Last Week in Event SPACE: Toshiba, Takeda, Spring REIT, SK Holdings, IMAX, Samsung C&T

Last Week in Event SPACE ...

• King Streets' proposals for Toshiba Corp (6502 JP) are aggressive and overly optimistic. The 127-page document is long on details and short on realism.
• A spread of ~8% in the Takeda Pharmaceutical (4502 JP) / Shire PLC (SHP LN) deal following the EC submission is very attractive.
• Spring Real Estate Investment Trust (1426 HK) unitholders (potentially) have one day in which to reach an opinion on the merits of the PAG's Offer versus the Huizhou acquisition.
• SK Group plans to sell SK Shipping (57.2% held by Sk Holdings (034730 KS)) to Han & Co may be a precursor to a wider Group restructuring.
• The implied market valuation for IMAX Corp (IMAX US)'s deconsolidated operations is challenging to reconcile.
• With the overhang of block deals removed, Samsung C&T (028260 KS) is trading "cheap".

(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: $19.3bn; Liquidity: $54mn)

King Street Capital urged an accelerated implementation of Toshiba's buyback together with an expansion in size from ¥700bn to ¥1.1tn. King Street outlined further initiatives which they felt had the potential to boost shareholder value. By and large, their assumptions appear to be excessively optimistic.

• LightStream Research agrees that Toshiba suffers from a lack of scale in its remaining businesses as those under the parent company's purview appear to have been neglected while Toshiba focused on nuclear and NAND. This leaves the company with something of an identity crisis.
  • King Street's presentation comes across as being along the lines of focused investment and encouraging selectivity, but without the investment. It is unclear which businesses they feel Toshiba should be trying to turn into their growth pillars and thus comes across as a simple break-up type value extraction suggestion, and a hurried one at that.
• Travis Lundy also views King Street's proposals and valuation analysis as being punchy. Telling Toshiba that it can run a razor-thin capital backstop, and take on debt, and sell its cash-flow-generating assets at full price and increase its credit rating at the same time, and be left with a bunch of assets which need restructuring but which will cost nothing to restructure?
  • Each part of King Street's ex-buyback valuation analysis seems to have its issues, but the embedded assumptions in the second and third parts are quite optimistic, and the evaluation of the stock price depends on no small measure of asset-stripping. Margins will, according to King Street, rise to a combined 10.6%, after getting rid of all businesses which are underperforming - at high valuations as if they were good businesses, without any additional costs - and cutting costs and right-sizing. That will generate a bunch of cash and help increase the buybacks, which are not incidentally a magic bullet. This seems more than a little naive and not well thought-through.
• LightStream believes Toshiba would do well to eventually raise OP towards ¥175-200bn. The stock is probably worth ¥4,000-4,500 (post-reverse split) and the buyback is likely to propel it towards that level. In contrast, King Street's targets a near-term OP of ~¥175bn and a TNP target of ~¥325bn. Toshiba has never generated more than ¥290bn in OP even when it was consolidating the memory business.
• Regarding buybacks, Travis notes King Street's comments on "delays" are inaccurate and unjustified. He believes King Street overcomplicates open market purchases and he has in the past (in spring and early summer insights) concluded ToSTNeT-3 buybacks were required. But ToSTNeT-3 buybacks need sellers. The goal is then to get the share price up substantially higher first, and THEN launch a ToSTNeT-3 buyback.

links to:
LightStream's insight: Toshiba: King Street Assumptions Look Exceedingly Optimistic
Travis' insight: Toshiba: King Street's Buyback Proposals Lack Required Detail
Travis' insight: Toshiba: King Street's Valuation Analysis Is... Punchy?

Takeda Pharmaceutical (4502 JP)(Mkt Cap: $32bn; Liquidity: $172mn)

Takeda announced that the company had established the Record Date (19 October 2018) for its EGM to approve its merger with Shire PLC (SHP LN). Travis believes the EGM will take place in the first week of December. EC AntiTrust Review has commenced and presumably so has JFTC. There is a decent chance this deal is approved by year-end, which means that is when the spread would collapse.

• Net-net, there is probably something like 15-25% of Shire to sell from active holders (including retail, UK-only active holders, and excess UK holding by US holders who don't want to own a "Japanese" stock), then about 10-13% of Shire to sell on global index passive selling, 10% of Shire to buy on global index passive buying, then another 13% of Shire to buy on passive buying for purely Japanese indices (TOPIX, JPX Nikkei 400).
• That means a net overhang still of 10+% of Shire. A 10% overhang of Shire means someone has to be willing to buy a $4bn position in Takeda. That is active risk.
• The risk arb spread at 7.8% offers a very good risk/reward because Travis sees little chance of a significant delay due to anti-trust, and expects shareholders to approve both sides. The deal should close by mid-January 2019 at latest.

(link to Travis' insight: Takeda/Shire III : EGM Announced, Drug Deal Coming Together)

Spring Real Estate Investment Trust (1426 HK) (Mkt Cap: $660mn; Liquidity: $0.7mn)

Spring has dispatched the circular in regards to the Huizhou property acquisition. The EGM for unitholders to vote on the transaction will be held on the 29 October. Two days later, PAG Real Estate's Offer document was dispatched. Conditions to the Offer include 50% acceptance (including PAG's stake) and unitholders voting down the Huizhou acquisition. If 50% is reached by the 15 October, the Huizhou condition will be waived. According to CCASS, tendering to date is 0.88% of units out.

• The 15th October is specified by PAG for good reason. If declared unconditional on that date, units tendered will be settled within 7 business days, or 24th October. This will enable PAG to take control of those units on or before the 24 October record date in which to vote at the EGM. In effect, PAG would have sufficient votes to block the Huizhou sale.

• The issue is Spring's Response Document, which includes the IFA opinion, which will only be dispatched on or before the 15 October, effectively only giving unitholders (potentially) one day in which to reach an opinion on the merits of the Offer versus the Huizhou acquisition.

• That's not adequate. Spring should delay the EGM to provide sufficient time for unitholders to formulate a decision.

(link to my insight: Spring REIT's EGM Should Be Delayed)

Sk Holdings (034730 KS) (Mkt Cap: $14bn; Liquidity: $66mn)

Reportedly SK Group plans to sell SK Shipping to Han & Co., a large local private equity firm. Douglas Kim believes a likely scenario is for Han & Co. to participate in a major rights offering of SK Shipping that could be worth nearly ₩1.5tn (US$1.35bn). A major portion of the funds will be used to reduce debt and the remaining portion will be used for Han & Co. to become the largest shareholder of the company in the range of 80-90%.

• However, the exact details about what portion of the ₩1.5tn will be used to pay off debt or to acquire the 80%+ stake in SK Shipping are not known. If the SK Group is able to sell SK Shipping to Han & Co., one of the major benefits would be an improved consolidated balance sheet of Sk Holdings (034730 KS), which has a 57.2% stake in SK Shipping. The sale could also form part of a wider SK Group reorganisation plan.

(link to Douglas' insight: Korea M&A Spotlight: SK Group Plans to Sell SK Shipping to Han & Co)

Briefly ...

The tender offer for Melco Resorts and Entertainment (Philippines) (MRP PM), which was to commence on the 3 October, has been delayed for approximately 2 weeks "or until such time that it otherwise determines." As reported by news outlet BusinessWorld last week, the tender offer has been labelled unfair by some local traders, due to the offer price of PHP7.25/share being nearly half of the price when it IPO'ed.

Jeil Pharma Holdings (002620 KS) will aim to acquire a total 7,000,000 Jeil Pharmaceutical (271980 KS) shares (47.6% of total shares) at ₩53,874 in order to complete the holding company conversion. Still to be finalised (this will occur on the 23 Oct) is Holdings' price per share to be swapped with Pharmaceutical shares. As it is, Holdings' swap price per share is 'tentatively' set at ₩32,208.
(link to Sanghyun's insight: Jeil Pharma Holdings (002620) : ₩377bil Tender Event Summary)

Under the US$2.6bn merger agreement between Aspen Insurance Holdings (AHL US) and Apollo Global Management, deal completion is subject to Aspen not suffering losses for the period of July 1, 2018, through January 31, 2019 of more than $350mn net of reinsurance. Full-year net cat losses for Aspen averaged $249.5mn per year for the 2008 to 2017 - $576mn in 2017. Though premature to make estimates for this year, management incentives to complete the deal have driven Aspen into a position where it would be highly unlikely to exceed the loss cap associated with calendar 2018 results. The deal is also contingent on a raft of regulatory approvals such as the Hart Scott Rodino act. (link to CTFN's insight Storms Add to Aspen/Apollo Cat Limitation Tally)

HAECO (44 HK)'s scheme meeting will be held on the 10 October.

IMAX Corp (IMAX US) / Imax China Holding (1970 HK)

After recently retracing (slightly) from its 12-month high of ~22%, IMAX's current premium to NAV is 15%. This implies a forward EV/EBITDA of 16x for the parent operations. That looks aggressive.

• IMAX's growth drivers and superior margins are derived from Imax China. IMAX's forward deconsolidated revenue growth is flat to negative; EBITDA margins are flat and income generated at the parent level of $2mn and $5mn in FY18E and FY19E accounts for just 4% and 8% of FY18E and FY19E's net income.
• Overall, IMAX stub ops appear to be trading unjustifiably richly. I'm not aware of any specific catalyst other than the fact its NAV premium has pulled back from recent extreme highs.

(link to my insight: StubWorld: TCL's Possible Stake in ASM, Imax Is Not The Ticket, Out of Touch Intouch)

Samsung C&T (028260 KS) (Mkt Cap: $18.3bn; Liquidity: $38mn)

C&T's block deals ended last month on Sep 20, freeing the company of its circular shareholding links, and in turn, removing the biggest uncertainty factor overhanging the stock.

• C&T's discount to NAV, with reference to Smartkarma's Holdco monitor, is at a historic low. To Sanghyun Park, this alone is an argument to go long C&T.
• This could be hedged with Samsung Biologics Co., (207940 KS),the largest contributor to C&T's NAV with 31.5% Over the last three months, BioLogics' price had gone up 24.25%, gaining ₩2.9tn in market cap while the other two large contributors, Samsung Electronics (005930 KS) and Samsung Life Insurance (032830 KS), pretty much drifted sideways during the same period.
• C&T had also gained ₩2.1tn in market cap with a 9.57% price gain during this period. But during this period, C&T's cash holding increased by about ₩1tn from the Seocho HQ building sale. This suggests that only one-third of BioLogics market value increase has translated into C&T's current price.

(link to Sanghyun's insight: Stub Trade on Samsung C&T with BioLogics as a Sole Pair Partner)

Briefly ...

Wheelock & (20 HK)'s discount to NAV has widened out to 44%, an all-time low since Wharf Real Estate Investment (1997 HK)'s in-specie. This is probably a combination of an increasingly bearish read through on its dev properties, most of which was purchased in recent years, therefore exposed to (potentially) static to falling primary sales; and WREIC support from strong Hong Kong retail sales. Nevertheless, it does look to have overshot.

Two weeks ago I flagged Intouch Holdings (INTUCH TB)'s NAV discount was widening back out to the multi-year extreme of 30% first touched in early May. That is where it is trading now. At a 7.7% yield and at a multi-year low ratio (Intouch over AIS), Intouch does look attractive here. A catalyst would be helpful though.

Should TCL Corporation's rumoured acquisition in Asm Pacific Technology (522 HK) unfold - and there is no certainty it will - Asm International Nv (ASM NA) is the more interesting play, which is trading towards the low-end of its NAV discount range, activist shareholders will be happy, the holding discount will be removed, and the company will be cashed up, with ~88% of its market cap in net cash, using current prices. Shareholders should expect a material special dividend resulting from the sale of ASMPT.

A change of pace, with no major CCASS movements of note in the past week, below is a list of companies who have had the auditor changed or resigned in the past month.