Last Week in Event SPACE: WorleyParsons, Clarion, Healthscope, Idemitsu/Showa, Intu, Mazda, Orion

Last Week in Event SPACE ...

• WorleyParsons Ltd (WOR AU) investors who were bullish at 23x earnings should be more bullish a bigger, better company at lower multiples assuming its tilt for Jacobs Engineering Group (JEC US) is successful. So the Rights Offer should have been expected to go well. It did, and then it didn't.
• Hitachi Ltd (6501 JP) made a deal to sell Clarion Co Ltd (6796 JP) to Faurecia (EO FP) at well over 10x EV/TTM EBITDA, and at a declared 5.7x EV/EBITDA assuming synergies. Perhaps Alps Electric (6770 JP)'s directors should sell Alpine Electronics (6816 JP) to Faurecia or someone else.
• Have the dynamics changed enough in the preceding six months such that the same offer by BGH-AustralianSuper Consortium for Healthscope Ltd (HSO AU) gets up this time?
• It rankles a bit, and the returns on the risk arb here are not sufficient, but the Showa Shell Sekiyu Kk (5002 JP) and Idemitsu Kosan (5019 JP) deal will likely get done as planned.
• A firm Offer from a long-standing major shareholder is likely to unfold for Intu Properties (INTU LN).
• The merging of their sales financing operations may be a precursor to wider tie-in between Toyota Motor (7203 JP) and Mazda Motor (7261 JP).
• A ~60% discount for what is effectively a very simple single stock structure Holdco is unjustifiably wide for Orion Holdings (001800 KS).
• Hitachi Ltd (6501 JP) separately decides to increase the size of its elevator and escalator business in China through a public tender offer for Yungtay Engineering (1507 TT). And there could be something interesting to look at here.
• Orix Corp (8591 JP) finally decides to buy out subsidiary Daikyo Inc (8840 JP).

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

WorleyParsons Ltd (WOR AU) (Mkt Cap: $2.8bn; Liquidity: $17mn)

WorleyParsons announced the acquisition of the Energy, Chemicals, and Resource division of Jacobs Engineering Group (JEC US) in the US, for a cash and debt-free total enterprise value of US$3.3bn (A$4.6bn) at an implied pro forma FY18 EBITDA multiple of 11.5x, which would fall to 8.5x after including an expected A$130mm annually in cost synergies. Simultaneously, WorleyParsons announced this acquisition would be funded via an A$2.9bn Non-Renounceable Entitlement Offer and A$985mm of stock issued to Jacobs.

• With WorleyParsons trading at very high EV/EBITDA multiples (almost 20x estimated June 2019e) and 23x earnings, buying Jacobs ECR business at 11.5x EBITDA and seeing 20% EPS accretion pre-synergies (and ex-costs) while boosting underlying revenue 93% and backlog 154% (note that the backlogs are measured differently) seems a reasonable deal.
• Travis expected this Rights Offering would present interesting trade opportunities. He also expected instos to take up their rights to a decent extent, but not the full extent, because of the sheer size of the deal, but expected there had been some sounding-out going on down under. This deal would not get done otherwise.
• He said that if you liked oil exposure, you would probably still like this deal. The deal seemed to make sense but one cannot help but wonder whether it will smell a bit "late cycle" to some investors.

(link to Travis' insight: WorleyParsons' Giant Makeover)

Healthscope Ltd (HSO AU)(Mkt Cap: $2.6bn; Liquidity: $8mn)

After shares closed at $1.78 earlier this week, its lowest level since February, below the $2.03 undisturbed price prior to the BGH-AustralianSuper Consortium's April proposal, and 44% down from its September 2016 peak of $3.17; the Consortium backed itself by pitching an almost identical offer of $2.36/share, one that had previously been rejected. Though perhaps a tad opportunistic, the Offer price looks full vs. peers, and the premium to the undisturbed price is a punchy 32.6%.

• The Consortium's second attempt is driven by Healthscope's plans to inject ~A$1bn of its hospital properties into a trust and then sell 49% of that trust to a co-investor. This latest proposal is conditional on this spin-off not proceeding.
• Ellerston Capital, which holds ~9.37% is backing the Consortium and supports due diligence access. With Ellerston's backing (in the absence of a superior proposal), ~23% of shares out support the proposal. This may be the magic number for Healthscope's Board to open up the data room.
• The proposal remains indicative and Australia is an "indicative" graveyard. A response from Healthscope may be forthcoming at its EGM on Wednesday (31 October). The current upside to the indicative proposal is ~11% versus 16% down, or around a 60% chance of going through, which looks about right, although a spread or two lower from here would be more attractive.

(link to my insight: Healthscope: BGH-AustralianSuper Dusts Off A Similar Offer)

Clarion Co Ltd (6796 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

The Nikkei Thursday evening carried a very short article saying that Hitachi Ltd (6501 JP) was "poised to" sell its 63.6% stake in car audio and GPS manufacturer Clarion for about ¥80bn to French autoparts manufacturer Faurecia (EO FP). Where there is smoke there is often fire, and the idea of it smelled right.

• The share price is now effectively at a 5-year high. If a buyer had to pay that to get the business, it is in the right place already. And Hitachi has been on a ten-year crusade to extricate itself from "non-core" businesses.
• In order for Faurecia to buy it, it would almost certainly have to conduct a Tender Offer. But it did not necessarily need to pay up that much. Hitachi owns 63.6% of the company and Clarion has about 33bp of the company in Treasury shares, so not far short of the 66.7% needed to squeeze out minorities.
• There was a possibility that this deal is just meant to get Hitachi out of their stake and Faurecia will deal with minorities over time. But Travis had reservations. Clarion is expensive, and I do not see a reason for Faurecia to pay up.

He also says look at Alpine. On these metrics, Alpine could be bought at far higher than the current price and would still look cheaper than this Clarion deal.

(link to Travis' insight: Hitachi to Sell Clarion? Alpine Investors Take Note!)
(link to Travis' next insight: Faurecia to Buy Clarion at ¥2500/Share)

Idemitsu Kosan (5019 JP)(Mkt Cap: $8.8bn; Liquidity: $52mn)

On the 16th of October, Idemitsu and Showa Shell Sekiyu Kk (5002 JP) announced the boards of the two companies had agreed to execute a Share Exchange Agreement (merger) based on a Business Integration Agreement, whereby the two companies will merge as of 1 April 2019, with Idemitsu being the surviving entity. The two companies will hold EGMs on December 18th based on the record date of share ownership of November 1st. Showa Shell's last day of trading will be March 26th 2019.

• The ratio decided was 0.41 shares of Idemitsu for every share of Showa Shell, which happened to be a zero percent premium to where the shares were trading realtime when it was announced at mid-day. Both stocks proceeded to fall sharply, with Idemitsu briefly 10% down on the day. The shares rebounded by day end, to end down only 3.2%, but Idemitsu shares fell 8% more by end of week to end the week down 12.3%.
• For Idemitsu shareholders, this should be seen as a disappointment. A sharp increase in profitability and profit quality since the early musings of this deal came out at end-2014 and were confirmed in 2015 has gone largely unrecognized.
• One can vote against the deal, but by Travis' rough-and-dirty calculations, he does not see how this is likely to get voted down unless there is a holy hue and cry. One could use appraisal rights to get a better deal.
• Those who want to play the risk arb will probably get out OK. As a trading play, Travis would rather be tilted short. Still. as an arb play, he'd rather be long Idemitsu vs Showa because if there is injustice in the ratio, he thinks the ratio overly favours Showa Shell shareholders. But there is not a lot to do.

(link to Travis' insight: Idemitsu/Showa Deal - Idemitsu Minorities Giving Up Value To Get Scale, Survivorship Bragging Rights)

Ci:z Holdings (4924 JP) (Mkt Cap: $2.5bn; Liquidity: $7mn)

Johnson & Johnson (JNJ US) announced a US$2bn+ deal and Tender Offer to buy the 52% of Ci:z Holdings not held by CIC Corp (the family company of CEO Dr. Shirono and family) and Cilag GmbH International - a subsidiary of J&J which already owns 19.9% of Ci:z Holdings. Ci:z Holdings announced that the board of directors resolved at a board meeting today to express its opinion in support of the Tender Offer.

• Dr. Shirono is giving up and selling out. Or at least that is what it looks like. Johnson & Johnson have been talking with him for three years and have been invested for 27 months with just under 20%, and they have had a shareholder agreement with Dr. Shirono and family that they not sell their shares without J&J approval.
• At ¥5,900/share, and a significant premium to market and to rivals' multiples (EV/Sales, EV/EBITDA, PER), this is priced to complete. Because of the long date and the fact that it goes over year-end, Travis would expect this to trade a bit wider than many other tender offers. But he does not expect any issues.

(link to Travis' insight: J&J Tenders for Ci:z Holdings)

Mitula (MUA AU) (Mkt Cap: $98mn; Liquidity: $0.2mn)

In May this year, Australia-listed leading digital classified group Mitula and leading Japan-based online classified company LIFULL (2120 JP) announced a friendly, but very complex deal, for Lifull to acquire Mitula.

• The new news was a Scheme Implementation Deed (SID) Amending Deed changing the Cut Off Date which determines whether small shareholders (20,000 shares or less) can get cash consideration or will get shares has been set to 24 October 2018. And on the same day, Lifull announced FY earnings which saw revenue come in 1.7% better than the company forecast. Less good news, perhaps, is that the forecasts for next year are light compared to consensus.
• But the stock rebounded 25% in two days.
• The Scheme Booklet was subsequently dispatched. The IFA deemed the deal fair and reasonable in the absence of a competing offer. Thousands upon thousands of Aussie retail holders are likely to vote to get A$0.80/share (vs A$0.63 close on Friday), and management has agreed to take 2120 JP shares. Travis would still want to be long here. The scheme meeting is set for the 11 Dec and payment 18 Jan. The deal requires 50% by headcount and 75% by vote. Insiders have not quite 50% as far as Travis can tell. That means one needs to get all the insiders and affiliates AND probably 51% of retail. That gets you to 50% by count and 75% by shares.

(link to Travis' insight: Mitula/Lifull Deal - Push Is Coming To Shove)

Daikyo Inc (8840 JP) (Mkt Cap" $1.8bn; Liquidity: $4mm)

Friday after the close, Orix Corp (8591 JP) announced that it would buy out the remaining shareholders of Daikyo in a cash tender offer at ¥2970/share which is almost a 5-year high. It is probably a decent deal for everyone.

• It is well-enough priced.
• Orix already owns more than 67% on a fully-diluted basis when one counts its remaining Pref Share holdings. This deal could theoretically get done and minorities squeezed out using Article 235 of the Companies Act with no shares tendered.
• Travis expects the deal to garner enough shares to look OK doing that though.

(link to Travis' insight: ORIX Tender Offer for Daikyo (8840 JP))

Yungtay Engineering (1507 TT) (Mkt Cap: $0.7bn; Liquidity $0.5mm)

Hitachi Ltd (6501 JP) also announced with earnings an intention to launch a public tender offer at TWD 60/share to buy out its Taiwan partner Yungtay Engineering, in which it has been invested for 50 years, and with which it has joint ventures and co-investments in China for decades. Chairman Hsu Tso-Li has agreed to tender his shares.

But there is intrigue here. There was a management 'scuffle' last year which extended to June this year, and after it looked like Hsu Tso-Li came out on top, he is now selling. This is a new deal so Smartkarma subscribers get first crack.

(link to Travis' insight: Going Up! Hitachi Tender for Yungtay Engineering (1507 TT))

Briefly ...

The first closing date for PAG's Offer for Spring Real Estate Investment Trust (1426 HK) is the 29 October (tomorrow). Tendering is currently estimated at 19.87% (big increase towards the end of the week). PAG needs 35.2%. This is looking promising.

Jeil Pharma Holdings (002620 KS) targets 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. Jeil Pharma's swap price for the tender offer to the Pharmaceutical shareholders is set at ₩23,950 based on the Oct 19~23 VWAP at a 0% discount. The spread touched 12.76% as of Oct 23 but has contracted to 1.6% by weekend. It may not be easy to borrow Holdings' shares.
(link to Sanghyun Park's insight: Huge Spread Opening in Jeil Pharma Holdings Tender Event: Spread Is Now at +12%)

Hanergy Thin Film Power (566 HK)'s majority shareholder, is offering to privatise the company at "no less than HK$5/share" via cash or scrip. Following the privatisation, Hanergy will be listed on China's A-share market. The indicative offer values Hanergy at ~US$27bn. The problem is Hanergy has been suspended for over three years. The Offer appears geared towards taking out minority shareholders ahead of a possible forced delisting next year after the Hong Kong Stock Exchange introduced new delisting rules on the 1 August 2018. But presumably, Hanergy's share would first need to resume trading, with the SFC's approval, before a privatisation Offer (also requiring SFC approval) could unfold.
(link to my insight: Hanergy Thin Film - A Mooted Privatisation Ahead Of Possible Delisting)

Kayin Holdings, the 68.23% shareholder of Selangor Properties (SPR MK) has proposed a selective capital reduction and a corresponding capital repayment of RM5.70/share (a 40.39% premium to last close) in SPR for all remaining shareholders. Conditions include ≥75% of disinterested shareholders voting for the proposal, and ≤10% against.

Intu Properties (INTU LN) (Mkt Cap: $3.4bn; Liquidity: $13mn)

Ahead of a possible Offer, REIT intu's 3Q18 update showed the adjusted NAV/share declined 5% over 3Q18 to 344p, down from 362p at 2Q18, which itself was down 12% from 4Q17. The triple net NAV declined by 12p or 3% during 3Q18 to 297p, which followed an 11.5% fall in triple NAV in 2Q18 vs. 4Q17. Those first-half numbers resulted in the CEO David Fishel resigning in July.

• The 210.4p/share all-cash Offer is tabled by a Consortium comprising the Peel Group (27.3% shareholder) - which is 75% owned by billionaire-John Whittaker and 25% by Saudi investment group Olayan (itself a ~2% direct holder) - and global real-estate group Brookfield Property Partners (BPY US).
• John Whittaker has been closely affiliated with intu for the past eight years as a substantial shareholder; and even further afield as Whittaker was the property developer of intu Trafford Centre (which opened in 1998), intu's single largest holding.
• The timing of the Offer is potentially opportunistic as we hit peak bearishness on the UK retail sector; however the pricing (assuming it goes through at the Indicative Offer price, and the PUSU for the Consortium is the 1 November) is reasonable in terms of the premium to last close and vs. peers; and with ~30% of shares outstanding in the bag, a firm Offer is likely to unfold and be successful.

(link to my insight: Intu's Asset Depreciation Ahead Of Possible Offer)

Mazda Motor (7261 JP) (Mkt Cap: $6.7bn; Liquidity: $51mn)

The Nikkei reported that Toyota Motor (7203 JP) and Mazda would merge their sales financing operations, with Toyota purchasing a 51% stake in SMM Auto Finance, which is a JV between Mazda (49%), SMBC (41%) and SMBC's credit card company Cedyna (10%) that was formed after the dissolution of Mazda's capital relationship with Ford Motor Co (F US). Toyota will purchase the stake from SMBC and Cedyna.

• The shrinking domestic market, the emergence of ride sharing and rising interest rates in the US apparently form the backdrop for this move. While this merger is focused on the domestic market initially, it should allow Toyota to improve efficiency due to scale (Mazda's unit sales are about 15% of Toyota's) while Mazda should be able to benefit from lower financing costs thanks to Toyota's scale and financial stability.
• One of Mazda's weaknesses overseas is its distributors, servicing and financing. Coming under Toyota's umbrella would help Mazda in this area significantly and the impact of freeing management attention to focus on engineering and development where Mazda is extremely strong should not be underestimated.
• Ultimately, LightStream Research believes stronger capital ties are likely to be a matter of when, not if. It would not necessarily expect purchases at large premiums, but greater operational integration will have a significant impact on Mazda's margins. One hurdle to a merger would be the domestic market share where Toyota (with Daihatsu, Hino and Lexus) typically flirts with a 50% share at just under 45%, while Mazda's share is about 4%.
• Mazda is trading extremely cheaply to book and LightStream believe downside is relatively limited, though the name could be a value trap for some time.

(link to LightStream's insight: Mazda: After Integration of Sales Financing with Toyota, How Long Till Toyota Ups Its Stake?)

Orion Holdings (001800 KS) / Orion Corp (271560 KS)

Following the completion of last years' tender offer for Holdings, the discount to NAV has persistently plumbed new lows and is now around 60%. 90% of the stub assets, excluding net cash, is taken up by Holding's HQ (at cost); and brand income, both of which are largely constant numbers. There is very little in terms of an event or circumstance which can materially impact the value of the stub value. And the stub itself accounts for just 23% of NAV or 19% of GAV. Holdings is, for all intent and purpose, simply an indirect holding into Corp - and that holding is worth 171% of its market cap.

• The pushback on Holdings is its low liquidity on a standalone basis and relative to Corp. This is not lost on foreign investors who (according to Naver Finance) currently own 17.3% in Orion Holdings, down from 35.2% on July 7th, 2017; and 39.55% in Orion Corp, roughly flat vs. 39.8% on July 7th, 2017.
• Sanghyun believes the multiple litigations against the owner family and the struggling Chinese business have contributed to the widening trend.
• Although there is no apparent catalyst for reversing this widening trend, a ~60% discount for what is effectively a very simple single stock structure Holdco is unjustifiably wide.

links to:
my insight: StubWorld: Extreme Bifurcations in Orion Holdings And JCNC
Sanghyun's insight: Orion Holdings Stub Trade: Time Seems to Be Ripe for Both Clear & Market Neutral Setups

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

JCNC's discount to NAV goes from extreme to extreme-ier. Currently ~27% by my calcs vs. an average of ~19% and a reversal from ~11% in July.

• The volatility of the core business performance at the parent level - especially in Vietnam - was a key reason for the discount to NAV widening through much of 2017. This trend appears to be reversing as 1H18 underlying profit was up +17% YoY, primarily driven by a rebound in Vietnam car sales, and was the largest six-month total since 2H16.
• JCNC has perennially been viewed as a proxy for the Indonesian market. Prior to 4Q13, there did exist (for several years) a correlation between the NAV discount and the US$/Rupiah movement, where a strengthening in the Rupiah coincided with the discount widening. That correlation has all but disconnected and it would now appear a correlation between a weakening Rupiah, as is the case now, and a widening in the discount is emerging.

(link to my insight: StubWorld: Extreme Bifurcations in Orion Holdings And JCNC)

Casa Inc (7196 JP) (Mkt Cap: $126mn; Liquidity: $1mn)

Casa announced (J-only) that the TSE had approved its application to move from the Second Section to the First Section of the TSE as of the 31st of October 2018. TSE1 reassignment triggers inclusion into the TOPIX Index, with the inclusion event be at the close of trading November 29th, 2018.

• It is entirely likely in Travis' mind that the buying which needs to be done has already been done. The announcement of its decision to move to TSE1 in June precipitated significant buying. There was a selldown in August but a revised H1 forecast in early September confirmed a week later has helped the stock regain the ¥1300 area despite a weak market overall.
• On a very near-term basis, Travis is bullish the stock relative to peers because of the inclusion. There should be relatively little demand to sell the shares from fundamental holders (there aren't many) and there should be demand to buy the stock.

(link to Travis' insight: Casa (7196 JP) TOPIX Inclusion)

Kitakei Co Ltd (9872 JP)(Mkt Cap: $87mn; Liquidity: $0.2mn)

KITAKEI CO announced (J-only) that the TSE had approved its application to move from the Second Section to the First Section of the TSE as of the 26th of October 2018. TSE1 reassignment triggers inclusion into the TOPIX Index, with the inclusion event be at the close of trading November 29th, 2018.

• This TSE1 promotion was not outright signalled in recent months. The stock has been listed since 1991 and there could not have been much of a reasonable expectation they would have wanted to move to the TSE1.
• At 0.86x book, and mid-high teens PER, the company is slightly expensive compared to its peers and definitely expensive to where its peers have traditionally traded.
• Even if you play very small events, this stock looks illiquid - and this is a relatively small inclusion for a relatively unknown company - and there is no expectation that it will garner any coverage or see any major change in liquidity in any near-term. Travis suggests that the volume already traded is willing to sell into the inclusion. He would sell if you had some and avoid the trade altogether if you don't. Leave this for retail punters.

(link to Travis' insight: Kitakei (9872 JP) TOPIX Inclusion)

• Scottish Pacific (SCO AU): the Scheme Booklet was lodged with ASIC. The IFA has deemed the Scheme "fair and reasonable and in the best interest of Scottish Pacific shareholders (minority and management alike). Scheme meeting is set for the 30 Nov with an expected implementation date of 18 Dec.
• Guoco Group Ltd (53 HK)'s court meeting will be held on the 1 November (Friday) to vote on the privatisation. As discussed in Adverse Mark-To-Market Valuations Support Guoco's Scheme, I expect this privatisation to get up.
• Melco International Development (200 HK) announced Melco Resorts & Entertainment (MLCO US)'s tender offer for Melco Resorts and Entertainment (Philippines) (MRP PM) will no longer be conducted for the purpose of voluntary delisting of MRP, but will instead be carried out to increase the Bidder’s (MLCO) shareholding interest in MRP on "on substantially the same terms as those disclosed in the Preliminary Tender Offer Report".

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.