Last Week in Event SPACE: Toshiba, Altaba, Sanyo. APA, HAECO, Avichina

Last Week in Event SPACE ...

• Games of chicken in Altaba Inc (AABA US)'s tender offer
• A rational event investor should buy Toshiba Corp (6502 JP), then buy more on dips
• Sanyo Special Steel Co Ltd (5481 JP)'s current price offers excellent reward/risk skew irrespective of the new Corporate Governance Code changes
• Cheung Kong's offer for APA Group (APA AU) to test foreign investment mood
• An attractive spread on the privatisation of moaty Hong Kong Aircraft Engineering Co., Ltd. (44 HK)
• BWX Ltd (BWX AU)'s BoD handballs the big questions to the independent committee

Toshiba Corp (6502 JP) (Mkt Cap: $20.5bn; Liquidity: $95mn)

The company announced a statement of Shareholder Return Policy which includes the intention to buy back up to ¥700bn of equity as soon as possible. This is designed to get the activists out. They likely won't get out unless the price IS higher. So the price will likely have to go higher. This is not a Buyback Program announcement, but an announcement of the fact that when they get their books in order and the environment is right, they will spend up to ¥700bn of equity to buy back shares; which is a bigger amount than people expected, a better outcome, and on a faster execution.

• This is STILL an Activist Situation. Recently, both Farallon Capital Management (5.37%) and King Street Capital Management (5.23%) altered their large shareholder filings (end May and June 1) to say they intend to "make important proposals to management" - i.e. go more activist.
• And cost cuts are everything here. If the company can get ¥60bn of costs cuts annually for the year to March 2020, that is 3 turns on EV/EBITDA and a ¥500 share price (with buyback at that price) leads to a PER of 13.0x and EV/EBITDA of just over 10x. According to LightStream Research, the two key variables in determining the overall value of Toshiba are the likely trend of NAND prices and the potential for the company to effect cost cuts within its non-memory business.
• "What would a rational investor do when there is a big price-insensitive buyer at a roughly-known time, ready to buy in a pretty-well-understood manner, providing a zero impact selling opportunity to price-sensitive sellers who hold a lot of the company, and other people who choose to sell at the same time?" In Travis Lundy's mind, that investor would buy the stock, and then buy more on dips.

links to:
Travis' insight: Toshiba ¥700 Billion Buyback - Bigger*, Better, Faster, Stronger
Lightstream's insight: Toshiba: Gauging the Upside Potential

Altaba Inc (AABA US) (Mkt Cap: $67.9bn; Liquidity: $449mn)

Altaba announced (press release) the start of a Tender Offer to buy back up to 195mn of its own shares at a purchase price equal to the quantity of 0.35 Alibaba ADS and an amount of cash equivalent to 0.05 x Alibaba VWAP. That is a buyback of 24% of shares out, and is designed to liquidate up to 30-32mm Alibaba Group Holding Ltd (BABA US) ADSs in addition.

• If 195mn shares of Altaba are tendered, the total number of Alibaba shares involved is going to be 0.35 x 195mn shares exchanged PLUS 30-32mn shares sold by Altaba. 98-100mm shares at US$200/share is US$20bn. That is just over a quarter of what Alibaba owns and just under 4% of Alibaba shares out.

• This tender offer is a taxable transaction at both the corporate level and the shareholder level. There will be some who get upset with that given the somewhat insignificant discount to NAV. That raises the question of whether there will be much participation. There IS a minimum of 10mm Alibaba ADS sold to make the tender successful. If this tender is successfully completed, this tender is probably the last major Alibaba liquidity event for Altaba until resolution of the Alibaba/Altaba absorption issue.

• The deal involves selling 30-32mm shares/ADSs of Alibaba. Given that Alibaba is said to be near CDR issuance, it would make sense to sell a chunk of those to Alibaba. 30mm shares would be $6bn and 32mm would be $6.7bn at the current price, which would be a decent start for Alibaba as Xiaomi Corp (XIAOMZ HK)'s CDR plan is said to be ~$5bn. 10mm shares would be US$2bn and might be a bare minimum for Alibaba to place as CDRs under a "cornerstone" or "pre-IPO" CDR issuance to large institutional holders.

link to Travis' insights:
Altaba Tender Offer I : More Games of Chicken 🐓.
Altaba Tender Offer II: Who's There? "Just Us Chickens" 🐓

SK Chemicals Co Ltd/New (285130 KS)(Mkt Cap: $1bn; Liquidity: $6.9mn)

Sewon Park discussed the spinning out of SK Chemical's vaccine business, which is tentatively named SK Bio Science. The purpose behind the split is two-fold: i) to improve the efficiency of capital allocation, and ii) to attract external investment to further develop new vaccine products, which may take the form of an IPO.

• SK Chemical has two separate divisions: Green Chemical & Life Science. The Life Science division has operated through two sub-divisions: vaccines and pharmaceuticals and the company has prioritized its Life Science division as a key growth driver. The Green Chemical division generates stable cash flow, though its growth potential is relatively limited.
• This spin-out might help unlock the hidden value in the vaccine business, improving SK Chemical's overall valuation. However, investors who prefer cash flow stability of the Green Chemical division might be more cautious.

(link to Sewon's insight: SK Chemical: Spinning Out Vaccine Business)

Sanyo Special Steel Co Ltd (5481 JP) (Mkt Cap: $832mn; Liquidity: $4.7mn)

Travis believes the Corporate Governance Code changes implemented June 1st are unhelpful rather than helpful for Sanyo Special Steel investors if they lead to existing cross-holders participating in the Tender Offer to a greater extent than expected. The unanswered question is whether cross-holders will take action before they need to have a policy in place (end of this fiscal year) or after.

• Negotiations are ongoing towards making Sanyo Special a subsidiary of Nippon Steel & Sumitomo Metal Corp (5401 JP) (Nippon Steel already owns 14.51%), with an expected announcement date in August and expected deal close date by March 2019. A Tender is likely. The increase in forecast in EBITDA for March 2019 since the results announcement is positive on the expected Tender Offer Price. The change is worth ¥200-300/share. 1x Book Value is almost ¥4000/share. A deal at 0.8x book would be ¥3,200/share.
• At a current price of ¥2,764/share and assuming a back-end price equivalent of 5.0x March 2019e EV/EBITDA (not including the cross-holdings that Sanyo owns) brings you to an IRR of ~11% at an effective minimum Tender Offer fill ratio of ~54%.
• Sanyo Steel's current price is not out of whack and there is not a significant premium to the share price. When you look at the fundamentals, and compare against the other specialty steelmakers' forecasts and consensus, Sanyo looks even less expensive. Travis remains bullish this opportunity and situation.

(link to Travis' insight: Sanyo Special Steel - Still Mis-Underestimated, Still Special, But Now Different.)

APA Group (APA AU)(Mkt Cap: $8.6bn; Liquidity: $21mn)

APA Group (APA AU) confirmed the receipt of an indicative, non-binding and conditional proposal from CK Asset Holdings (1113 HK) and Power Assets Holdings Ltd (6 HK) (collectively CKI) to acquire the company at A$11/stapled security, a 33% premium to last close; plus a distribution not exceeding A$0.24/stapled security for the six months to 30 June 2018. This A$13bn proposal comes just 12 months after CKI's successful US$5bn bid for DUET Group (DUE AU), a deal extensively covered by Smartkarma.

• But it's trading wide - 14.4% as of the close of Friday - and for good reason. As Australia's largest natural gas pipeline player, this deal will attract considerable attention and scrutiny, in the media and the political arena.
• Approvals are needed from FIRB and ACCC, the latter of which has two ongoing inquiries by the Australian Energy Regulator into the supply and demand of domestic wholesale and retail gas prices. The APA board may block the deal. So could 16.1%-shareholder UniSuper. Australia/China's relationship is distressed, and a federal election could be called as early as August this year. I am sceptical on the FIRB and Treasurer standpoint - this smells like a place for a political knockdown.
• Morningstar rates this a 50:50 chance of completing. It believes most competition issues can be solved through asset divestments, and the ACCC is unlikely to block the deal. The FIRB has a more open mandate and may recommend the deal be blocked if it is not considered to be in Australia's best interests. It approved Duet but blocked Ausgrid as the latter provides critical power and communications services to business and government, including security agencies. Is APA materially different to Ausgrid?

links to:
my insight: CKI's APA Proposal to Test Foreign Investment Mood
Morningstar's insight: APA Receives Attractive Takeover Proposal From CKI; We Lift Our FVE to AUD 9.50

Hong Kong Aircraft Engineering Co., Ltd. (44 HK)(Mkt Cap: $1.5bn; Liquidity: $0.5mn)

With low liquidity and 30+ years of inactivity in the capital markets, Swire Pacific Ltd Cl A (19 HK)announced the privatisation of the aircraft maintenance player by way of a scheme at $72/share vs. the undisturbed price of $44/share. The offer has been declared final. Assuming the deal completes in September, shareholders will also receive a $0.53/share (maximum) dividend.

• As a Hong Kong-incorporated company, the headcount test is not applicable. The key risk to the deal is the 10% blocking condition or 2.501% of shares out or 4.16mn shares. ~US$36mn using the price at the time of this insight. 4.42mn & 4.41mn shares voted against the same resolution at recent AGMs, however this specific resolution - the issuance of new shares - typically garners the most "against" votes. I would not use this as a gauge of shares that may block the deal.
• Swire is patient. It clearly sees value in privatising HAECO, and the offer was pitched shortly after it touched a 52-week low and 3 months after announcing its first ever full-year loss - which was primarily due to impairment charges. The current offer is at a discount to Swire's 2010 MGO $105/share cash offer - which had a marginally higher implied valuation. That 2010 offer reads more like a by-product from an internal restructuring with Cathay Pacific Airways (293 HK) as opposed to a full-fledged delisting offer for HAECO.
• Some investors may opt to hold out for a superior offer, but that won't unfold for years. Currently trading at a 5.2% gross spread when incorporating a maximum dividend. I'd take that spread despite the key risk on the blocking stake.

(link to my insight: HAECO to Be Taken Private by Swire)

BWX Ltd (BWX AU)(Mkt Cap: $543mn; Liquidity: $3.9mn)

The board of BWX, which approved the strategy undertaken by CEO John Humble and Finance Director Aaron Finlay to completely redefine the company in the last 12 months, has decided to take a step back, releasing a statement announcing the Independent Board Committee will undertake a "Strategic Review of Options".

• The announcement of the unsolicited, preliminary, non-binding, indicative, and conditional proposal by the CEO and Finance Director caught the IBC off-guard and they obviously don't know enough to feel comfortable about their decision one way or another.
• Travis personally thinks the stock should be trading a little wider here, but it is on the order of several percent rather than 10+%. This is still a game of chicken, and the stakes were just raised a bit. At the moment, he would perhaps rather not be an owner.

(link to Travis' insight: BWX MBO Game of Chicken Is Extended)

Red Star Macalline Group Corp Ltd (1528 HK) (Mkt Cap: $9.1mn; Liquidity: $4.7mn)

Red Star went ex-div on Thursday so Travis touched on the breakeven levels. At HK$11.00 ex-div, it is like HK$11.39 pre-div, which was a few percent higher than when he first wrote. He thinks if you can get borrow this is still a quite decent trade. According to HKEx, 28.94% of shareholders have now tendered into the offer.

(link to Travis' insight: Red Star Macalline - Egad! EDAGs! (Ex-Div Arb Grids)

Briefly ...

Sirtex Medical Ltd (SRX AU) signed a binding Scheme Implementation Deed with CDH. Trading at an 8.4% discount to CDH's proposal of $33.60 cash/share. This seems wide for a deal expected to close by end Sept 2018, but it would seem people are concerned with possible delays with the CFIUS approval. The statutory timetable for the CFIUS process is 105 days following submission of the notice. Any delay may push the implementation date of the scheme back.

(link to Travis' insight: Sirtex Terminates Varian Scheme, Embraces CDH)

Swire Pacific Ltd Cl A (19 HK) (Mkt Cap: $14.9bn; Liquidity: $15mn)

With Swire Pac already holding a majority stake in HAECO, Morningstar believes the benefits of the privatisation are limited to a simplification of the former’s corporate structure, a reduction in corporate expenses, and the possibility of a further narrowing of Swire Pac’s discount to book value. The latter, along with the sizeable premium, will likely entice common shareholders of HAECO and Swire Pac to accept the deal. As such Morningstar believes the deal is fair for Swire Pac shareholders and a small premium to pay, in the context of the group, to consolidate a generally moaty business. My own discount to NAV for Swire remains at ~29%, close to an all-time low.

(link to Morningstar's insight: Swire Pacific Seeking to Privatise Haeco for HKD 3 Billion; No Change to FVE)

Genting Bhd (GENT MK) (Mkt Cap: $8.2bn; Liquidity: $8.9mn)

Johannes Salim, CFA believes GENT is attractively valued as it trades at (near) a 2 SD below its 5-year NAV discount mean; while fundamentals at Genting Singapore Plc (GENS SP) and Genting Malaysia Bhd (GENM MK) have considerably improved.

(link to Johannes' insight: Genting Berhad: Attractively Valued on 5-Yr NAV Discount History)

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

Avichina Industry & Tech H (2357 HK)'s share transfer represents the conversion of its unlisted domestic shares into H shares under the Pilot Program. Avichina announced on the 8 May that the CSRC has approved the conversion and listing up to 3,609,687,934 domestic shares into H shares. This is the total number of its domestic shares outstanding. Avichina is the second candidate in this Pilot Program, following Legend Holdings Corp H (3396 HK), which I discussed in my insight: Legend's Conversion of Domestic Shares.

• In that insight, my understanding was the converted shares would be treated similarly with shares in the Southbound Connect; that is, these converted shares are effectively in a closed loop. Upon further inquiries, that conclusion would be incorrect. My direct conversation with Avichina indicated these converted shares can be sold to foreign investors, should the current shareholders wish to sell.

China High Speed Transmission Equip Grp (658 HK)'s shareholding move is odd. Then again, much of the shareholding and surroundings of CHST is unorthodox. Back in April this year, 17.95% moved from Goldman into BNP. Now that is mostly reversed. CHST updated the market on 25 May that a possible offer is still under discussion.