Last Week in Event SPACE: Vedanta, Evergrande Auto, Cocokara, Leyou, Mitsu Lease/Hitachi Cap

Leyou Technologies (1089 HK) (Mkt Cap: $1.3bn; Liquidity: $7mn)

(link to my insight: Tencent/Leyou: China Bytes)

Levo Chan Weng-lin, chief executive of Macau's junket brand Tak Chun Group, has entered into a SPA on the 11 September with David Chow and Sheldon Trainor De Girolamo, to acquire 20.65% of shares out or 1.280bn shares. Because of a prior agreement entered into between Chow inter alia, who are collectively known as the Covenantors (holding >51% of shares out), following the completion of the SPA, Chan is deemed to be acting concert with the Covenantors and De Girolamo, and will therefore be obligated to make an unconditional mandatory general offer. The MGO Price will be HK$1.05/share, the same price Chan paid for his 20.65% stake. That's a 9.34% premium to the last close.

• The obvious trade here is to buy. The question is how far up can one buy it. Travis expected one can buy this up to about ¥3500 comfortably. He expects there is a risk that the Tender Offer Price is set a bit lower than that so as to encourage people to sell, because on the back end, if DCM does not get to 50.1% in a tender offer, Shimachu could agree to sell shares to make up the difference after the Tender Offer, diluting existing shareholders. Those shares could be sold at a premium to last trade but at a discount to the Tender Offer Price.
• There is a possibility that if the terms seem somewhat unfair, some activists could make some noise on this situation.

Australian IT services company DWS agreed to be acquired by an Australian subsidiary of Indian Tech Giant HCL Technologies (HCLT IN) in a Deal that valued the company at a market cap of A$162mn (~USD118mn). The Scheme consideration will be A$1.20 per share in cash and the Deal is expected to be completed in December 2020. The transaction is conditional on receiving Target Shareholder approval and regulatory approvals. This is a friendly all-cash Deal. The board has unanimously recommended the Deal and has agreed to vote in favour. Danny Wallis (Founder, CEO, and the largest shareholder with 42.7% of total shares) has agreed to vote in favour. HOWEVER, the Offer Price (Scheme Consideration of A$1.20) seems light.

• At the time of writing, DWS is at A$1.17 translating to a gross spread of 2.6% which seems attractive for a short-dated rate-of-return trade. If you assume time to completion to be around 3 months, this will translate to an annualised spread of approximately 10.5%. The wide spread could also be a reflection of regulatory concerns and it is likely the spread will compress once the regulatory approvals have been granted. Based on the multiples, DWS does not seem expensive and there is room for an overbid from a competitor.

Hitachi Capital (8586 JP) and MUFJ Lease have decided to merge, and Mitsubishi Corp (8058 JP) and Mitsubishi UFJ Financial (MUFG) (8306 JP) would each own 20% of the new merged company. The two companies would merge at a share exchange ratio of 1.0:5.1, with the effective date of the Merger on 1 April 2021, and shareholder meetings for each company to approve the deal in late February 2021, but it does not discuss the idea of Mitsubishi Corp owning 20% of the combined company (it already owns 20% of MUFJ Lease but its stake would be diluted in the merger.

• This is an "easy" merger at a price which is probably slightly too high (in that MUFJ Lease is probably slightly overpaying but it is not clear whether overseas expansion has caused Hitachi Capital to have lower margins in places where it goes. MUFJ Lease is currently getting it for less than book, which means there would be negative goodwill. If not, that means the shares are going up.
• There will be slight accretion because some shares at Hitachi Capital will not be converted, but it is not terribly special. There may be some synergies here, but the real thing important to MUFJ Lease is that it is a big asset base and big customer base which can be bought below book.
• These companies remain cheap. For arbs, there isn't much to do except to buy at a tight spread and sell at an even tighter spread, repeatedly, for the next six months. For long-onlies who own either one, Travis thinks you are OK. If anything, he would want to be long Mitsubishi UFJ Lease because if there is some kind of financial issue, or re-rate on the ratio, it will favour Mitsubishi UFJ Lease.

(link to Travis' insight: Hitachi's Hitachi Capital Capital Case - A Merger With MUFG Lease)

GNH has announced its Hung Hon Man (CEO), with 29.99%, has made a voluntary cash offer of HK$0.17/share, a tiny premium to the undisturbed price. The Offer is conditional on Hung and Concert Parties holding more than 50% of the voting rights in GNH. GNH holds 72.99% in Get Nice Financial (1469 HK) (GNF). Should the Offer for GNH turn unconditional, the Offeror would be obligated to make a downstream Offer for GNF. That Offer price will be HK$0.4726/share, a 33.44% discount to last close.

• If someone wanted to buy a portfolio of securities and loans cheaply, this is the way to do it. When stocks like this get an offer, often they see increased stickiness at the price. One can often, such as an activist, buy a bigger stake in the company around such events. However, the major shareholder has an effective blocking stake. And this is not a particularly liquid arb situation. I would avoid.
• UPDATE. Hung Hon Man bought 0.04% in the market, triggering an MGO. It's an unattractive Offer price and distinctly possible no one tenders. One possible angle: by the Offeror nudging above 30%, and should that level remain static as at the close of the Offer, he is now guaranteed to be able to add 2% per year under the creeper rule. That option was not afforded previously when he held <30%. The announcement says he may buy more shares in the open market - my guess is that he will continue to do so at HK$0.17/share.