Last Week in Event SPACE: Toshiba, Meituan/Xiaomi, Harbin Electric, Asia Sat, Jardines, Caesars

Last Week in Event SPACE ...

• Despite Toshiba Corp (6502 JP) having underperformed the TOPIX100 since the buybacks began and ~10% of shares out to be bought by mid-November, the reward vs risk profile of buying shares here does not seem that great in the near-term.
• The addition of dual-class structures (Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)) to the Hong Kong/Shanghai/Shenzhen Stock Connect appears imminent.
• Harbin Electric Co Ltd H (1133 HK)'s unprecedented deal calls for unprecedented action as only 37% of tendered shares withdrawn have traded.
• There is a non-negligible risk the Asia Satellite Telecom Holdings Ltd (1135 HK) deal does not get done because of investor opposition. But there is hair on the asset and hair on the reinvestment model in the years ahead as long as US-China relations remain bad.
• Recent buying by Jardine Matheson Hldgs (JM SP) into Jardine Strategic Hldgs (JS SP) leaves negligible scope for future acquisitions if adhering to the 15% free float limit.

• Caesars Entertainment (CZR US) and Eldorado Resorts (ERI US) roll the dice and announce their highly anticipated merger.

• Plus, other events, CCASS movements and Mood Spins.

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

Toshiba Corp (6502 JP) (Mkt Cap: $16.4bn; Liquidity: $68mn)

Toshiba's buyback started last November with three instances of ToSTNeT-3 buybacks, followed by seven-plus months of on-market buybacks. Since the start of on-market buybacks, the company has bought back 20.8% of market volume. Notably, when the share price was weak in January and June, the company bought back ~32% of volume during those months. That leaves the company with ¥195.6bn (8-11% of remaining shares) left to spend on its buyback program. The buyback goes until November 8th 2019. At last month's strong pace, it would take the full four months to complete.

• Fundamentals are not overly positive. OP is expected to rise almost 300% this year vs last year, which was a bad year. But net income is expected to be negative. And that was before taking into account the Yokkaichi electrical outage problem at Toshiba Memory and substantial worsening of NAND prices out in the world. Expectations of a Toshiba Memory IPO later this year may be dashed as well given the losses which will arise from lower ASPs, and sharply lower QoQ bit growth because of the incident.
• There are some very deep-pocketed activist-like shareholders who may be in this for the long haul. When the buybacks look like they are ending - it will likely be quite a while until another buyback occurs - we may see previously strong hands become weak hands and be interested in liquidating simply because the market support of the buyback will be gone.
• With less than ¥200bn to go, and a multi-year path for Toshiba Next Plan ahead, the one hope here is serious capital action (mergers, sales) or other significant action by the new board to show they mean business. Travis Lundy thinks buying out minorities in Toshiba Plant Systems and Toshiba Tec - which are simply too cheap at 4.5x and 4.0x EV/EBITDA - is a reasonable idea, but doesn't think the board will be as effective in early days as some might hope.
• He would be a seller of Toshiba in the market into strength because he sees post-buyback overhang, and does not see tremendous progress near-term. After the Buyback ends, if there are no capital transactions, the next major flow event for foreign investors to take profits on their "buy-the-dip" trade of 2017 is years away.

(link to Travis' insight: Toshiba Buyback: Down To The Last ¥195.6bn)

Meituan Dianping (3690 HK) (Mkt Cap: $51bn; Liquidity: $188mn)

Meituan and Xiaomi Corp (1810 HK), two of the largest IPOs in Hong Kong last year, were included in Hang Seng Composite Index shortly after their listing (Xiaomi on July 23th and Meituan on October 8th). But neither was included in the southbound Hong Kong Connect scheme due to their dual-class structures. This may change.

• The Stock Exchange of Hong Kong (SEHK) has been working with the two exchanges in Shenzhen and Shanghai to allow the dual-class shares to be included in the Hong Kong Connect. In April this year, representatives from the SEHK mentioned that dual class shares of Chinese companies shall be included in the Hong Kong Connect scheme in July.

(link to Ke Yan, CFA, FRMs' insight: Meituan/Xiaomi: Thoughts On Trading the Likely Hong Kong Connect Inclusion This Month)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $844mn; Liquidity: $3mn)

Shareholders who had tendered in Harbin Electric's Offer have been entitled to withdraw those shares since 11 June - 21 days after the Closing Date on the 20 May. 112.7mn shares or 16.7% of shares have now been withdrawn. Netting off shares that have tendered (~12.5mn) since the 20 May, the total acceptance level is estimated at 71% compared to 85.84% at the time of the unprecedented extension. Harbin's price of $3.85/share now offers an extraordinary one-up (~18.5%) to the Offer price of $4.56/share, to two-down (~35%) to the undisturbed price of $2.50.

• The Offer has shareholder approval - shareholders comprehensively (99.13% of H-shares attending) voted FOR the proposal. The Offeror wants the deal done - which is why they sought and received the extension from the SFC. Both the Offeror and shareholders who voted would prefer to get this deal done now rather than later.
• My interpretation of the Takeover's Code and the Scheme Document is that the Offeror can buy in the market. Why haven't they? This is likely down to the Offeror not being 100% confident what it buys in the market will achieve the 90% acceptance objective. Plus, the Offeror would prefer not to hold any H at all, as before, should the deal lapse.
• One unorthodox approach for shareholders to express interest in getting this deal up is for investors to independently 'self-coordinate' towards a common objective, by initiating a hybrid institutional acceptance facility (IAF). IAFs are common in Australia. Investors could individually (and collectively) offer their stock out in the market at the Offer Price both during trading or during the auction period, as a signal for the Offeror to allow them to buy in the market.

(link to my insight: Time For Unprecedented Action In Harbin Deal)

Asia Satellite Telecom Holdings Ltd (1135 HK) (Mkt Cap: $461mn; Liquidity: $0.4mn)

Asia Sat announced a Scheme Implementation Agreement at HK$10.22/share, a 23.4% premium to last close - the undisturbed is likely not HK$8.28 from the day before it was halted; the shares mysteriously moved beforehand - and a 10% premium to the 31 December 2018 NAV. The Offer Price is final. The Offeror, holding 74.73% is split 50:50 between CITIC and Carlyle, the latter acquiring its stake from GEC in 2014 via a Sale and Purchase Agreement at HK$26.00/share, in which the Independent Financial Advisor found the deal to be not fair and not reasonable.

• Ex-special dividend in 2015, the Offer Price is 50% below where the stock was trading just after the last Mandatory Offer in 2015 when Carlyle bought in. The fact that it is trading wide to terms tells you the initial reaction is that this has hair. This is not difficult to block - it would require about US$13mm of stock. International Value Advisers has 6.1% and could block with that. It is not clear what their total purchase price was. The last 1.1% or so was purchased at HK$5.12/share. The previous 4.9% could have been done at a low price or a fair bit higher price.
• The stock is illiquid, trading at a low PER, and low EV/EBIT ratio, partly on the fact that there is no possible alternate bidder for the asset (because CITIC will take it eventually) and partly because the assets don't live forever. They will have to replace the existing satellites with others in the 5-10 years to come. At a multiple well lower than the average of the peers, it is not a compelling multiple at which to sell.
• Because the satellites appear to be used by Chinese government agencies and possibly the Chinese military, there is a risk that if the US cracks down further on US-China interaction, and US export controls start to deem semi-autonomous Hong Kong (as control location despite corporate legal jurisdiction in Bermuda) as part of mainland China rather than separate (as it does now), AsiaSat might have a substantially less bright future.

(link to Travis' insight: Asia Satellite (1135 HK) Scheme Announced; Trading Wide)

Gbst Holdings (GBT AU) (Mkt Cap: $171mn; Liquidity: $1mn)

GBST announced a non-binding indicative Offer of $3.25/share (cash) from Ss&C Technologies (SSNC US) by way of a Scheme at a 64.6% premium to the closing price on the 11 April, when GBST was first approached by Bravura Solutions (BVS AU). Two days later SSNCV bumped its Offer to $3.60/share. GBST had mentioned in an announcement the previous Friday when talks broke down with Bravura, it "has now received other non-binding confidential competing proposals to acquire 100% of the ordinary shares of GBST via cash offers at a price higher than $3.00 per share". On cue, the updated SSNC announcement mentions an Offer of $3.50 from FNZ Group.

• Although indicative, SSNC's Offer probably had a better chance of getting up compared to Bravura as there is a risk the two competing softwares offered by Bravura and GBST could not be folded into one.
• GBST's board will exclusively open its data room to SSNC for four weeks. Should a Binding Offer transpire, the board will unanimously recommend it. Shareholder support should follow a binding proposal from SSNC. Spheria, the second largest shareholder, had previously expressed Bravura's $2.50/share Offer had merit. Spheria promptly bumped its stake in GBST to 10.74% from 9.09% on the 13 May, then to 12.42% on the 20 June. and most recently to 14.46%.
• SSNC's Offer is an 82.3% premium to the undisturbed price. Trading at terms with two, possibly three, competing bidders. Getting involved, as recommended, when SSNC entered the scene nicely paid off. Sitting at or just below the Offer price may still yield a decent return - this could go another 5-10% more.

(link to my insight: AOF Should Support Abacus/Charter's Revised Offer)

Australian Unity Office Fund (AOF AU) (Mkt Cap: $341m; Liquidity: $0.2mn)

Abacus Property (ABP AU) and Charter Hall (CHC AU) have now announced an A$3.04/unit Offer versus its initial $2.95/unit all-cash non-binding proposal. This will be reduced by any further distribution. The proposal is also "best and final". All other prior conditions remain - such as completion of due diligence - but this time on a non-exclusive basis.

• In the meantime, AOF announced the value of its property assets had increased by ~A$0.14/unit as part of its 2019 revaluation process. This has elevated the unaudited NTA/unit to A$2.79/unit, up from $2.67/unit December-end 2018.
• Therefore, the revised Offer is a 9% premium to the NTA compared to a premium of 10.5% under the original Offer; but bear in mind AOF has recently gone ex the June-quarter dividend of A$0.0395/unit. The revised Offer also exceeds the initial Offer plus the June and September distributions.
• On balance, this bump is probably enough to account for the uplift in the NTA. And compared to precedent property transactions demonstrating similar characteristics to AOF, this should get up.

(link to my insight: AOF Should Support Abacus/Charter's Revised Offer)

Coffee Day Enterprises (CCD IN) (Mkt Cap: $697mn; Liquidity: $0.1mn)

Reportedly Coca Cola Co (KO US) is in talks to buy a stake in CCD's core coffee business which owns 'Cafe Coffee Day', India's largest coffee chain. Coke has stated plans to expand beyond sugary drinks into healthier drinks and acquired Costa Coffee for USD5.1bn last year.

• Devi Subhakesan expects CCD to double from the (then) current market price of Rs229.5 and trade closer to its SOTP value of Rs440/share. The coffee ops account for ~72% of NAV.
• This is based on her assumption of 20x EV/EBITDA used in the SOTP as being conservative, with domestic F&B retail peers like Jubilant Foodworks (JUBI IN) trading at around 26x.

(link to Devi's insight: Coffee Day Enterprises (CCD IN): Time to Rise and Shine. Likely Stake Sale Can Unlock Value, Finally)

Caesars Entertainment (CZR US) (Mkt Cap: $7.6bn; Liquidity: $250mn)

Caesars and Eldorado Resorts (ERI US) have announced their highly anticipated merger, encouraged by 17.75% CZR shareholder Carl Icahn, which combines Reno NV-based Eldorado with Las Vegas, NV-based Caesars into the largest U.S. gaming company. Deal terms call for each CZR share to receive $8.40 cash and 0.0899 shares of ERI common stock. There will be a provision for shareholders to elect, subject to proration, the form of consideration. Upon completion of the deal, the combined company shareholder split will be approximately 51% ERI shareholders and 49% CZR shareholders. The merged entity will take the Caesars name.

• The combined company will be the largest U.S. gaming company in terms of number of properties, with approximately 60, followed by PENN with 37 properties. ERI management expects the combined company to have the greatest combined EBITDAR in the industry of $4 to $4.5bn in a year or two, with MGM number two with $2.5bn.
• The multiples being paid are a premium based on most of the metrics evaluated, though on the important EBITDA multiples, both trailing and forecast, the premium is not particularly high. Still, John DeMasi didn't think this would present a problem with REI (ERI’s largest shareholder with 14.3%) and Carl Icahn (CZR’s largest shareholder with 17.75%) having entered into voting agreements to vote for the transactions relating to the merger.
• For definitive deal, rate-of-return arbitrage and event-driven investors, the CZR/ERI deal is attractive and should be considered for portfolio inclusion. It has support of major shareholders on both sides, it is a strategically logical deal by an acquirer who is one of the best operators in the sector, with an excellent track record of adding value with acquisitions. Financing is not a condition, and none of the conditions seems onerous. HSR can probably be resolved with a few divestitures and state gaming approvals should not be a problem with ERI’s track record of running its properties well since 1973. Based on what is known at this point, this arb seems like a relatively safe bet.

(link to John's insight: Caesars Entertainment Bets on Merger with Eldorado Resorts)

Jardine Matheson Hldgs (JM SP) /Jardine Strategic Hldgs (JS SP)

JM has bought a further 4.85mn shares in JS since my previous insight (StubWorld: Matheson's Strategic Buying of Strategic) in March - or ~0.44% of shares out, taking its 2019 total to 6.6mn or 0.6% of shares outstanding. The simple ratio (JM/JS) is now at 1.62x against an 8-year average of 1.7x and the long-term average (20 years) of 1.79.

• JS is required to maintain a free float of 15% as stated at the end of every SGX announcement of shares acquired by JM (here is the most recent announcement). JS's primary listing is in London, and that's the reason the Financial Conduct Authority of the United Kingdom is referenced at the top of each share purchase filing by JS. The default position under the UK listing regime is for companies to have a minimum free float of 25%, but Jardines negotiated a lower percentage (15%) with the UKLA.
• My correspondence with Jardines indicates the % held by JM in JS indicates very little wiggle room (read the insight (link below) for exact details). JS offers scrip dividends which expand the denominator, yet the latest scrip entitlement announced early May was for just 130,691 shares.
• What to do? If investors believe there will be more aggressive buying (as seen in the 1Q19) by JM into JS and therefore supporting JS's share price, they should reconsider. This does not appear to be workable. Unless Jardines negotiates a still lower % float, which appears doubtful - I'm not aware of any precedent. The long-term ratio (JM/JS) is in favour of JM. And JM's yield is more attractive at 2.67% versus 0.86% for JS.

(link to my insight: StubWorld: Matheson Nudges Strategic Headroom)

The Taiwan and Indian M&A Guides issued this past week are the seventh and eight installments in a series of M&A guides that our Quiddity team (Travis, Janaghan Jeyakumar, and myself) are publishing to aid investors in understanding the rules, parameters, possibilities, and processes when companies conduct mergers and acquisitions. These insights are designed to be used as a reference. Any questions are welcome.

For a list of Quiddity M&A Guides, click here.

• Health Management Intl (HMI SP) has announced a S$0.73/share (14.1% & 24.8% premium to last close and one-month VWAP) Offer from EQT by way of a Scheme. Irrevocables total 61.8%.
• Ap Eagers Ltd (APE AU) has announced the divestment of Kloster Motor Group to assist in securing ACCC approval for its merger with Automotive Holdings (AHG AU).
• As expected, the Nomura Research Institute Lt (4307 JP) tender offer started July 1st.

• "City failed to value us, says Merlin Entertainments (MERL LN) theme park boss Sir John Sunderland". It may be true, but it is not a good look. It is management's job to do the right thing with regard to investor relations. And if the stock is not cheap enough to buy rather than grow by investing in new assets, then it isn't "too cheap" for management.

• Brookfield has now been confirmed as the preferred party in negotiations with Aveo Group (AOG AU).

• Villa World Ltd (VLW AU) announced AVID's DD on an exclusive basis has concluded but continues on a non-exclusive basis.

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.

Interestingly, on the 2 July, 229 companies with shareholdings in SHK, were moved into China Everbright. This is probably just cleaning house.