 29. Following a suspension on the Nov 30, shorts accounted for 10.32% on Dec 1. Insiders who knew of the defect incident or arbitragers? Or perhaps both.
• Then Inteflex made several revisions to the rights offering. The second & final round offering price will now be determined on Dec 18 (instead of Dec 6). The final offering price will be announced on Dec 18. The subscription will take place on Dec 21-22, and new shares will be listed on Jan 10. Subscription rights will trade until Dec 20.

(link to Sanghyun's insight: Complex Situation Surrounding Interflex Rights Offering & Defect Issue)

Very, very briefly in M&A:

• AWE Ltd (AWE AU) (Mkt Cap: $332mn; Liquidity: $1.5mn). After CERCG withdrew its proposal earlier this week, they have returned with a marginally bumped, hostile offer at A$0.73/share. (We'll have a note out on this shortly).

• Integral Diagnostics Ltd (IDX AU) (Mkt Cap: $243mn; Liquidity: $0.5mn) was down mid-week on news that the purchase of I-Med had collapsed after the two remaining Chinese bidders were unable to pay for the whole business.

• The EC has approved the acquisition of Orient Overseas International Ltd (316 HK) (Mkt Cap: $6bn; Liquidity: $7.9mn).

• Bloomberg headlines carried comments from the Head of OJK Banking Supervisory Department suggesting that Mitsubishi UFJ Financial Group (8306 JP) would purchase 40% of Bank Danamon Indonesia Tbk (BDMN IJ) (Mkt Cap: $3.9bn; Liquidity: $1.2mn) in two phases, with the first phase "by early 2018". >50% triggers an MGO.

• China National Materials Company Limited (1893 HK) and China National Building Material Co Ltd (3323 HK) both announced that shareholders have overwhelmingly voted in favor of the transaction. Sinoma filing | CNBM filing.
• CTFN discussed a Beijing-based legal source saying it is not in Mofcom’s best interest to consider retaliation against the increased US scrutiny of acquisitions with Chinese buyers. Another source sceptical of retaliation, adding, “If you target A because I targeted B, then it's a never-ending game and it's a losing game for everyone.”(link to CTFN's insight: Mofcom Retaliation for CFIUS Resistance Not Expected)

Stubs

Sk Chemicals Co Ltd (006120 KS) (Mkt Cap: $1.7bn; Liquidity: $15.4mn)

December 1 was the official demerger date of Sk Chemicals Co Ltd (006120 KS). Both SK Discovery (holdco and surviving entity) and SK Chemicals (opco and new entity) are now suspended and will trade again on Jan 5.

• What’s next? SK Discovery is expected to do a tender offer to SK Chemicals shareholders to swap their SK Chemicals shares with the holdco shares. Chey Chang-won must do this to increase his shareholding to 30+% from the current 17-18%. And for SK Chemicals to be placed under SK Discovery as a part of the holding company structure, a tender offer to SK Chemicals shareholders must be done, probably around Feb next year, one month after the Jan 5 re-listing.

• There are huge tax incentives for those who embark on a holdco conversion. When major shareholders move their affiliate shares to a holdco, they do not need to pay the associated taxes. But the exemption only applies when a holdco owns < 20% stake in affiliates whose shares will be swapped. Therefore Choi Chang-won will be heavily incentivized to do a tender offer to move his SK Chemicals shares to SK Discovery.
• Logically the major shareholders would prefer to see a weaker price for SK Discovery and a higher price for SK Chemicals so as to get a favourable swap ratio. In practice, it doesn’t always work out this way, however, Sanghyun still prefers to be a holder of SK Chemicals.

(link to Sanghyun's insight: SK Chemicals Holdco Conversion Process Update

Hyundai Development Co Engg & Cnstn (012630 KS). (Mkt Cap: $2.7bn; Liquidity: $10.8mn)

Hyundai Development Co Engg & Cnstn (012630 KS) (HDC) announced it will convert to a holding company structure via a split-off, by reason of improving corporate transparency; but the reality is that Chung Mong Kyu, the Chairman of HDC, wants to strengthen his ownership position in HDC.

• After the company split, HDC is likely to become the holding company and HDC Hyundai Development Co. the operating company and an affiliate of HDC. To facilitate this, HDC will probably purchase Chairman Chung Mong-Kyu’s 13.4% stake in HDC via a share swap. Taking into account treasury shares, this would give HDC Co. a 20.4% stake in HDC Hyundai Development Co., conforming with the current holding company regulations (a holdco needs to own more than 20% of a publicly listed entity).
• Douglas Kim has a negative view of HDC with a fair value (applying post-split analysis) of ₩38,392. Shares closed at ₩39,350 on Friday.

(link to Douglas' insight: Hyundai Development Co. (HDC) Valuation Analysis: Holdco Conversion & Company Split)