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Toshiba Corp

Last Week in Event SPACE: Toshiba, Grab, Huarong, Invesco Office, Intouch, Jardines

339 Views18 Apr 2021 07:41
SUMMARY

Last Week in Event SPACE ...

  • The King Is Dead, Long Live the King: Toshiba Corp (6502 JP) announces Kurumatani-san is out and Tsunakawa-san is in.
  • Plus, other events, CCASS movements, and Mood Spins.

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

M&A - ASIA

Toshiba Corp (6502 JP) (Mkt Cap: $19bn; Liquidity: $170mn)

Toshiba's board supported Kurumatani-san, and has supported his lack of progress and capital plans. It has supported a certain lack of transparency. It supported Kurumatani-san's objections to the new investigation. But if shareholders don't trust Kurumatani-san, or the Board's support of him, and a majority of the senior-most executives distrust the CEO too, then they must distrust the influence he has had on the Board. This cannot be good for the Board and the combination of shareholder activism and senior executive opinion has to be seen as something which could trigger dramatic change. and sure enough, Kurumatani-san is shown the door.

  • The Trade is still to be long. If a PE deal goes through, it should go through well north of ¥5,000/share. While a PE deal seems difficult because of national security concerns, they should be allayed with the right structure and funding. CVC’s talk about involving JIC and DBJ to support funding could lay out a model for KKR and Brookfield - both rumoured to be kicking tires - to follow. Fundamentally, there is upside to good execution and good governance. Multiples could definitely rise to match those of rivals which would get the stock well into the ¥6xxx handle. We have multiple private equity funds looking. While a ¥6xxx handle was noted in the press earlier this week, a ¥7xxx handle is appropriate if Kioxia is still part of the asset base being bought.
  • METI's involvement in Toshiba's downfall, while bad, is now overshadowed by METI's involvement in what are now governance issues. It may be that METI itself would rather see the company taken over and everything cleaned up behind the curtain of private ownership rather than have it play out with public, activist ownership.
  • As Mio Kato has noted repeatedly, the Toshiba Next Plan is not going badly at all. The track Toshiba is on is decent, and if it plays out with better capital allocation that would be all to the good. There is a Kioxia monetisation to wait for. If Coinbase which earns much less than Kioxia as an avatar of technology and the lower cost of fintech disruption of traditional markets can list at US$100bn, then there is money to buy the maker of a scarce commodity.
  • In addition, there is STILL a buy of 15,000,000 shares to complete the TOPIX upweight at the close of 28 April. If you think that the significant large activists in the stock now will not be sellers because push is coming to shove and they won't sell before the conclusion, that means the actual float willing to sell is quite a bit smaller than people think it is.

Links to:
Travis Lundy's insights: Gaming Out a CVC Bid for Toshiba - The Right Noises, The Wrong Price, and Toast & Toshiba - The King Is Dead, Long Live the King
Mio's insight: Toshiba – How the Kurumatani Resignation and KKR or Brookfield Bids Could Change Things
David Lepper's insight: Toshiba Corp (6502 JP) Chapter 1: CEO Out, Activists up the Game

Invesco Office J Reit (3298 JP) (Mkt Cap: $1.7bn; Liquidity: $14mn)

Invesco announced that it was asking Starwood Capital Group for an extension of their Tender Offer (launched a week ago) to 60 days. The "problem" is that Starwood is planning on squeezing out minorities in such a way as to not grant them appraisal rights. The concerns are that the squeeze-out will be carried out through procedures that do not give dissenting unitholders an opportunity to express their objections; and that a Mandatory Squeeze-Out is not Anticipated under the Investment Trust Act. The Investment Trust Act does not afford unitholders protections enjoyed by shareholders under the Companies Law, and METI Fair M&A Guidelines are not followed in this case.

  • The request for an extension is made. It is not, to Travis' knowledge, absolutely required that the Bidder honour the request for the full 60 days, but he would expect an extension of a certain length.
  • This is DEFINITELY not a done deal for Starwood. It would make more sense for Invesco J-REIT holders to sell their shares at an uplift in return for shares in another REIT. Travis still thinks Ichigo Office Reit Investment (8975 JP) is the most likely candidate.
  • Travis would be happy being long here for the short-term, but longer-term, there is a non-negligible possibility that this doesn't get past the minimum tendering threshold. At ¥20,840, the shares are 2% through Terms + Dividend. This is somewhat strong for a low-volatility asset in Japan - especially one in uncharted waters. At the end, there could be a game of chicken played between a buyer or buyers and the Bidder.

(link to Travis' insight: Invesco Office J-REIT Responds to Starwood's Hostile Offer)

Jardine Matheson Holdings (JM SP) (Mkt Cap: $23bn; Liquidity: $23mn)

The vote at Jardine Strategic Holdings (JS SP)'s special general meeting was a foregone conclusion. The resolution as set out in the Notice of Special General Meeting contained in the Circular to shareholders on 18 March 2021 was duly passed. 92% of shareholders voted for the resolution. I understand 966.563mn shares voted FOR the resolution, 85.549mn AGAINST, and 55.282mn did nothing. So the turnout was 95%. Turnout ex-Matheson was ~70%. The maximum dissension is 7.8% of shares out.

  • Collapsing the circularity and removing its quirky complexity may continue to drive interest (from LOs) in Matheson, especially with certain listcos (MAND, HKL, JCNC) trading cheapish.
  • Yet a 14% discount is not particularly attractive for a vast holding company structure. Plus the governance-lacking aspects of the UK's Standard listing have been laid bare. A derisory offer for Matheson down the track is a real possibility.

Mainstream Group Holdings Ltd (MAI AU) (Mkt Cap: $0.2bn; Liquidity: <$1mn)

On 9th March 2021, Australia-based third-party fund administration services provider Mainstream announced they had signed a Scheme Implementation Deed to be acquired by Hong Kong-headquartered Vistra in an all-cash deal that valued the company at a market cap of ~A$170mn. The Offer Price was A$1.20 per share. MAI has now announced that they had received a superior bid from US-based financial technology company Ss&C Technologies (SSNC US) at an Offer Price of A$2.00/share.

  • SS&C's proposal requires the Vistra Scheme Implementation Deed (SID) to be terminated. MAI has notified Vistra about SS&C's proposal and Vistra has until 16th April 2021 to respond. Vistra has a matching right and they can decide to match or overbid. If Vistra decide not to exercise their matching right but decide to exercise their call option deeds that Vistra entered into with entities controlled by MAI directors, they will have to vote all shares it received in favour of SS&C's proposal. Vistra will hold approximately 19.9% as a result of this transaction.
  • SS&C's proposal translates to a FY21E EV/EBITDA multiple of 24.2x which is a significant improvement on the EV/EBITDA multiple of 14.2x offered by Vistra. However, it is worth remembering that MAI is a high-growth company with an expected EBITDA CAGR of 28%+ for FY21E-FY23E. If Vistra or another competitive bidder decide to overbid, this situation could become more interesting.
  • Janaghan Jeyakumar would be long at or below the current trading price. MAI shares are currently at A$1.975 translating to a gross spread of 1.27%. According to the Indicative Timeline provided in the Official Announcement, the Deal is expected to complete in ~3 months. That translates to an annualized spread of 5.1%. In the absence of an overbid by Vistra (or another competitive bidder), Janaghan expects this Deal to complete.

(link to Janaghan's insight: Mainstream (MAI AU): Massive Overbid by SS&C, Now Vistra Has to Respond)

Zhejiang Cangnan Instrument (1743 HK)'s Offer Document has been despatched with the IFA concluding the Offer price to be fair and reasonable. The EGM will take place on the 17 May and the first closing date is the 31 May. As discussed in Zhejiang Cangnan (1743 HK): H-Share Buyback, given the company's dubious price action last year and shareholder concentration, I would normally give this stock a wide birth. But it is precisely this shareholder concentration that the Offer has an excellent chance of getting up. Including the 90% tendering condition.

In Square Enix – CTFN Reports M&A Interest, Mio is sceptical as to the CTFN report that Square Enix Holdings (9684 JP) is the subject of M&A interest from a variety of companies. His suspicion is that there are some companies sniffing around Square Enix which would make sense because it is relatively cheap and has some great and unique assets. But he doesn't think it is available for sale and we do think that Sony could defend it relatively easily.

The share purchase agreement entered into between Zhuhai SASAC and Di Er Ton /Digital Science & Technology, to acquire domestic shares in mobile device manufacturer Beijing Digital Telecom (6188 HK) has now completed. The MGO has subsequently been triggered. The MGO has a 50% tendering condition - attached to ALL voting rights of Beijing Capital. No irrevocables have been received to date. The Composite Document is expected to be despatched by the 16 April, at which time the Offer will be open for acceptances. Link to my insight: Beijing Digital (6188 HK): Zhuhai SASAC's MGO On Track.

EVENTS

Grab (0967655D SP)

The proposed transaction with Altimeter Growth Corp (AGC US) represents an expected equity value of US$39.55bn and EV of US$30.36bn, with cash proceeds of US$4.54bn. In past insights on SPACs, beginning with Virtual IPOs/Direct Listings: Uninhibited Price Discovery, one issue for SPACs is their overabundance in the market today, targeting popular private companies. As such, popular private companies can tee up “SPAC-offs,” where various SPACs pitch their deal, competing (mostly) on price. The higher the acquisition price, the lower the future return for SPAC investors.

  • And Grab has competition. Its main rival is Indonesia's Gojek (1379371D IJ), and the two courted each other around February last year before irreconcilable differences led to them parting ways in January this year. There is talk Gojek will merge with e-commerce payer Tokopedia and similarly seek a US listing. Mobile gaming and online shopping platform player Sea Ltd (SE US) is also in the mix, and currently boasts a non-insignificant market cap of US$125bn.
  • Pegging the various business ops - mobility, delivery - to peers, one would end up with a lower multiple than what the business is being offered at.

Links to:
Sumeet Singh's insight: Grab SPAC Listing - High on Ambition, Very High on Valuation
my insight: SPAC Grab ... At 2x Uber
Shifara Samsudeen's insight: Grab: SOTP Suggests Steep Discount to Proposed SPAC Valuation

China Huarong Asset Management (2799 HK) (Mkt Cap: $5.1bn; Liquidity: $4mn)

Huarong was originally set up in 1999 by Beijing, in response to the Asian financial crisis, to bail out a State-owned bank - ICBC - before listing. Rumours abound the State may resort to bailing out Huarong or risk a domino effect of losses at other (state-owned) entities which have lent to Huarong. The bailer becomes the bailee?

  • Reportedly a restructuring of Huarong, modeled on the May 2019 government-led bailout of Baoshang Bank, was proposed earlier this year, involving a takeover from a counterparty, and the PBOC opening up the spigots. Part of that plan allegedly involved recovering RMB350bn of Huarong's outstanding bonds at around par.
  • Alternatively, Huarong is broken up into its securities, banking, trust, and futures divisions - operations deemed "good assets" worth maintaining. And divisions that boast necessary permits. Another asset manager would then step in and take over the running of Huarong as an AMC.
  • With the benefit of the restructuring of Baoshang Bank - and Anbang and Evergrowing Bank - China has developed a mature process to address a situation such as Huarong's. A more measured de-risking approach is likely here as opposed to a less-than-optimal major debt restructuring, which may result in an unnecessary domino effect for financial companies and creditors of its RMB 350bn of liabilities.
  • I don't have a strong opinion on Huarong's equity here, although its P/B of 0.25x compares to its average of 0.5x since listing. But the offshore bonds look like the wrong price.
  • Reuters are now reporting that Chinese regulators have asked banks not to withhold loans to Huarong as part of support measures to stabilize its cash flow.

(link to my insight: China Huarong Asset Management (2799 HK): This Is Manageable)

In two SCMP articles on the 7 April, PRC media tycoon Li Ruigang, Television Broadcasts (511 HK)'s largest shareholder (via Young Lion Holdings), discussed his dissatisfaction with TVB's performance. Unqualified voting controllers - such as Li - at general meetings of TVB are capped at 49%, however, I believe there could be major changes in the Broadcasting Ordinance. It could be argued that even if that were the case, any reform would occur at a glacial pace - it took the Communications Authority 28 months to review TVB's shareholding structure. But in TVB (511 HK): Small Screen Saver, I surmise that the accelerated rate at which legislature and reform are occurring in this city, a revamp, should it come, may occur quickly. TVB is very beaten up. Li has a plan, it would seem - one that fits in with CMC's listing in a couple of years. If he is given the green light, shares will pop, if not on the economics, but at least on sentiment.

A recent internal discussion paper, authored by an executive committee member of the Bauhinia Party - pro-Beijing political party with close links to Beijing's authorities - refers to the housing issue in Hong Kong, wherein the gap between the rich and poor is widening, causing social unrest to the point of "threatening the security of one country". The paper indicates the Central government has the right to coordinate the supply of land in Hong Kong. Expropriation would be in flagrant violation of Basic Law protection of private property. But the precision and speed with which legislature and reform are taking place in Hong Kong, such a possibility is all-too-believable. In Hong Kong Property Developers: Eminent Domain I canvass previous attempts to address Hong Kong's farmland, and see Henderson Land Development (12 HK) has the most to lose from any such extraordinary measure, followed by New World Development (17 HK).

In SK Telecom Equity Spinoff Announcement: Summary, Takeaways, & Price Impact and SK Telecom Officially Announces a Spin-Off to Create a Holding Company Structure, Sanghyun Park and Douglas Kim discuss SK Telecom (017670 KS) finally announced its long-awaited decision to create a new holding company for its non-telecom related subsidiaries

STUBS

I see the discount to NAV at ~12%, versus a one-year average of 21% and a long-term average of more than 25%. By my estimate, the discount to NAV has never been narrower. And the simple ratio (Intouch/Advance) is also at an all-time extreme; with the implied stub around levels only briefly touched previously, before later retracing.

  • Gulf's holding is problematic and breaks every guideline in corporate governance 101. Intouch is on record that Gulf's stake in the company is "positive", reflecting Intouch's dividend yield and favourable business direction; yet cash outlayed of ~Bt30bn should have been distributed to Gulf shareholders as a dividend - and it is for those shareholders to decide whether to invest in Intouch, not Gulf's management.
  • Gulf's buying appears to be done, for now. I did not expect Gulf to lift its stake from 5% to 10%, then again to 15%, therefore it is difficult to rule out further increases. It is now two and half months since the last stake increase.
  • I'd be shorting Intouch here and buying AIS. I think a more reasonable discount to NAV is >20%.

M&A - US

Hollysys Automation Technology (HOLI US) (Mkt Cap: $0.8bn; Liquidity: $5mn)

What a mess. On the 1 February a consortium including co-founder and former Hollysys CEO Baiqing Shao, Ace Funds, and Chinese PE outfit CPE Funds Management bumped its Offer for Hollysys to US$17.10 from US$15.47. Hollysys has yet to make public its opinion on the revised Offer, other than there is no need for shareholders to “take any action at this time”. But the big issue concerns the legal dispute over the beneficial ownership of the Hollysys' shares held by Ace Lead and the beneficial ownership of the shares of Ace Lead held by Shao, Hollysys announced a legal action had commenced in the Hong Kong High Court against Shao and Ace Lead on March 9, 2021.
  • Cases are ongoing in both Hong Kong and the BVI. I am no legal expert, and it is not clear how the validity and enforceability of this pans out as to the claims in the BVI - where Hollysys is domiciled - or the Hong Kong Court. Hollysys appears to be claiming the shares held by Ace Lead are held in trust and that Shao is simply not the beneficial owner. Hollysys has also requested that the trial of the lawsuit should take place on an expedited basis in July 2021. Don't expect any major developments until the conclusion of this trial.
  • I estimate forward PER/EV-to-EBITDA of 9.0x/2.8x under the indicative proposal, and a PER/EV-to-EBITDA/PBR of 13.1x/3.3x/1.1x on a trailing basis. Before factoring in the large net cash pile - US$682mn or 88% of the current market cap. Hollysys shares appear substantially undervalued, as does the indicative Offer.

  • I agree with CPE that the board of Hollysys should convene a shareholder meeting for its shareholders to consider and vote on the consortium's proposal. It has a fiduciary duty to do this. But such a meeting should only take place once the legal spat has concluded. Shares are cheap here, and may drift cheaper, until a firmer timeline of the legal wrangles unfolds. I suspect CPE will continue to flame the situation with additional press releases in the interim.

On March 26, 2021, MagnaChip Semiconductor Corp (MX US) entered into an agreement to be acquired by Wise Road Capital in all-cash go-private transaction of $29/share. With the prevailing share price of $25.29 as at the close of business on April 12, 2021, the spread at ~15% offers a potentially attractive IRR of between 20% and 32% should the transaction close by the end of December or September. In MergerTalk: Magnachip Semiconductor Corp (MX US)-Wising Up To An Attractive Risk-Arb OpportunityRobert Sassoon lays out why think the spread indicates a rewarding risk-arb opportunity.

M&A - EUROPE

On 13 April, Orange SA (ORA FP) announced that its €22/share offer for Orange Belgium (OBEL BB) was final. The offer price implies 5.1x EV/21E EBITDA (below the median of peers at 5.9x, see table above) and 9.7% 21E FCF yield (source Capital IQ consensus), and 2.2% dividend yield. The market seems to think there are grounds for an improved offer, as the share price is still above the offer price. In Orange Belgium - Orange: Final Offer and Holdouts, Jesus Rodriguez Aguilar recommends buying on any dip below the offer price.

Veolia Environnement SA (VIE FP) has increased its Offer for Suez (SEV FP) from €18 per share to €20.5 per share. The improved offer represents1.5x EV/Fwd revenue, 8.1x EV/EBITDA, 27.4x Fwd P/E, and an implied EV of €25,574 mn and implied equity value of €13,103.6 mn. In Suez - Veolia: Peace Pipe, Jesus reckons this is a rock solid trade, albeit the gross spread is an unexciting 3.2% on a deal that may take up to a year from now to close. Long TP €20.5, and monitor to add on any dip.

SHARE CLASS

In Ping An A/H Premium: Nearing a Discount; Set Up for Expansion, Brian Freitas highlights Ping An A-shares Ping An Insurance Group Co Of China (601318 CH) are trading at parity versus the H-shares Ping An Insurance (H) (2318 HK), suggesting the risk/reward is skewed in favour of buying the A-shares and selling the H-shares.

INDEX REBALS

Kasikornbank PCL (KBANK TB) is included in the MSCI Standard index through its foreign line Kasikornbank PCL (KBANK/F TB) and the NVDR Kasikornbank PCL (KBANK-R TB). In Kasikornbank (KBANK TB) - Double Whammy, Brian sees a high probability of the foreign line being deleted at the upcoming May SAIR since it fails the EM Minimum Liquidity Requirement. There is also a possibility of a reduction in the Foreign Inclusion Factor (FIF) on the Non-Voting Depository Receipt (NVDR) line if the foreign room stays below 15% on the price cutoff date.

China Securities Index Co will announce the changes end May/beginning June and the changes will be effective after the close of trading on 11 June. In CSI300 Index Rebalance Preview: Recovering from the Growth Sell-Off, Brian expects 30 changes at the upcoming June 2021 index review - this is the maximum number of changes that are permitted at a single review. Estimated one-way turnover is 4.08% and will result in a one-way trade of CNY 10.8bn.

NIFTY50 Index Rebalance Preview. At more than a third of the way through the review period that runs from February to July, in NIFTY50 Index Rebalance Preview: Info Edge Could Replace IOC Brian sees one possible change to the index with Info Edge India (INFOE IN) replacing Indian Oil Corp (IOCL IN). There could be more changes if some large stocks like Adani Green Energy Ltd (ADANIGR IN) and Avenue Supermarts Ltd (DMART IN) are included in the Futures & Options (F&O) segment of the market. Vedanta Ltd (VEDL IN) does not make the cut for index inclusion following the 10% reduction in its free float following the open offer.

FTSE TWSE Taiwan 50 Index Rebalance Preview. The next quarterly rebalance will be effective after the close of trading on 18 June and the changes will be announced on 4 June. Data from close of trading on 24 May will be used to determine the list of inclusions and exclusions. Using data from the close of trading on 15 April, Brian reckons in FTSE TWSE Taiwan 50 Index Rebalance Preview: Price/Volume Surge Brings Three Potential Changes that Evergreen Marine Corp (2603 TT), AU Optronics (2409 TT), and Innolux Corp (3481 TT) will be added to the index at the June review, while the three deletions are Wiwynn Corp (6669 TT), Taishin Financial Holding (2887 TT) and Catcher Technology (2474 TT).

OTHER M&A & EVENT UPDATES

CCASS

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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

Name

% chg

Into

Out of

Janco (8035 HK)10.00%KingswaySilverbricks
Speed Apparel (3860 HK)75.00%ElstoneOutside CCASS
Anchorstone (1592 HK)64.99%Get NiceYuzhou
Tianyun International Holdings (6836 HK) 27.00%China GalaxyOutside CCASS
K Group (8475 HK)25.02%EasyOutside CCASS
Kinetix (8606 HK)33.75%ZundiaoLee Go
Wang On (1222 HK) 32.36%UBSKingston
Sandmartin Intl Hldgs (482 HK) 25.39%SHKMorton
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Mediawelcome (2159 HK)51.76%CitiOutside CCASS
JHBP (Genor) (6998 HK) 11.76%St ChartOutside CCASS
Channel Micron (2115 HK)13.40%MasonOutside CCASS
Source: HKEx
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