Last Week in Event SPACE: Yahoo Japan, Chiyoda, Nexon, AHG, Misawa, Harbin Elect, Advanced Disposal

Last Week in Event SPACE ...

• The explanation in the Yahoo Japan (4689 JP)'s announcement document for WHY the transaction is occurring is basically Grade A codswallop, unmitigated trumpery, and unalloyed blatherskite. But the real reasons WHY, are much clearer. And the reasoning much easier.
• Chiyoda Corp (6366 JP) was the proverbial car driven off the road, but now that an adult is at the wheel, it's time to get on board.
• Apparent management disagreement may result in separate bids from Netmarble and MBK for Nexon Co Ltd (3659 JP).
• This looks a done deal as Automotive Holdings (AHG AU) board backs Ap Eagers Ltd (APE AU)'s improved offer.
• It's not a big ask to get the necessary votes for Toyota Motor (7203 JP)'s okay scrip merger for Misawa Homes (1722 JP) to get up.
• An almost unanimous shareholder approval for Harbin Electric Co Ltd H (1133 HK)'s delisting offer, but the acceptance condition is still a risk.
• Competing offers are rubbished as Waste Management (WM US)'s cash offer for Advanced Disposal Services I (ADSW US) trades unnecessarily tight.
• 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)

Yahoo Japan (4689 JP) (Mkt Cap: $15.7bn; Liquidity: $50mn)

On 8 May 2019 after the close, Softbank Group (9984 JP), Softbank Corp (9434 JP) and Yahoo announced a two-way transaction whereby i) Yahoo Japan will conduct a Tender Offer at ¥287/share to buy 1,834,377,600 of its own shares or 36.08% of shares outstanding. SBG will be the seller, reducing its stake to zero; ii) Yahoo Japan will issue 1,511,478,050 new shares to SBC at ¥302/share which will lift its position from 12.08% of shares out to 44.64%. Softbank will newly consolidate Yahoo Japan.

• It is a Win-Win-Win situation: SBG gets its money - almost $5bn of it. SBC gets to consolidate a stable earnings source (and a bank and a payment system). Yahoo Japan gets 6.8% EPS accretion at a 28% discount to current market price. Yahoo Japan forecasts 10% CAGR OP growth for the next five years on top of this accretion.
• It cleans up the business line responsibility. No longer is SBG the owner of a domestic opco stake with which its subsidiary has a bunch of strategic partnerships. This is SBG cutting the remaining strands of mature businesses, completing its transformation into more of a pure "new tech investment co" plus a stake in SBC which it monetises with a high dividend payout ratio/yield. Effectively SBG is taking a larger chunk of its investment capital out of "domestic Japan", freeing it up to be reallocated outside of Japan.
• It provides Softbank Corp with a relatively inexpensive (accretive to its own shareholders) way of obtaining OP and NP growth over the next several years and reallocates the lower growth, low-ish volatility, high leverage-ability Japan businesses in the Softbank Group consolidated portfolio into the telco.
• Yahoo Japan is trading near a 20-year low on an EV/EBITDA basis. This event just makes it less expensive. And it clears out the SBG overhang. Travis Lundy likes it as a long.

(link to Travis' insight: Softbank Shuffles Yahoo Japan Ownership: Accretion, Ownership, Index Buying)

Mitsubishi Corp (8058 JP) (Mkt Cap: $43.5bn; Liquidity: $104mn)

Along with an earnings announcement and a plan to inject significant capital into Chiyoda Corp (6366 JP) (see summary below), Mitsubishi also announced it is to spend up to, but not more than, ¥300bn to purchase up to, but not more than, 120mn of its own shares between 10 May 2019 and 8 May 2020, on the Tokyo Stock Exchange. At the then closing price, ¥300bn only buys 100mm shares so the repurchase would only be 6.25%, but that is enough to lift EPS over the year well-beyond forecast growth, which is minimal.

• With up to ¥300bn to spend to buy up to 120mn shares (more like 100mn at the then current price), this is 20+ days of volume to buy so 8% of one-year ADV. It is also about 11.6% of Real World Float (what is likely possible).
• In practical terms, unless the stock goes quite a bit higher, Travis expected half the Real World Float simply won't entertain selling. That is a high-quality problem for shareholders looking to own the shares because of the buyback.
• While MitCorp is not ragingly inexpensive vs peers on multiples (8x PER and 1.0x book), and there is always the case of product mix, Travis would tend to want to own here because of the upward pressure he expects of MitCorp buying 11-12% of existing float over the next year, and/or 8% of volume every day for the foreseeable future. Buying back stock AND making a large capital injection into Chiyoda adds to the bullishness.

(link to Travis' insight: Mitsubishi Corp Buyback - Bigger Than It Appears)

Chiyoda Corp (6366 JP) (Mkt Cap: $653mn; Liquidity: $13mn)

Chiyoda provided further details regarding the large downgrade to FY guidance. The key points were: i) ¥80bn provision for extra costs at both Tangguh and Cameron; ii) ¥20bn change in expectations for several legal arbitrations, and iii) ¥10bn in extra cost assumptions for numerous small domestic and foreign projects. Chiyoda noted that it is being especially conservative in order to ensure that it does not repeat the cycle of downgrades it has suffered this year.

• All signs pointed to Chiyoda building up the largest possible buffer to ensure that nothing goes wrong for Mitsubishi or MUFG. Mio Kato, CFA's read on this was that the company was trying to prevent excessive share volatility prior to details at its fiscal 2018 earnings this past Thursday.
• Financing came in at ¥180bn. ¥70bn from prefs, ¥20bn in loans from MUFG and ¥90bn in loans from Mit Corp's subsidiary. Mitsubishi's Kazushi Okawa is to become CEO while the current President and CEO becomes President and COO. Chairman Nagasawa is to step down. This looks like a strong commitment to turning this around and imposing discipline by Mitsubishi Corp which should be a positive for risk management and governance.
• All told, this is a bailout that is actually very generous behind-the-scenes with prefs issued with a 54% conversion premium and loans at just 1.5-2.5% a year. The structure of this deal only makes sense if Mitsubishi has genuine confidence that the operational business is solid and will turn around quickly. But Mitsubishi has no intention of turning Chiyoda into a subsidiary and is merely here to provide adult supervision until Chiyoda's risk controls can mature.

link to Mio's insight:
Chiyoda: Explanatory Call on Downgrade Reinforces Impression of Extreme Conservatism
Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It

Nexon Co Ltd (3659 JP) (Mkt Cap: $12.8bn; Liquidity: $41mn)

Sanghyun Park discusses the latest developments. Apparently, there are some critical disagreements between MBK and Netmarble, and they are no longer forming a consortium, leading to separate bids in the upcoming bidding scheduled for May 15. The most critical disagreement apparently is how each side wants to approach everyday management of Nexon after takeover, with MBK concluding that it'd be better to keep the current Owen Mahoney team intact even for valuation boosting.

• Kim apparently also wants to keep the current Mahoney management team and also minimize workforce restructuring. Therefore Netmarble (and even Kakao) may not be an attractive option. But does MBK want this? ₩7~8tn for only Kim's Nexon stake is already a big ask for MBK.

• What about Tencent? Kim may not want Tencent to completely take over Nexon for the same reason he doesn't want Netmarble to take it over. There is also the issue of Korea's growing anti-China corporate sentiment. Tencent's role may likely be limited to a LP if it wants to remain in this race. MBK would want a sensible partner for Tencent. And the fact Tencent is flush with cash won't be lost on MBK.

(link to my insight: Nexon Sale: Latest Development & Likely Outcomes)

Automotive Holdings (AHG AU) (Mkt Cap: $543mn; Liquidity: $2mn)

In my prior insight, I suggested "adjusting the terms to 3.5-3.6 AHG shares for every APE share - or $2.41-$2.47/share based on APE's last close - may be needed to get this over the line." And on cue, Ap Eagers Ltd (APE AU) improved the consideration to 1 APE share for every 3.6 AHG shares, from 3.8 shares. This compares to the one-year average, prior to the initial offer, of 3.5x.

• AHG's board has unanimously recommended the improved Offer. The Offer is also now free from the market fall condition and APE has waived the MAC conditions, once a merger authorisation from the ACCC comes into force.
• I recommend shareholders take the deal. APE's acceptance facility has collected 22.49% of shares out - reportedly including Perpetual and Argo Investment's stakes - which together with its 28.84% holding takes APE above the key 50% threshold. The gross/annualised spread is at 5.9%/18.8% assuming a conservative closing date in early September. The pushback is that I'm hearing the borrow rate for APE is around 10%.
• To play the back-end, scale is key and combined, APE (5.2%) and AHG (6.7%) would have a market share of ~12% of new vehicles dealership market in Australia. This should not raise competition concerns with the ACCC on a national level. The merged AHG/APE was expected to exact pre-tax cost synergies (according to APE) of $13.5mn annually, a number that is expected to improve with the benefit of full due diligence and an integration plan.

(link to my insight: AHG & AP Eagers - Even Smarter Carma)

Misawa Homes (1722 JP) (Mkt Cap: $374mn; Liquidity: $1mn)

Toyota Motor (7203 JP) and 52%-held Misawa Homes announced the boards of both companies had decided to merge (with Toyota being the surviving company and Misawa becoming a wholly-owned subsidiary) with the effective date of the merger on 7 January 2020 after shareholder meetings to approve the deal in November 2019. The proposed merger ratio is 0.155 shares of Toyota for every share of Misawa Homes held.

• This is an easy, okay deal. 30% premium and only one-third of the float is required to approve to get this merger passed.
• There was no expectation this was ever going to happen any other way.
• It is not cheap as is. If Toyota were to get rid of it, the shares would go way down. This should trade quite tight, and if it trades too tight to dividend-adjusted terms, it is a sell because one could do better with one's liquidity in a small cap than to own a future Toyota proxy.

(link to Travis' insight: Toyota To Take Over Rest of Misawa Homes)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $924mn; Liquidity: $3mn)

It wasn't even close. At Harbin's H share class meeting, 99.13% of H-shares attending and via proxies voted FOR the special resolutions. Therefore, the special resolutions to approve the merger and delisting by the independent shareholders were duly passed.

• This two-stage delisting proposal now requires 90% of H shares to tender into the offer by the 20th May. My CCASS analysis indicates 9.57% have now tendered into the Offer, but just 1.2% since the vote. Mmm.
• The 20 May - or Closing Date - may be extended under Rule 15.5 of the Takeovers Code. Harbin's board consenting to an extension is the simplest, and perhaps only available option.
• As previously discussed, a 90% acceptance condition is not uncommon in these hybrid delisting offers for PRC incorporated companies. The difference here compared to precedents is that the tendering condition cannot be waived. On balance, at a gross return of 6.5% (at $4.28/share) - with a potential payment on the 29 May - the risk-reward looks good to take here.

(link to my insight: Harbin Electric: And The Brave Won Out)

800 super holdings (ESH SP) (Mkt Cap: $117mn; Liquidity: $1mn)

800 Super, a provider of waste management, cleaning, and conservancy services, has received a privatisation Offer from KKR by way of a Voluntary Conditional Offer of $0.90/share or a 16.1% premium to last close and 30.6% to the 1-month VWAP. The Offer price will not be increased.

• The Lee Family - the "promoters" and deemed joint Offerors under Rule 10 of the Code - collectively hold 77.62% of shares out and have given an irrevocable undertaking in favour of the Offer. The offer is subject to a 90% acceptance condition.

• 800 Super has capex'ed S$80mn in the past two years on the recently commissioned biomass plant in Tuas South and a new laundry business. The family is, therefore, taking the company private just as it moves into downstream waste treatment and affiliated operations.

• The Offer does appear opportunistic. Yet minorities have limited options. They would be better off tendering now rather than face a delisting offer later this year or early next, wherein the offer price presented will in all likelihood be the same as the one now.

(link to my insight: Is 800 Super Talking Rubbish?)

Advanced Disposal Services I (ADSW US) (Mkt Cap: $2.8bn; Liquidity: $37mn)

Waste Management (WM US) announced back on April 15, 2019, a definitive agreement to acquire ADSW for $4.9bn ($3bn in equity plus ~$1.9bn of net debt) in a cash deal of $33.15/share, a 22.1% premium to ADSW’s last closing price and a 20.9% premium to its 30 days VWAP. ADSW is now trading $0.85 below the deal price, or a (then) tight gross/annualised spread of 2.6%/3.4% assuming completion by the first quarter of 2020. Does this suggest a competing bidder?

• The multiples at which ADSW is being acquired are lower than most peer trading multiples, and the premium to last close is relatively low.
• The only serious potential strategic buyers were WM, Republic Services (RSG US), and Waste Connections (WCN US). Only WM took the bait and as John DeMasi discusses in his insight, both WCN and RSG both ran a ruler over ADSW and passed.
• Using a $27 downside price, there is $5.30 down, and $0.85 up, for a 6.2:1 risk/reward ratio. At a 3.0 – 3.4% annualised rate of return with a virtually-certain second antitrust request, and without a competing bid, this is not an attractive rate-of-return deal.

(link to John's insight: Waste Management Buying Advanced Disposal Services – A Rubbish Deal or Cash from Trash?)

Unusual Spreads:
Pacific Biosciences Of California (PACB US)
Genworth Financial Inc Cl A (GNW US)
Stewart Information Services (STC US)

Robert Sassoon delved into unusual spreads for announced US M&A deals of >$400MN in size with the intention of identifying and highlighting misunderstood and/or under the radar risk arb opportunities.

• Illumina Inc (ILMN US) / Pacific Biosciences. Despite a couple of not insignificant regulatory hurdles to overcome, the combination of ILMN’s recently re-stated confidence that the deal can close by mid-summer and the (then) ~8% spread which he interpreted as the market sitting on the fence over the timing risk, the risk-reward profile of this risk-arb opportunity looks reasonably attractive. Even if there is a delay in deal completion to the end of 3Q 2019, there is the prospect of snagging annualized returns in excess of 20%, while year-end closure still leaves a double-digit IRR on the table for the taking.
• China Oceanwide / Genworth Financial. The spread continues to trade around the 40% level as the transaction effectively waits for Canadian regulatory approval, which Robert and the company expect will be granted. He continues to believe this deal will close and most probably within the next 3 months. The prevailing spread appears to be a very attractive situation for an arb so late in this game.
• Fidelity National Info Serv (FIS US) / Stewart Information Services Corp. The prospective merger of two of the leading title insurance players in the US real estate market has naturally attracted regulatory scrutiny. Precedent demonstrates that regulatory issues are resolvable through select divestments. While timing risk has been elevated, the spread provides a reasonable opportunity for arbs to capture double-digit annualized returns.

(link to Robert's insight: MergerTalk: 3 Merger Deals Involving PACB US, GNW US and STC US Look Attractive Plays For Arbs)

Dah Sing Financial Holdings (440 HK) / Dah Sing Banking Group Ltd (2356 HK)

Since the HK$8bn sale of the Hong Kong life insurance business was completed on the 19 June 2017, followed by a special dividend of $6.60/share paid on the 14 July the same year, the NAV and implied stub have steadily widened and are now at all-time low levels.

• The stub ops mainly comprise the general insurance businesses in Hong Kong and Macau, which generated profit of ~HK$35mn in FY18, a 15% increase over FY17, but with an ROA of 0.8%. Critically, salaries paid at the parent level after de-consolidating out DSB, actually exceed the profit of the general insurance division. This is not ideal. The sale of the life insurance and payment of the special dividend now leaves a relatively lackluster - and minor - operating segment at the parent level, with overly excessive operating costs.

• Ideally, this division should also be sold, cleaning up the holding company structure and facilitating a buyer of DSF and in turn, DSB. However, it's not clear DSF would meet the Exchange Listing Rules - i.e. that DSF retains a sufficient level of operations and sufficient assets to support its separate listing status - after selling the general insurance segment. (Arguably, DSF is already in contravention of this rule.) This limits further disposals/restructuring at the parent level for the foreseeable future, lessening its attraction.
• Knowledge and analysis of the remaining stub ops have been discussed in greater depth by Travis Lundy in his "Ka Ching" series. This is a very clean, single stock Holdco structure, trading at extreme levels, into a bank which is trading <1x PBR. The implied stub has never been lower.

(link to my insight: StubWorld: Dah Sing At An All-Time Low)

SK Telecom (017670 KS)

SKT will undertake an equity-carve-out of SKT Opco (new entity), selling a 30% stake. It will use the proceeds to buy additional Hynix shares, lifting its stake to 30% from 21.4% currently. At 6.27x FY19E EBITDA of ₩3.8tn, SKT Opco is worth ₩18.7tn or ₩13.1tn for SKT's 70% stake. As for SKB, the recent merger with T-Broad prices the merged entity at ₩5tn. SKT gets to retain a 74.4% stake valued at ₩3.7tn. Sanghyun estimates SKT's discount to NAV at 53.7%, suggesting the market hasn't yet fully priced in the upside potential. Reportedly SKT wants to complete the spin-off before year-end.

(link to Sanghyun's insight: SK Telecom Stub Valuation: Follow-Up Study)

This is the fourth 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.

links to:
Quiddity Thailand M&A Guide 2019
Quiddity Japan M&A Guide 2019
Quiddity Hong Kong M&A Guide 2019
Quiddity Singapore M&A Guide 2019

• Occidental Petroleum (OXY US) revised the terms to acquire Anadarko Petroleum (APC US) to $76.00/share comprising $59.00 in cash and 0.2934 shares of Occidental per APC share. The revised proposal has been unanimously approved by OXY's board and represents a premium of approximately 23.3% to the $61.62/share of Chevron Corp (CVX US)’s pending offer as of market close on May 3, 2019. In a separate release, OXY announced that, in connection with its latest APC proposal, it has entered into a binding agreement to sell Anadarko’s Algeria, Ghana, Mozambique and South Africa assets to Total S.A. for $8.8bn.

• At its EGM on the 7 May, shareholders of Frasers Property (Thailand) Pcl (FPT TB) approved the acquisition of Golden Land Prop Dvlp (GOLD TB) by means of a voluntary tender offer at Bt8.50/share. The Offer price may be reduced by the amount of dividend paid per share if GOLD announces its dividend payment before the voluntary tender offer for all of the securities of GOLD takes place:

• San Miguel (SMC PM) announced it has secured a deal to acquire 85.7% of Holcim Philippines (HLCM PM) for ~$2.15bn. A tender offer will be made for HLCM's minority shareholders. The transaction is subject to the approval of the Philippine Competition Commission.
• Graincorp Ltd A (GNC AU) has informed LTAP it is unable to proceed with the non-binding indicative proposal.
• The ACCC has decided to oppose the proposed merger between TPG Telecom Ltd (TPM AU) and Hutchison Telecomm (Aust) (HTA AU).
• A private media source which Reports on Deals notes that the OJK has told MUFG they have two years to restore Bank Danamon Indonesia (BDMN IJ)'s float to the minimum level (20%). Which is as expected. We cannot find this on the Danomon/MUFG/JPX/TDNET/OJK websites, but assume it to be true.
• Asahi Net Inc (3834 JP) is buying back 1.8mm shares (6+% of shares out) from holders tomorrow morning in a ToSTNeT-3 buyback at today's closing price. Small-cap, not cheap, the stock price has run up recently. If not wed to this, this is a liquidity opportunity.
• Siam Cement (SCC TB) announced it has acquired a 55% stake in Fajar Surya Wisesa (FASW IJ) for US$665mn. It will now be obligated to make a mandatory tender offer for all remaining shares. Completion is expected in the 3Q19.

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.