Last Week in Event SPACE: Xiaomi, AGL Energy, TOPIX's Big April Basket, Evergrande Auto

Last month as Xiaomi shares were getting pummelled in the selloff prior to the Trump Executive Order securities ban going into effect, with FTSE and S&P selling, and MSCI expected to delete the stock at the last minute, the company made an unusual Voluntary Announcement to the effect that the company intended to buy back shares in the market due to the sharp fall in price since earlier in the year, prior to being named on the DoD list. There should be questions about the entire thing. This was discussed in Will Xiaomi Get the National Team Bounce? They placed shares at HK$23.70 in December to "optimize the capital structure of the Company" and support a healthy and sustainable development. The shares had, in three months, fallen all the way back down to where the company placed shares. That did not suggest urgency or dramatic share price weakness vs the previous capital action. But this week, the company started buying back shares on market.

• This buyback may help absorb any eventual selling by the Seller of the original subscription shares (Lei Jun) who was locked up for three months after the original placement, should he want to sell, but it would also clear out loose shares prior to the FTSE re-inclusion which would be expected in June.
• Travis Lundy expects that most active US Person holders would have sold prior to the last date just to avoid getting crowded out in the rush. He expects US Persons have had a chance to load up on Chinese ADRs and shares in the past week or so with the demise of Archegos Capital so do not need to buy stocks which didn't get crushed for the same reasons.
• Travis expects the drive here now to be the buyback and the EV story, even though there is not a lot to it yet. Eventually, it will be the spinout-of-subs story. He expects that traders can buy the dips in Xiaomi as Xiaomi management will be willing to buy them too. But this buyback will clear out only 2.0-2.5% of float. It clears out some loose hands. It does not create major impetus find a new class of buyer.

(link to Travis' insight: Xiaomi Buyback Commences. Expect More Quickly)

AGL announced it was splitting into two separate companies: a thermal coal generation business and a separate zero-carbon energy retailer. The split follows a raft of new initiatives/developments recently including an agreement with suppliers for grid-scale battery plans, the renewal of the Portland smelter contract, and the participation in PowAR's acquisition of Tilt Renewables Ltd (TLT NZ) (Tilt Renewables: Mercury/PowAr's Big Blow). Speculation of a demerger has been running hot since Australia's oldest energy unity grappled with softening power prices, and a A$2.29bn loss in the 1H21, exacerbated by A$2.7bn in impairment charges. The share price reaction to the split was largely muted.

• New AGL will be Australia's largest “multi-product” energy retailer in terms of the number of services provided to customers. New AGL would have a 2.1GW portfolio of flexible generation and storage, covering renewables (such as access to wind power through AGL’s stake in the PowAR fund), gas power, and batteries. New AGL would be carbon neutral for direct emissions from day one. PrimeCo would be Australia's largest electricity generator (and largest emitter of greenhouse gases), encompassing the large coal power plants. AGL expects PrimeCo to see a step-down-change in emissions reductions as plants close, including a 20% reduction in 2023; a 50% decline by 2035; and net zero in 2050.
• There is a rapidly expanding investment community focusing on environmental, social, and corporate governance. The demerger provides investors with a choice on their carbon investment exposure, and for those investors who reject AGL given its coal-reliant operations.
• AGL appears pretty beaten up here. Yet the demerger announcement provides shareholders with a much-needed choice with respect to their carbon exposure. Arguably, the split should be positive for forward growth for both entities - the carbon and non-carbon businesses.

Sakai Ovex (3408 JP) (Mkt Cap: $0.2bn; Liquidity: $2mn)

(link to my insight: Sakai Ovex Tender Offer Fails But The Stock Gains an Activist)

On the 29 March, Mortgage broker MOC announced it had entered into a Scheme Implementation Agreement with REA Group Ltd (REA AU). The Offer consideration of $1.95/share is a 66% premium to last close. An interim dividend of A$0.04/share announced on the 18 February and to be paid on the 15 April will also be added. The ex-date was the 25 February. MOC's directors unanimously recommend the Scheme. In addition, directors holding an aggregate of 12.7% out have confirmed they will vote in favour of the Scheme. Save for standard Scheme conditions and FIRB approval, the Scheme is not subject to due diligence or financing conditions.

• That directors' aggregate holding of 12.7% will include Rodney Higgins' (co-founder and NED) 12.4% stake. Spheria is MOC's largest shareholder with 19.9%. Spheria ramped up its shareholding in the 4Q18-1H19. The consideration price under the Scheme appears to be well above Spheria's average in-price. Commonwealth Bank of Australia (CBA AU) - MOC's second-largest shareholder with 17.5% - increased its holding in November 2011 by ~17.2% to 25.2% after acquiring Count Financial (by way of a Scheme), which in turn held 17.2% in MOC.

• This has the support of the founder and in-the-money Spheria will arguably support the Scheme. I think the likelihood this Scheme necessitates a bump is slim. Trade the spread - which is tight at a 1.8%/7.5% gross/annualised. But this is not a super liquid arb situation.

China Evergrande Group (3333 HK) / Evergrande Auto (708 HK)

I estimated CEG was trading at a discount to NAV of 77% (at the time of my report) against a one-year average of ~62%. China Evergrande Auto (CEA) shares declined 6.98% this past Monday after state-owned media outlet, Xinhua, targeted the company for creating a share price bubble without having produced any electric cars. The media arm singled out issues in the NEV industry - but not specifically targeting CEA - of false advertising and safety concerns, resulting in over 33,000 EVs being recalled due to safety concerns, according to SAMR. Additionally, the vehicles' claimed range was rarely achieved in practice. NEV is how China refers to low- or zero-emission vehicles.

This revised guide - Quiddity M&A Guide 2021: Hong Kong - is part of a series of M&A guides that our Quiddity team are publishing to aid investors in understanding the rules, parameters, possibilities, and processes when companies conduct mergers and acquisitions.

The initial guide - Quiddity Hong Kong M&A Guide 2019 - was published in April 2019. Since that time, there have been various new developments, many of which relate to PRC-incorporated companies being taken private. This is an update.

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