Last Week in Event SPACE: UNIZO, Maanshan, SK Holdings, Z Holdings, AVIC, TVB, HN Renewable, Webster

Last Week in Event SPACE ...

• On a risk-reward basis on the Unizo Holdings (3258 JP) deal, if Ichigo, Elliott, and others do not step in, this may be near-term "dead money" even at ¥4,000/share, but the situation is still live.
• The tendering condition in the Maanshan Iron & Steel H (323 HK)'s MGO appears a high hurdle. The pair trade with Angang Steel Co Ltd (H) (347 HK) looks more interesting.
• Own Z Holdings (4689 JP) expecting a pop next week, but be careful owning beyond about ¥350/share because in general, the equity world is not acting like a very pretty place, and October is October.
• The Communications Authority belatedly okays Television Broadcasts (511 HK)'s shareholding structure, increasing the likelihood of an Offer being re-launched, with shares 50% down from the last tilt.
• The IFA will have to pull out all stops to opine Avic International Holding-H (161 HK)'s Offer, at an 80% discount to NAV, is fair and reasonable.
• SK Holdings (034730 KS)'s chunky buyback is the clearest sign the SK Group is not pursuing Asiana Airlines (020560 KS).
• Huaneng Renewables Corp H (958 HK)'s Offer is "okay" but it's probably enough to get up. Just watch out for the 90% tendering condition.
• ACCC and FIRB should be non-issues as PSP goes nuts for Webster Ltd (WBA AU).
• Plus, other events, CCASS movements (including IPO lockups) and Mood Spins.

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

Unizo Holdings (3258 JP) (Mkt Cap: $1.5bn; Liquidity: $29mn)

Since Fortress launched a friendly Tender Offer as the result of a "market check" auction UNIZO conducted to find competing interest to the Partial Tender Offer by H I S Co Ltd (9603 JP) commenced suddenly in July, the shares have traded through terms. There were expectations of a bump, and expectations of activism.

• UNIZO announced a "Basic Policy for Handling Acquisition Proposals Targeting UNIZO Holdings Company, Limited by a Third Party", effectively requires any buyer to provide a jobs and incentives guarantee to the employees of UNIZO before the company will support a Tender Offer - no matter the price.
• UNIZO decided to withdraw its support for and withhold its opinion recommending the Fortress Tender Offer. UNIZO announced that it had also rejected a Tender Offer proposal from one of the original potential "market check" sponsors at ¥5,000/share - a 25% premium to the one to which they had originally agreed and a 150% premium to where the shares were trading the day before the H.I.S. Tender Offer announcement. Basically, UNIZO won't support an Offer without an explicit "mechanism" for continued employment of all its employees.
• There is a non-negligible chance that neither the Fortress Offer nor New Acquirer's Offer will be successful at ¥4,000/share, and unless Fortress makes their mechanism "explicit" Travis did not see that in future an Offer necessarily has to bid more than ¥4,000/share. The New Acquirer had two opportunities to respond to UNIZO's requests regarding employee control, compensation, and job guarantees. They did not match it. Fortress has had several opportunities to up their price. They didn't. They were asked to raise their price to ¥5000/share. They have not. Fortress' release this past Wednesday is more one of defending its honour on the expectation UNIZO comes back to the table with a more reasonable agreement.
• The stock opened up 7% this past Monday, before closing +6.8% at ¥4815. That looked like short. There should be no natural market buyers north of ¥4000/share if Fortress cannot get this deal done. The natural "buy back what I sold" crowd is 25-30% lower - at the average price where Elliott and Ichigo bought 20% of the company.

link to Travis' insights:
Unizo (3258 JP) Goes Hostile on Its Own Shareholders?
UNIZO (3258 JP): At 4% Shy of a Tender Offer Which Doesn't Exist, Risk Is To The Downside
UNIZO: Fortress Clarity Is Not Certainty

Maanshan Iron & Steel H (323 HK) (Mkt Cap: $2.9bn; Liquidity: $6mn)

The Composite Doc has been issued. The First Closing Date is the 29th October, and the Offer will lapse if not unconditional by this date. Maanshan has traded at or below terms, on average, on 35 days of the 49 days traded since the July announcement. 822mn shares have changed hands, 502mn on days when trading at or below terms.

• China Baowu's low MGO price was intentional. China Baowu did not want to make an MGO for Maanshan's H shares - just as they didn't want to make an MGO for the A-shares. The CSRC has waived China Baowu's obligation to make an MGO for the A shares, but Hong Kong's SFC denied China Baowu's application on the Hs. The announcement makes it clear the Offer will lapse on the First Closing Date if the acceptance condition is not met. The intention is to maintain Maanshan's listing.
• On a simple ratio - Maanshan over Angang Steel Co Ltd (H) (347 HK) - the 3% premium at the time of the insight, has only briefly been exceeded in the past ten years, a handful of times in August and early September. In addition, Maanshan H shares are trading at par with the As, compared to a 10-year average of a 40% premium in favour of the As.
• Arb players are active, either on a potential re-rate over the US/China trade dispute, or simply to tender if the dispute continues. I'm still not sold there are sufficient shares in arb hands for the MGO to be met. What looks more interesting is Maanshan against Angang. Tendering into the Offer was 0.38% as per recent CCASS numbers.

(link to my insight: The Magang/Angang Pair Trade Is Preferable To The MGO)

Z Holdings (4689 JP) (Mkt Cap: $14.4bn; Liquidity: $61mn)

On 10 September 2018, Altaba Inc (AABA US) announced an offering of its Yahoo Japan (now known as Z Holdings) shares. They held 1.36353bn shares of Yahoo Japan at the time. By day end, YJ had determined they could sell the whole swath of shares and announced a sale of their entire position at ¥354/share. This lifted the float dramatically - from about 1.2bn shares to close to 2.6bn shares.

• There are 220-260mm shares of Z Holdings to buy in the Free Float Weight rebalance for TSE-calculated indices (TOPIX and JPX Nikkei 400) at the end of October (30 Oct at the close). Over the last year the average ADV is 21mm shares. There is therefore 10-12 days of ADV to buy or ¥68-80bn. The announcement of the free float changes is after the close of the 7th October.
• Since the selldown in Yahoo Japan last year, no shareholders (other than Softbank) appear to hold anywhere near a 5% position. That means there is much less clarity than we would like. It is also quite unusual. It is possible there are some who bought in that offering who still own but wouldn't mind selling if the stock went up 10-15%. It is equally possible someone might find a reason to own more.
• It is Q4 and Japanese funds and long/short funds have not done as well this year as their US counterparts. There could be a desire to take profits where profits can be taken. This insight is cautiously bullish Yahoo Japan in the short-term but warns that this trade is well-signalled among a certain type of trader/investor.

(link to Travis' insight: The BIG BUY of Z)

Television Broadcasts (511 HK) (Mkt Cap: $716mn; Liquidity: $1mn)

Almost 28 months after commencing its review of new information into the shareholding structure of TVB, the Communications Authority (CA) concluded that although the information was materially relevant, and could potentially be (mis) interpreted as to who controlled Young Lion Holdings (YLH) - TVB's largest shareholder with 26% - the CA opted to revoke the 2015 and 2016 Shareholder Agreements (SA), only to subsequently grant approvals to the SAs, mindful of the new info. The CA signing off on the SA arrives 20 months after the Buyback/Offer lapsed.

• The bulk of this insight I recapped events leading up to the CA review, then asked whether TVB would re-launch an Offer as more than 12 months have lapsed since its Offer expired. It is worth noting the 2017 buyback was a highly advantageous offer by management towards boosting their percentage holding in the company, utilising recently injected funds in tandem with the fall in the share price after the profit warning. The undisturbed price was only 4.3% above its 5-year low, while the offer price was only a 14.7% premium to that undisturbed price.
• TVB remains a takeover candidate. TVB reaches all of Hong Kong’s 7.4mn people and provides a unique landing point in the Pearl River Delta with a view to expand. That may not seem like a lot of viewers, but this didn't stop Jack Ma taking out SCMP (100k subs) in late 2015, or CITIC privatising Asia Satellite Telecom Holdings Ltd (1135 HK) recently (Asia Satellite (1135 HK) Scheme Announced; Trading Wide). If YLH tabled a conditional (50%) offer at say $20, they'd easily gain control. A scheme would be blocked by Silchester.
• Trading at levels last touched in February 2003, and over 50% down from the time of the Buyback announcement, the stock appears compelling. But I don't see much love for shareholders or a compelling strategy to boost revenue/income. Buying back recently issued notes, with the money from those notes, plus investing in Smi Holdings (198 HK) bonds (which blew up), aren't motivating shareholders to buy into TVB. This money should have been paid out to shareholders via a special dividend.

(link to my insight: Time To Tune Into TVB Or Tune Out?)

Avic International Holding-H (161 HK) (Mkt Cap: $1.2bn; Liquidity: $2mn)

AVIC mysteriously gained 27% last week ahead of its suspension on the 27 September pursuant to the Hong Kong Code on Takeovers and Mergers. AVIC has now announced a privatisation Offer from its parent, AVIC International (37.5% shareholder), by way of a Merger by Absorption. The Offer price of $9.00/share, a 29% premium to last close and 81.31% premium to the average closing price in the past 30 days, has been declared "Final." By my calculations, this Offer is pitched at an ~80% discount.

• As AVIC is PRC incorporated, the proposal requires ≥ 75% for, ≤10% against, in a scheme-like vote from independent H-shareholders. Should the vote pass, the tendering acceptance condition in this two-step Offer is 90% of H shares in issue.
• This AVIC Offer and Harbin Electric Co Ltd H (1133 HK)'s (failed) Offer are uncannily similar, right down to the length of the announcements. AVIC's H shareholders account for 28% of shares out versus 39.56% for Harbin. Harbins' Offer premium was 82.4%, while its deal size was US$395mn compared to US$376mn for AVIC. Plus, Harbin's Offer was also low-balled, in my opinion; although shareholders still voted for it and ~89% tendered into the Offer.
• Trading at a wide gross/annualised spread of 8.9%/22.9% assuming early March completion, based on Merger by Absorption precedents. Harbin traded at a considerably wider spread right up until the day of H share class meeting - 9.6% at the time.

(link to my insight: AVIC Parent To AVIC (161 HK) Shareholders: Please Sell Me Your Shares at an 80% Discount!)

SK Holdings (034730 KS) (Mkt Cap: $10.6bn; Liquidity: $22mn)

SK Holdings announced it will conduct a major share buyback of 3.52mn shares (5% of shares outstanding) worth ₩718bn, the largest share buyback program in the Korean stock market this year. The company plans to conduct the share buyback from October 2nd, 2019 to January 1st, 2020. Of the 70.36mn common shares outstanding, the company had 14.53mn shares in treasury (20.6% of shares outstanding). Post buyback treasury shares will account for 25.7% of SO. At 2Q end, SK's cash holding (de-consolidated) is less than ₩300bn so additional money will be needed via a special dividend (probably) from SK E&S.

• According to the company, the main reason why it is conducting this share buyback is that the company believes that its share price is excessively undervalued. SK Holdings' share price is down 32% from its highs in February 2018 and 14% YTD. However, Sanghyun Park believes the buyback relates to the SK Telecom demerger (equity spinoff).
• Douglas Kim reckons the share buyback may be a final, strong signal that the SK Group will not make a serious bid to acquire Asiana Airlines (020560 KS).

link to:
Douglas' insight: Huuuge Share Buyback for SK Holdings
Sanghyun's insight: SK Holdings Share Buyback Means a Change in SKT Demerger Scenario

Huaneng Renewables Corp H (958 HK) (HRC) (Mkt Cap: $4bn; Liquidity: $10mn)

Following the suspension of its shares on the 30 August pursuant to the Hong Kong Code on Takeovers and Mergers (discussed in Huaneng Renewables Targeted Amidst Clean Energy Privatisations), HRC announced its major shareholder, China Huaneng with 52.7%, had indicated its intention to make a conditional voluntary cash general offer for all the H shares, other than those H shares already owned, which could result in a privatization and delisting of HRC. HRC has now announced a privatisation Offer from China Huaneng, by way of a Merger by Absorption.

• HRC, like AVIC, is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a scheme-like vote and a tendering acceptance condition. The 90% acceptance condition is now mandatory for companies who do not permit compulsory acquisition rights under the laws of certain jurisdictions, such as in the Mainland.

• This is the third Hong Kong-listed, clean-energy company subject to a privatisation or change of control in the past six months, after SOE State Power Investment Corporation successfully privatised China Power New Energy Development Co (735 HK) by way of a Scheme last month as discussed in China Power New Energy To Be Delisted After SOE Injection Abandoned; and Gcl Poly Energy Holdings Limited (3800 HK), the 62.28% shareholder of Gcl New Energy Holdings (451 HK), entered into a Cooperation Intent Agreement back in June with China Hua Neng Group (a subsidiary of SOE China Huaneng Group - the same shareholder of HRC).

• The Offer price of $3.17/share, an 18.73% premium to last close and 46.08% premium to closing prior to the announcement late August, has been declared "Final." It's an "okay" bid. HRC traded above terms as recent as June of last year. If simply pegging to windpower and clean energy peers, HRC's Offer price is fair. Currently trading at a wide (but roughly comparable to AVIC's) gross/annualised spread of 7.8%/19.8%, assuming early March completion.

(link to my insight: AVIC Parent To AVIC (161 HK) Shareholders: Please Sell Me Your Shares at an 80% Discount!)

Webster Ltd (WBA AU) (Mkt Cap: $476mn; Liquidity: $1mn)

Australian agribusiness company WBA has entered a Scheme with Canada's PSP Investments. The consideration under the Offer is $2/share, a 57% premium to last close. PSP currently holds 19.1%. Should the Scheme be implemented, Webster will then transfer certain assets to a separate, newly formed PSP Investments group entity (KoobaCo), in which Belfort Investment Advisors (12.5% shareholder) and Verolot Limited (10.7%), Chris Corrigan (chairman) and David Fitzsimons (NED) investment vehicles respectively, will be offered an opportunity to acquire a 50.1% ownership in KoobaCo. Independent shareholders can vote on this entitlement.

• This takeover announcement follows Nutrien Ltd (NTR CN)'s recent takeover of Ruralco Holdings (RHL AU) - discussed in Nutrien's Move On Ruralco Makes Agronomic Sense - and Elders Ltd (ELD AU)'s takeover of IRR. Both deals required ACCC scrutiny and the competition watchdog (ACCC) is on record saying it will closely monitor increasing consolidation in Australia's drought-struck rural sector. WBA accounts for 90% of Australia's annual walnut crop.
• PSP Investments is one of the largest and most active foreign investors in Australia’s agricultural sector. However, I don't see the regulator having a problem with this. Webster may have 90% of Australia's output for walnuts, but this would simply be moving from one holder to another. And the ACCC and FIRB should not have an issue with WBA's cotton assets, as production accounts for ~4% of the national output.
• The Offer is pitched around its life-time high - WBA has only closed above terms once, back on the 19 June last year. Trading at a gross/annualised spread of 3.1%/8.5%. Tight but a relatively attractive entry point.

(link to my insight: Webster: PSP Goes For the Juglans)

OSRAM Licht AG (OSR GR)

Late Friday night, the results came out for the Osram offer by ams AG (AMS SW) at €41. They only got 51.6% of the shares (including their own 19.99%).

The deal failed, and 31.6%/80% not owned is a pretty poor showing. In the after-market, the shares fell to €37-38 in tiny volume.

• ams said they are still interested in consolidating to make a European player.
• Osram said they will present strategy on 12 November, and in the meantime Bain Capital and Advent are conducting due diligence with an eye to making an Offer.
• ams owns 19.99%, which would make a future non-friendly-to-ams Domination effort more difficult.
• Travis expects the three major parties will have to get together. Until then, this may be dead money. It may also simply require doing a deal at a higher price a year or three from now.

(link to Travis' insight: Ams Offer Does Not Win Osram. Back To Square 2. )

The Japanese Market (lots of liquidity)

When the Nikkei 225 announced its Annual Review results on 4 September, Tokyo Dome Corp (9681 JP) came out and was replaced by M3 Inc (2413 JP), the Japanese market was just starting a rally. Between the close of 4 Sep and the close of 30 Sep, the market rose 5.4%, M3 rose 16.5%, and Tokyo Dome fell 2.9%. The M3 buying rebal portion was strong, as expected. The stock jumped on Day1, and from Day2 to end-month outperformed TOPIX by 4.4%, and on Oct1 outperformed by another 1.8%.

• Tokyo Dome went down hard on Day1 and did not follow through at all, outperforming TOPIX from Day2 to end-month. Trading looked a lot like there were "usual suspect" traders who had shorted in order to buy back at the print. The shares underperformed on Oct1.
• For M3, future direction will still be determined by Foreign Active investors. Generically speaking, foreign active investors increase allocations to Japan and stocks when they go up, and decrease when they go down. They are momentum investors. When the momentum turns, they will turn. As of today, it has not turned yet. They owned 75+% of the float as of end-March and it isn't clear they own less after 26% of the real float was sold to Nikkei 225 funds.

• Consensus FY2020 EBIT has stopped falling but it doesn't have great momentum. Travis would suggest the next directional move on consensus EBIT forecasts is important as the stock is now 44.3x 2020 consensus EBITDA. I would wait (to trade) until the trend on EBIT forecasts starts to turn (for a legitimate reason) but when it does, the stock price could go a lot further than the consensus change suggests.

• Travis would also point out that the event created 27mm shares of short positions in M3. That is a LOT. It is a very big piece of the float. And the people who bought from them do not need to sell in any observable timeframe. Those shorts have to buy back from people who did NOT sell to the indexers.

(link to Travis' insight: Nikkei 225 Rebal Post-Mortem - Be Careful!)

GPIF (Government Pension Investment Fund (of Japan)): World's Biggest Pension Fund

GPIF released a comment, such that "for foreign bonds with foreign currency hedges attached, considering that such investments are an effective as a substitute for domestic bonds, and that their risk / return profile is close to that of domestic bonds, such investments will be removed from the asset category of "foreign bonds" and added to the asset category of "domestic bonds" for the purposes of portfolio allocation policy measures."

• This provides more room under the foreign bond portfolio limits if they already have some portfolios with hedges on (and there is a little bit with a hedged benchmark). And IF the mandate is provided to existing mandate allocations, it would allow domestic bond portfolio managers to sell negative-yielding domestic debt to buy foreign debt yielding zero when hedged back into yen. Zero is better than negative. But there is also the question of who will have the right to do this, to what extent, and whether it applies to all managers - active and passive - within the domestic bond allocation.
• This may become a big thing, but to start only ¥1.25tn moves from the FOREIGN BOND allocation to the DOM BOND allocation. That frees up around 80bp of the GPIF portfolio under the FOREIGN BOND cap at 19%. The DOM BOND allocation is 75/25 Passive/Active and the Passive portion is 45% straight JGBs and the bulk of the rest is largely JGBs. Adding anything which adds a spread, or has zero yield compared to a negative yield, is a good thing.
• There will be some effect on cross-currency basis, and there will be some effect on the skew of short-term currency options. I would expect dollar/yen calls to get relatively cheaper. It is possible there will be some small effect on forex (i.e. to net buy $/yen) but it will be small.

(link to Travis' insight: Mind the Gap! GPIF Goes Basis Hunting)

Fila Korea Ltd (081660 KS) (Mkt Cap: $2.8bn; Liquidity: $37mn)

Fila has announced its plans to form a holding company. The current Fila Korea company will be divided into two entities including a) Fila Holdings which will serve as the holding company focusing on international business and b) Fila Korea which will become the operating company, focusing on the domestic business. The split-off due date is scheduled for January 1st, 2020.

• Douglas Kim believes there are three main reasons why the market is viewing this new holding company structure of Fila Korea negatively (as evidenced by the stock price decline): poor performance of holdcos related stocks in Korea this year - op five holdcos in Korea experienced an average decline of 11.6% in their share price performances YTD; uncertainty in taking a "different" approach of making Fila Korea (Opco) private; and concerns about "holdco discount" - the "holdco discount" range is quite wide from about 20% to as high as 50%.
• Overall, it appears that the negatives are outweighing the positives of this formation of the holding company for Fila Korea and this is likely to continue act as a negative factor on its share price in the next few weeks.

(link to Douglas' insight: Fila Korea Plans to Form a Holding Company)

Briefly ...

Now that we know the minimum level of shareholding that the Government of India is willing to hold, we can compute the effective discount on the BHARAT 22 ETF (ICICIB22 IN) tranche. In his insight (Bharat 22 ETF - Effective Discount Shrinks Substantially), Brian Freitas also recommended buying National Aluminium (NACL IN) and hedging with its peers since the stock should outperform once the ETF manager starts buying.

For the month of September, 12 new deals were discussed on Smartkarma with an overall announced deal size of ~US$250bn, aided by the mega-merger of Philip Morris International (PM US) and Altria Group (MO US).

• Half of these deals are preliminary and non-binding such as Huaneng Renewables Corp H (958 HK) (now official though), Bitauto Holdings Ltd Adr (BITA US), Yixin Group Ltd (2858 HK), Leyou Technologies (1089 HK), China Biologic Products (CBPO US) and, Changyou.Com Ltd (Ads) (CYOU US). Moreover, the downstream Offer for Yixin will only take place if the Offer for Bitauto completes.
• The average premium for the new deals announced in September was 33%, while the average for the first nine months of 2019 is ~32%.

(link to my insight: (Mostly) Asia M&A: September 2019 Roundup)

• Mod Resources (MOD AU) shareholders vote in favour of the Scheme with Sandfire. The implementation date is expected to be the 23rd October.
• Re: Dalian Port (Pda) Co Ltd H (2880 HK) - the filing for the change of business registration in respect of the Equity Transfer took place on 30 September 2019. The unconditional MGO is now triggered. The Composite Document will be dispatched on or before the 7 October. Subsequently, the SFC announced that the Offeror cannot deduct the final dividend from the Offer price. Therefore, the MGO price will remain at $1.0127/share.
  • The Composite Document has now been dispatched. The Closing Date is the 28 October. The Offer is unconditional.
• Pacific Energy (PEA AU) has announced QIC's Scheme Booklet has been registered with ASIC. The Scheme Meeting is to be held on the 8 November.
• AVID Property has received a "no objection" letter from FIRB in its tilt for Villa World Ltd (VLW AU) by way of a Scheme.
• Tcl Multimedia Technology (1070 HK) has announced a mandatory unconditional offer has been triggered following a restructuring agreement. The Offer price of $3.23 compares to the last close of $3.95.
• Tonly Electronics Holdings (1249 HK) has announced a mandatory offer has been triggered following a restructuring agreement. The Offer price of $5.89 compares to the last close of $5.69.

• The TSE has downgraded one stock Chugokukogyo (5974 JP) for breaching the market cap rule on a rolling average basis. For that, it will be downgraded to TSE2 on Nov1. This is tiny but unusual.

• Recruit Holdings (6098 JP) has commenced the buyback related to the follow-on after their offering, but from the 19th to the 30th of September, they only bought back 1.32mm shares for JPY 4.5bn. That is a far cry from the 30mm shares for JPY 80bn which was in the original authorization.
• ams AG (AMS SW) has gotten to 19.99% of OSRAM Licht AG (OSR GR) by sweeping the market up to EUR 41.00. Sellers had their chance. They aren't buying any more. The tender closed on the 1 October.
• The Scheme Meeting for Australian Unity Office Fund (AOF AU) is to be held on the 7 November.
• China Hua Neng Group (a subsidiary of SOE China Huaneng Group) has completed due diligence on Gcl New Energy Holdings (451 HK) and has been discussing possible solutions to the issues raised during the DD process on a continuous 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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

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