Last Week in Event SPACE: Yahoo Japan/ASKUL, Hanjin Kal, BTS, Reliance Nippon, Harbin, Sembcorp

Last Week in Event SPACE ...

• Yahoo Japan (4689 JP) has said it will vote against the reappointment of ASKUL Corp (2678 JP) CEO Iwata-san at the Shareholding Meeting August 2nd. ASKUL has asked to break the alliance. This means a fight. It won't go away. And it will be tough for ASKUL to defeat this but it is an interesting situation. While it is short notice, the asset is not to be ignored.
• Was KCGI played by Delta buying into Hanjin Kal Corp (180640 KS)?
• Ignoring the optionality, BTS Group Holdings (BTS TB)'s warrants are a cheaper way to own the economic exposure to the shares, and you get a free put.
• Indian tax rules on short-term capital gains may make the spread on Reliance Nippon Life Am (RNAM IN) a less attractive bet than it has been in past years (and the newer rules seem to be like a drive-by shooting of foreign investors), but it is an easy arb.
• 88.32% - the only number that matters in Harbin Electric Co Ltd H (1133 HK)'s failed Offer.
• Sembcorp Industries (SCI SP)'s pedestrian-growth stub ops are muddied from the loan to Sembcorp Marine (SMM SP). But it doesn't help explain SMM's mid-week pop.
• Plus, other events, CCASS movements and Mood Spins.

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

Askul Corp (2678 JP) (Mkt Cap: $1.2bn; Liquidity: $11mn)

In April 2012, leading office supplies distributor ASKUL and Yahoo Japan (4689 JP) announced that they would form a Business Alliance and Yahoo Japan would inject roughly US$400mm of new capital into ASKUL for a 42+% stake. Yahoo Japan's stake rose from 41.9% to above 44% as a result of a share buyback and cancellation in 2015 with a renewal of their alliance which led to ASKUL's agreement that Yahoo Japan consolidate ASKUL. Yahoo Japan consolidated ASKUL from that point on with ASKUL agreeing.

• On the 17th of July, Yahoo Japan announced that it would exercise its voting rights against the reappointment of ASKUL President and CEO Shoichiro Iwata - who joined in 1986 - at the upcoming General Shareholder Meeting. ASKUL subsequently announced that yes it was true Yahoo Japan had asked to exercise its management rights and yes it was true that ASKUL had made a proposal to Yahoo to dissolve their Strategic & Business Alliance. This is effectively war.
• The numbers suggest Yahoo Japan can come close on its own to pushing Iwata-san out. And if they get any help from other shareholders upset about the recent 10-15-year lack of profit growth, he is probably out.
• As an event trade, Travis Lundy would tilt to having a long position here. If you are a fundamental investor, he thinks the stock deserves a look and a deeper dive. It is not without interest if it can get its act together. Travis cannot help but think that ASKUL should be a takeover candidate at some point. He thinks of businesses such as Yamada Denki (9831 JP) and Seven & I Holdings (3382 JP) could be interesting matches (Yamada Denki has a tie-up with Softbank, Seven & i has an existing tie-up with ASKUL and this seems like the most interesting candidate). Another interesting one here would be Amazon.com Inc (AMZN US) which would look at ASKUL as a tiny bolt-on, but ASKUL has more in-house delivery and relationships to offer.

(link to Travis' insight: ASKUL Vs Yahoo Japan - Gloves Off)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.5bn; Liquidity: $57mn)

Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of >₩200bn. KCGI appears to be angling for management takeover. The question is whether the Cho family - holding 28.93% of the common shares and 3.02% of the prefs - are willing/forced sellers.

• Delta Air Lines announced it acquired 4.3% of Hanjin Kal shares mainly in May and June. The price pushing by KCGI and Delta in this "tax period" will result in the Cho family paying an additional ₩60bbn. The higher the tax, the higher the chances the family will have to sell their Hanjin Kal stake. This could be a plus for KCGI.
• But rumours abound. Was Cho Hyun-tae asking several local brokerages to short Hanjin Kal shares in May/June in an effort to keep the share price down? Was KCGI played by Cho? Was this whole thing about Cho asking around for shorting and Delta purchasing a setup designed to box KCGI into a corner?
• Valuation wise, Hanjin Kal is still at a substantially inflated level with a low holdco discount to NAV of 10%. If no family feud unfolds and the Cho family can foot the tax bill, Hanjin Kal's valuation should fall back to a more normal level.

(link to Sanghyun's insight: Hanjin Kal Situation: Several Curious Incidents)

BTS Group Holdings (BTS TB) (Mkt Cap: $5.1bn; Liquidity: $16mn)

At the end of June, the BTS' BTS-W4 warrants saw an exercise period come and go and with that event, some 655.4mm warrants were exercised leaving 611.5mm warrants left to exercise by November. The next event is the July-end dividend and warrant conversion price reset.

• Because the warrants are now (at the time of Travis' insight) 20% in the money, they have less optionality, and therefore the value of the implied put option as of the close is about 0.03 THB (about 0.24%).
• The warrants are a way to get a "free put" on the stock falling in the next four months, or a way to be short the currency vs a regular equity position in BTS. If you buy them in place of BTS shares, you are paying nothing for the optionality that the stock would drop 20+% in the next 4 months. If you think the baht will weaken in Q3 and Q4, you'd be better off buying the warrants than the shares because you have less money exposed. You would do the bulk of the FX trade later.
• The baht has benefited from trade tensions between the US and China and possibly upcoming with Japan. Like Vietnam, it has a serious tech export manufacturing base and could easily be used to relabel to reduce the stress on the bilateral US/China deficit.
• The arb is less interesting now. But the warrants still represent an interesting trade possibility, especially if you have a strong opinion on BTS up or down, or on the Thai baht weakening.

(link to Travis' insight: BTS Group Warrants - The Less the Merrier)

Briefly ...

Sanghyun discussed the Helixmith (084990 KS) rights offer which kicked off this past Thursday. The arb yield is gradually improving but still in loss territory. (link to Sanghyun's insight: Helixmith Rights Offer: Entry Points in Subscription Rights Trade Period)

Reliance Nippon Life Am (RNAM IN) (Mkt Cap: $913mn; Liquidity: $4mn)

In late May of this year, Nippon Life, which has heretofore had a joint venture with Reliance to run RNAM - India's fifth-largest asset manager - announced that it had reached a definitive agreement with Reliance Capital Limited (RELL) to increase its stake in RNAM to the maximum allowable 75% through an Open Offer (@ INR 230/share). Because of the 25% minimum float rule, it made sense for Nippon Life to ask RELL to liquidate some of its holdings - which it did concurrently with that May announcement - so that there was a 25% float existing prior to commencing the Open Offer.

• The Nippon Life Open Offer for RNAM shares will open this week and will close 5 August. Settlement would start 10 working days later so there is about one month to settlement if you buy now.
• If the public sells 15+% of its 25% to the Open Offer, Nippon gets to 90% - a Delisting Offer at the Open Offer Price can take place and that will lead to delisting. If the public sells less than 15% to the Open Offer, that would lead to RELL still owning a stake OR it would lead to Nippon Life needing to buy the rest from RELL under the terms of its SPA and then selling out the part above 75% to the public within 12 months. One would think Nippon would like to avoid that.

• At the (then) last traded price, there is about 1.3% of spread to take which is ~15.8% annualized. But there are short-term capital gains tax. (Quiddity's new Quiddity India M&A Guide 2019 is now published with guidelines to the relevant rules)

(link to Travis's insight: Reliance Nippon Life Asset Mgmt OPEN OFFER To Start)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $833mn; Liquidity: $3mn)

This was a hairy, unprecedented arb, and one that ultimately should have gotten up. But it didn't and one wonders if the rules should be changed for PRC incorporated companies or the tendering threshold reduced. It never was made clear why it had to be 90%.

• A perusal of Harbin's latest CCASS shows Morgan Stanley and HSBC Broking Securities increased their holding by 0.86% and 0.84% of shares out from the first closing date on the 20 May to the close of the Offer. Together these shares would satisfy the tendering condition.
• There was still 1.81% and 1.37% of shares out in Bank of China and HSBC (different CCASS ID) that had not tendered, but both saw their holding decline from the first close.
• What now? The Offeror has 12 months to contemplate its next move. Plus, Harbin will crater at the open tomorrow.

(link to my insight: Harbin Electric: Here We Are, Again)

Ruralco Holdings (RHL AU) (Mkt Cap: $310mn; Liquidity: $1mn)

Back in February, when Ruralco announced it had entered into a Scheme Implementation Deed for Nutrien Ltd (NTR CN) to take Ruralco private at $4.40/share, Mark Allison, the CEO of Elders Ltd (ELD AU), a key competitor for both Nutrien and Ruralco, said the proposed takeover would cause uncertainty and if approved, would lead to significant fallout. Not content to rest on its laurels, Elders has now made an A$187mn scrip/cash (50:50) Offer for unlisted wholesale buying group Australian Independent Rural Retailers (AIRR), by way of a Scheme.

• The Scheme requires ACCC to sign off. This appears relatively straightforward - a successful Offer will see a national wholesale platform bolted onto Elder's existing retail platform. Elders is not involved in wholesale, as clearly stated by the ACCC in its June Statement of Issues (SOI). But it does refocus discussions on the ACCC's assessment of the Ruralco/Nutrien deal.

• Ruralco's share price has been firm - and gradually increasing - since the ACCC's SOI last month. The deal has an implied completion percentage of >80%. Currently trading at a gross/annualised spread of 5.5%/31%, assuming completion end-September. On balance, I view this as a good risk/adjusted play.

(link to my insight: An Elders/AIRR Merger Re-Focuses ACCC on Ruralco/Nutrien)

Yatra Online (YTRA US) (Mkt Cap: $181mn; Liquidity: $1mn)

After several months of due diligence - which straddled a legal dispute with Air Travel Bureau - on 17th July 2019, Ebix and Yatra announced they had reached a definitive agreement for Ebix to acquire Yatra through a merger in an all-scrip Offer of US$4.90/share. The Offer price represents a premium of approximately 32% to Yatra’s closing share price on March 8, and is approximately in line with the back-dated scrip Offer, and where Yatra traded when the initial $7.00/shareOffer was announced.

• The deal appears a strategic fit, tying in Ebix’s expertise in the B2B segment, where Yatra is a leader in corporate travel bookings, together with cross-selling opportunities - Ebix forecasts US$0.40 to US$0.75 cents of accretion to its EPS once fully executed vs EPS in 2018 of $2.97.
• Last June, Yatra placed 9mn shares at $5.50/share. The announcement followed a statement with the US' SEC of an intention to raise $100mn over a three-year period. According to Capital IQ, Altai (10.7% of shares out) and Reliance Infrastructure (RELI IN) (7.1%) - and potentially other shareholders still on the register - participated in that placement.

• Full-year financials (March year-end) are already over one month past due compared to last year's announcement. Yatra's share price declined 27% from the June 2018 placement price up until Ebix's first expression of interest; it then proceeded to drift even lower - touching $3.56 earlier this month - despite the two companies entering into a confidentiality agreement.

• Having raised half the US$100mn it proposed to Offer in the next two years, faced with further dilution, Yatra's shareholders may view holding shares in a larger, more-liquid, proactive investor in India as a fair & reasonable alternative.
  

(link to my insight: An Ebix Merger Will Help Yatra's Travels)

UniCredit SpA (UCG IM) (Mkt Cap: $29bn; Liquidity: $205mn)

Banca Carige (CRG IM), the twelfth largest bank in Italy by total assets, has been under special administration by the ECB since the start of 2019. The board has been seeking a way forward via a private sector recapitalisation, but so far two potential private sector solutions - one backed by Blackrock in May and the other by Apollo Global in June - have fallen by the wayside. Blackrock pulled out in May, and Apollo Global's offer was rejected by the deposit guarantee fund FITD at the end of June.

• The two core scenarios for Carige are to either have the "good bank" absorbed into one of the major Italian banks (like the Veneto banks into Intesa), or, failing that, be the subject of precautionary recapitalization by the Italian government (like BMPS); both of which have recent Italian precedents.
• Victor Galliano believes that the likeliest outcome in the case of Carige is the "good bank" absorption; the precedent has been set by the Intesa absorption of the clean Veneto banks in June 2017.

• Under the Carige "good bank" absorption scenario, Victor thinks that the downside risks to returns for the two banks tipped to be interested - Banca Popolare Dell'Emilia Rom (BPE IM) or his preferred Italian bank name UniCredit SpA (UCG IM) (due to its modest PBV ratios relative to its prospective ROEs) - would be limited; still, for Banca Popolare Dell'Emilia Rom (BPE IM) the absorption would be more of a challenge, implying a near-term spike in the efficiency ratio.

(link to Victor's insight: Banca Carige - Limited M&A Risk for Bigger Cap Italian Banks)

Sembcorp Industries Ltd (SCI SP) / Sembcorp Marine Ltd (SMM SP)

SCI is coming up on my monitor as an "unwind." I see SCI's discount to NAV at 43.5%, towards the low end of its 12-month range and marginally above its one-year low of 45.3%. The big news recently was the provision of a five-year S$2bn subordinated loan facility to SMM.

• The subordinated loan will be applied to retiring S$1.5bn in bonds with the balance for working capital. SCI believes this financing will strengthen SMM, placing it in a better position for the eventual recovery of the industry. Temasek, SCI's major shareholder (49.46%), will be the key subscriber to its bonds.
• As SMM is consolidated into SCI, the overall impact is unlikely to be significant - barring the effect on WC. But this assumes SMM will be able to repay the debt when due. SCI is, therefore, taking on additional balance sheet risk. The counter-argument is that SCI's stub ops are (slowly) becoming more profitable, enabling SCI to re-focus and lift its exposure in SMM for future long term benefits. The market reaction to the loan was indifferent, with the discount to NAV barely moving.
• With an O&M sector rebound still appearing to be years in the making, could SCI's capital better deployed elsewhere? On balance, I tilted slightly in favour of SCI, as the discount to NAV is not at extreme levels, although it is towards the bottom end of its range. Yet right on cue, SMM pops 7.9% mid-week. No reason has (as yet) presented itself for the share price increase.

(link to my insight: StubWorld: Just Rumours (For Now) As SIA Engineering Pops)

The Philippines M&A Guide issued this past week is the tenth installment in a series of M&A guides that our Quiddity team (Travis, Janaghan Jeyakumar, and myself) are publishing to aid investors in understanding the rules, parameters, possibilities, and processes when companies conduct mergers and acquisitions. These insights are designed to be used as a reference. Any questions are welcome. The list so far is below:

Quiddity Australia M&A Guide 2019
Quiddity Hong Kong M&A Guide 2019
Quiddity India M&A Guide 2019
Quiddity Indonesia M&A Guide 2019
Quiddity Japan M&A Guide 2019
Quiddity Malaysia M&A Guide 2019
Quiddity Philippines M&A Guide 2019
Quiddity Singapore M&A Guide 2019
Quiddity Taiwan M&A Guide 2019
Quiddity Thailand M&A Guide 2019

• Australian Unity Office Fund (AOF AU) will give Abacus Property (ABP AU) & Charter Hall (CHC AU) a four-week, non-exclusive period to conduct due diligence, with a goal to agreeing and entering into a Scheme Implementation Agreement. In effect, AOF is ready to recommend ABP/CHC's Offer, in the absence of a superior Offer.
• The Takeovers Panel has declined to conduct proceedings on FNZ Group's application to suspend the Process Deed with Ss&C Technologies (SSNC US) & Gbst Holdings (GBT AU) and the DD thereon.
• Asia Satellite Telecom Holdings Ltd (1135 HK)'s Scheme Document has been delayed until the 29 July from the 18 July.
• Torex Semiconductor (6616 JP) announced it had finished its 5.2% of shares out share buyback. It's a small company but it is cheap as chips.
• Kyodo reports that H I S Co Ltd (9603 JP)said it will not raise its tender offer price even if Unizo Holdings (3258 JP)'s independent committee deems the tender offer to be "hostile." Note that Japan does not have a "truth in takeovers" provision in its code.
• A media organization which Reports on Deals reports that the Reliance Nippon Life Am (RNAM IN) / Reliance Capital (RCAPT IN) deal has CCI (Competition Commission of India) approval. It was also reported on the CCI Twitter account.
• Silchester International Investors LP had lifted their stake in Nippon Shokubai (4114 JP) from 6.1% to 7.24%. There is no reason to think we would not see an additional increase at some point, but given they could be buying 20-30k shares a day in some cases, they could easily have bought another 1% by now if they really wanted to. In the meantime, the Sanyo Chem/Nippon Shokubai share price ratio has dropped to the "buy level" Travis mentioned when he wrote about this situation in Sanyo Chemical - Nippon Shokubai Merger - Another "Guess the Ratio" Trade at the end of May.

• Acacia Mining (ACA LN) has agreed to a takeover by parent Barrick Gold (GOLD US). Barrick is offering 0.168 GOLD share for every Acacia share - a ~10% increase to its initial 0.153 scrip offer - implying an Offer price of 232p/share, a 54% premium to Acacia's closing price of 151p on May 20, the day before Barrick announced a possible offer. Barrick has been acting as the go-between with the Tanzanian government (GoT) to identify a proposed resolution to resolve Acacia's problems in the country, which have been bubbling for two years. Acacia was excluded from the discussions between Barrick and the GoT. It was a logical step for Barrick to takeover Acacia.

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.