Last Week in Event SPACE: Tokyo Dome, LG Corp, Kerry Express, Sogou, Adways

• With their 9.7% and perhaps another 10% among foreign investors and the possibility that some people may jump ship to the Oasis side, it is not impossible. But Travis Lundy personally expects that this EGM will not likely result in the departure of the three directors. To be clear, he would recommend voting for the Oasis proposals, but he would also recommend trying to block the current Mitsui Fudosan and Yomiuri Shinbun deal.
• Travis reckons buying 4-5% through terms is a reasonable option play. Longer-term, Tokyo Dome Corp will think that it needs to "rid" itself of Oasis and other shareholders who do not support management. he believe it will therefore be the goal of management to entrench management. This is a speculative trade. It suggests that either Mitsui Fudosan and YS will see the need to raise the bid, or someone else will come in, or a different consortium would come in to be a friendly White Knight. There is a strong possibility this gets extended, and more info and commentary comes out.
• Mio Kato reckons the proposals made by Oasis to be a little one-sided, and in some cases a little optimistic about the ability to change typical Japanese customs around baseball. Nevertheless, on the opinion that Tokyo Dome could be noticeably better managed overall and that ¥1,300 looks exceedingly cheap, he wholeheartedly agree.

• WPP had franking credits of ~A$147mn as at December 2019 - see page 117. That's a lot, technically (depending on reserves, and perhaps additional debt funding) enabling a large substantial franked dividend embedded in the $0.55/share Offer, of which domestic shareholders can take advantage. Such franking credits may not otherwise be realized, if at all, going forward.

• Optically, the price is light. Share traded above terms in early March. However, A$0.55/share is roughly the average share price - prior to the COVID-19 drop-off - following the share price decline subsequent to the market guidance announcement on the 23 October 2018. Extrapolating out the 1H20 figures backs out an FY20E PER of 14.5x.
• There is an air of opportunism here, however, the indicative Offer Price is okay, if viewing WPP's trading pattern ahead of COVID-19. A franked dividend is expected to form part of the Offer, one in which foreign shareholders can not take advantage. I would be a buyer at or below terms - there may be a bump here, as management argues the upside from its wide-ranging cost cuts. But this is not a very liquid arb situation.

After the close on the 30 Nov, Recruit announced (Japanese only so far) a selldown of shares by eight different companies with a total share sale amounting to 86.111mm shares (plus greenshoe) for an ex-ante expected Offering size of ¥416.8bn or US$4.0bn. This has happened twice before since IPO as corporate shareholders who owned most of Recruit prior to its IPO sell shares down. Like in large secondary share sales conducted in previous years, there is a buyback (Japanese only so far) attached where Recruit will buy back a non-negligible portion of the offering, and having learned from the mini-debacle in 2016, in 2019 the company started its buyback post-offering. This year it is the same.

• This is a small deal at 5.59% of shares out. This is a big deal at US$4bn. It is about 20 days of 3-year ADV. There are probably 15mm shares to buy from FTSE and MSCI on delivery date, and 20mm shares after the deal is done through buybacks by Recruit. That is well over a quarter of the deal so this is not $4bn to absorb but $3bn. The deal is going to be placed in very short order. The last two large public deals by Recruit were 13 days and 9 days from announcement til pricing. This is two days.
• Earnings this year will be down, and Q2 reported recently didn't scintillate - Consensus EBIT for 2021 has dropped slightly since then - but 2022 is expected to see a rebound and Consensus EBIT growth for 2019-2025 is 100%. Revenue is expected to grow 10% CAGR from March 2022 to March 2025. Anyone who looks at this stock and is a big owner might decide to buy the liquidity offered. But it is not cheap on a current year basis at 24x TTM EBITDA and 58x trailing PER.
• Travis expects this to get taken up well, but he expects the shares to drop into pricing, then he expect a 3% discount, and then he expects the shares to trade back up. The price movement on 1-2 December could be significant. If your impression is that foreign active holders will not buy this to hold it, he would avoid. I have mixed feelings about this. The stock has done well like many momentum stocks, and is forecast to continue top-line growth at a pace rare for Japanese stocks, but it IS pricey.

Mirait, a communications infrastructure construction company (telecom infra (everything from wiring data centers to cellphone towers, and solar power+batteries for renewable power sourcing for the same) announced a ToSTNeT-3 buyback tomorrow morning pre-open for up to 6 million shares at today's close of ¥1595/share, spending up to ¥9.57bn, which is a decent chunk of money. This is nearly 20 days of ADV using the past 52 weeks as a guide so it means something in liquidity terms too.

• This is a big buyback of 5.56% of shares out. Ceteris paribus it will lower PER by 0.5x. It improves capital usage a little bit but there is a long way to go. If you want to sell a large block, this is a GREAT time to do it.
• But the stock is cheap. This is a growing sector. It will take a long time to build all the way out and there is a lot more to go in many of its business lines. Longer-term, it looks like a buyout candidate, and on a capital-adjusted basis, it is extraordinarily cheap at 2+x Adjusted EV/EBITDA.
• Travis would be long and stay long for the long-term. Growth looks set to continue, and OPMs look stable at 5.0-5.5% on a rolling four-quarter basis. It probably won't get a lot better, but capital is definitely something to work on, and with a stable and growing top line and HSD PER, this is a stock where one range-trades multiples within one's portfolio construction. This name could, however, benefit from activist exposure.

Arisawa Mfg (5208 JP) announced (J-only) a Partial-to-Full Tender Offer for shares of their currently 52.3%-owned (and consolidated) Taiwan-based subsidiary Thinflex. The deal is conditional on them getting to 70% (i.e. buying a minimum of 17.7%) but they will buy all shares tendered. The deal is also conditional on receiving regulatory approval. The Tender Offer Price announced is TWD 36.00/share, which is a relatively tiny premium of 7.1%. It is not clear this should fly at that level.

• Arisawa Mfg is looking to take out the minorities in a Taiwan-based copper thin film subsidiary, but the premium offered for the 47% it does not own is paltry. We will wait for the Target Statement which may simply be a rubber stamp given control of the board but one might see some noise from an independent.

• Travis expects that in the interim, there will be questions about the lack of sufficient premium, and someone will try to have a crack at getting the terms lifted. If the terms do NOT get lifted by Arisawa, he would expect this deal might fail.

• Back in September this year, LG Chem said it will spin-off its leading battery business to establish a wholly-owned battery subsidiary. Estimates vary widely for the spin-off - from US$25bn-US$50bn - against a current market cap of US$55bn. And that number is a moving target on the back of the EV craze - and Tesla Motors (TSLA US) addition to the S&P500 later this month. A Bloomberg report back in September cited one analyst who reckoned the company could be rated on par with CATL (A) (300750 CH)- and that has a current market cap of US$86bn. LG Chem's price movement has been relatively muted since the spin-off announcement - a number of investors bought into LG Chem to gain exposure to its battery division. If the spin-off proceeds, and LG Chem dilutes its stake to an estimated 70-80%, investors may be persuaded to sell LG Chem and take a direct stake in the EV company.
• The 160%+ outperformance of LG Chem YTD over LG Corp is excessive, with LG Chem now accounting for 50% of NAV and 155% of LG Corp's market cap. Additionally, LG Chem's lop-sided outperformance doesn't justify LG Corp's underperformance (of ~20-22% YTD) against either LG Electronics (066570 KS) and LG H&H.

(link to my insight: 2021 High Conviction: LG Corp's Decade-Low Stub)

• An EBIT ratio analysis provides some grounds for investor support for TICO's stub - but not Y480bn worth of support. The current implied stub level has blown through the recent implied stub high in early 2018, which also coincided with the recent EBIT ratio high.
• TMC has significantly underperformed Honda, one of its closest peers.
• If you are in the Stub, unwind it here (sell 6201 buy back 7203). If you are not in the Stub/Holdco Trade, put it on in reverse. At least, it should go on the watchlist as something to put on when the momentum stops. The goal should be getting back closer to the 5yr average.

On the 29 September Back on the 27 July, Chinese search-engine Sogou, majority-owned by Sohu.com Inc (SOHU US) and Tencent Holdings (700 HK), entered into a definitive agreement for a Going-Private Transaction at US$9/share. Additionally, Sohu entered into a share purchase agreement with Tencent concerning its stake in Sogou, the completion of which will result in Tencent holding not less than 90% of the voting power in Sogou. Therefore the Merger will be in the form of a short-form merger - there is no vote. There are no dissenting rights. That's about as clean a deal as you can get. But wait ...