Last Week in Event SPACE: ZOZO, HKEx/LSE, Nexon, Pacific Energy, Melco, Philip Morris, Changyou

Last Week in Event SPACE ...

• In the end, what this Tender Offer for ZOZO Inc (3092 JP) from Yahoo Japan (4689 JP) is really about is the emergence of a small group of digital businesses that want to capture as much of the market for themselves. There are some interesting and profitable trades to do on the back of the Offer, and if you have stock borrow it becomes even more interesting.
• The HKEX (388 HK) / London Stock Exchange (LSE LN) deal is dead on arrival in the face of political pushback and the proposals "fundamental flaws".
• Nexon (3659 JP)'s buyback is better than a poke in the eye with a sharp stick, but it isn't huge. There is a lot of other cash which could be brought to bear.
• QIC and OPTrust/ICG tussle for Pacific Energy (PEA AU) yet pricing looks full.
• The vice of vaping and a potential Philip Morris International (PM US) / Altria Group (MO US) merger.
• Changyou.Com Ltd (Ads) (CYOU US) may finally receive a firm Offer, this time from major shareholder Sohu.com Inc (SOHU US).
• Plus, other events, CCASS movements (including IPO lock-ups) and Mood Spins.

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

ZOZO Inc (3092 JP) (Mkt Cap: $6.9bn; Liquidity: $183mn)

First reported by NHK and Nikkei, Yahoo Japan (4689 JP) and ZOZO announced a Tender Offer to acquire 50.1% of outstanding shares in ZOZO for ¥2,620. CEO Yusaku Maezawa will sell the majority of his stake, 30.4% of outstanding shares, of which 21.34% appear to have been pledged as collateral for personal borrowings. It will require Japan anti-trust approval (unlikely to be an issue) and the Tender Offer is expected to start in early October. ZOZO will remain listed. This is a big deal. It is a partial tender offer of some size and the "economics" of the transaction may have interesting effects on Yahoo Japan, its finances, and its valuation metrics.

• This is a little bit of a comedown for Maezawa-san, but many articles suggest he has decided to leave ZOZO to spend more time on his personal interests (including his planned trip around the moon with SpaceX). Maezawa-san owns 36% of shares out as of March-end ex-Treasury shares. In this deal he gives up all his remaining options which only vest if he is Representative Director at the time of vesting.

• Foreigners own 41.7%, of which passive is probably about 6-7% of shares out. Domestic passive investors own about 9-10% of shares out. Retail investors other than Maezawa-san own about 6%. Active foreigners are the big determinant and Travis Lundy's believes they are often quite willing to participate in partial tender offers at a premium when things are otherwise not going great. Travis' initial estimate is that pro-ration will be in the 63-75% range, though he thinks it should be in the 70-80% range unless many active foreign investors believe this combination has legs and ZOZO will get benefits out of it, in which case pro-ration could rise even further.
• Michael Causton, in his excellent insight, believes Softbank/Yahoo is the right partner for ZOZO to now expand into becoming a lifestyle mall selling across all product categories that sell a lifestyle including cosmetics, home/interiors, gadgets, lifestyle foods, and services. He thinks ZOZO looks like a buy within the frame of this deal, and also looks like a buy for the long-term. Additionally, ZOZO fills a huge gap in Yahoo’s e-commerce ambitions. As a result of this deal and its upcoming new ventures, Yahoo will be able to give Rakuten Inc (4755 JP) true competition for the first time in more than a decade, and also Amazon.com Inc (AMZN US).

• In contrast, Mio Kato is sceptical of whether this Tender would be long-term positive for ZOZO and reckons there could be a very big share price fall on the back end.

links to:
Travis' insight: Yahoo Japan Partial Tender for ZOZO. Pro-Ration and Arb Grids
Michael's insight: The Era of Digital Zaibatsu*: Takeover of Zozo a Win for Softbank/Yahoo in Online Supremacy Battle.
Mio's insights: Zozo: Yahoo Japan Tenders, Maezawa Is Out, Will GMO PG Be Squeezed Out? & Zozo: What Are the Downside Risks Post-Tender Close?.

Pacific Energy (PEA AU) (Mkt Cap: $326mn; Liquidity: $1mn)

On the 24 July, remote power station operator PEA agreed to a Scheme with Brisbane-based QIC Private Capital at A$0.975/share, cash, a 35.4% premium to last close. The cash consideration included a $0.015/share fully franked dividend. At the time, Canada's pension fund OPTrust had reportedly submitted an offer to PEA, but no details were made public. OPTrust, in tandem with Infrastructure Capital Group (ICG), have now offered $1.07/share + a final dividend of $0.015/share for PEA (A$1.085 all-in) - an 11.3% premium to QIC's Offer.

• Under the matching right process, QIC has the option of countering within 4 business days.
• Kenneth Hall, PEA's ED, has confirmed he maintains his intention to vote his 48.7% stake in favour of QIC's Scheme. However, if QIC does not match OPT/ICG's Competing Proposal, and should the Independent Expert conclude OPT/ICG's Offer is superior, Hall has confirmed his intention to vote his shares in favour of the OPT/ICG Scheme.
• Both suitors have deep pockets and bidding could feasibly go back and forth. However, you have an excellent premium to last close - and a material counter premium - plus a life-time high Offer price. The major shareholder was happy to exit earlier at a lower price, and the market had not closed above the previous terms since 5 August. Some investors can take advantage of franking credits, but I'm not bullish there is a lot left in the tank on this deal.
  • UPDATE: And right on cue, late Friday after the close, QIC tabled a matching Offer of A$1.085/share., the same as OPT/ICG's. QIC also lodged an application with the Takeovers Panel citing a breach of its SID by PEA entering into a Proposed Deed with OPT/ICG.

(link to my insight: QIC's Move After OPTrust Counters For Pacific Energy)

Nexon (3659 JP) (Mkt Cap: $12.5bn; Liquidity: $43mn)

On June 21st when it became clear that Nexon would not be sold, shares fell off a cliff. It must be remembered that KJJ's goal was to sell NXC/NXMH to a high bidder who would also not try to take apart the structure of Nexon and Nexon Korea. That goal has not been put aside, simply put a bit further forward. Six weeks later, Q2 results were announced and both results and forecasts were a disappointment, and the shares fell 24% to an 8-month low. The company has now announced its specific buyback plans - to buy up to 32mm shares (3.6% of shares out) for up to ¥30bn.

• The buyback was, at the time of Travis' insight, 8 days of ADV, so about 10% of ADV until the scheduled end of the buyback if everything is done on-market. The document suggests it will be bought on-market, but there is flex in the language if need be. Or the board could simply announce that the last portion will be done on ToSTNeT-3 and simply do that the next morning. The buyback will only be ~2.4% of shares out. That remains underwhelming but there are interesting issues here.
• Travis expects the aim of the buyback is to "prove" that management has turned over a new leaf to try to provide good capital management for shareholders, thereby getting the multiple higher. If Nexon can draw down some of the net cash, it will mean that a buyer of NXC or NXMH (or Nexon) in future will not have to do so. Any tax liabilities would be taken on Nexon to "clean up" Nexon for the next round of bidding.
• If the stock was to pop strongly on the news - which it did - Travis would've been shorting. 21mm shares is not that difficult to buy over time, and he expects that the cost-cutting at Embark and what is expected to be the imminent arrival of Mr Min Heo into the executive team will not show concrete results yet.

(link to Travis' insight: Nexon. Big Buyback. Big Whoop)

SVI Pcl (SVI TB) (Mkt Cap: $328mn; Liquidity: $1mn)

Pongsak Lothongkam, SVI's CEO and largest shareholder with 45.71% of shares out, has launched a Conditional Voluntary Tender Offer (CVTO) at THB4.85/share or a 23.7% to last close, but where the shares traded back in late April. The Offer is conditional on 19.29% of shares out tendering, to get Lothongkam to at least 65%. He has no intention of delisting SVI within 12 months after the (successful) completion of the Tender Offer period.

• SVI’s bottom line is sensitive to the THB movement given its revenue exposure from Europe, following the 2016 acquisition of Seidel Electronics, which has 3 production facilities in Austria, Hungary and Slovakia. Management has guided down the company’s FY19E revenue growth target by ~14%. Consensus points to a 40% drop yoy in the bottom line in FY19E.
• Trading at a gross/annualised spread of 4%/18% assuming mid-December payment under a 45-business day Tender Offer period. That's wide. Even wider if taking the view the Offer period is 25-business days.
• Dislodging 19.29% of the register at a price traded four months ago is no small task, notably when the second-largest shareholder added to its position in the 1Q19, when shares traded on average above the Offer Price. 120mn shares have traded since the announcement or ~29% of the minimum acceptance condition. This will be close. On balance, this may just get up.

(link to my insight: SVI's CEO Tables A Conditional Tender Offer)

Shenzhen Kondarl Group Co A (000048 CH) (Mkt Cap: $24.5bn; Liquidity: $144mn)

On 16th August, Chinese real estate developer and major shareholder, Kingkey Group, announced an all-cash tender offer to acquire the remaining 28.5% minority shareholders in Shenzhen Kondarl at an offer price of CNY18.97/share. This translates to a deal size of ~USD290m. The offer follows what appears to be the resolution of a long-standing (five years plus) dispute between major shareholder Kingkey and Shenzhen Kondarl's previous management team.

• There is no event trade to do here. The stock is trading well through terms. The main holder now holds 70+%. 80+% is non-float. If the stock were to drop 50% and the business were to be OK, it would be worth a trade.
• The company is a "mini-conglomerate" of sorts, but is now clearly going to be tied to the non-real estate whims of a real estate magnate. Control is now quite complete with the Shenzhen Huachao acquisition. The risk here is that connected party transactions would allow Kingkey to get the better of minority shareholders over time.
• While Shenzhen Kondarl Group is not terribly expensive vs a basket of conglomerate peers, it is not cheap, and at 8x book there are plenty of ways for an unfair transaction to take place to bleed value from minorities.

(link to Travis' insight: Management Tussle at Shenzhen Kondarl Leads to Tender To Take Out Minorities)

Holcim Philippines (HLCM PM) (Mkt Cap: $1.7bn; Liquidity: $1mn)

Back in June, San Miguel (SMC PM) ​and HLCM entered into a SPA whereby SMC would acquire an 85.73% stake in HLCM. The biggest hurdle for this deal to get up was expected to centre on competition concerns. Therefore, the launching of a Phase II review by the Philippine Competition Commission (PCC) should not come as a big surprise. The more detailed Phase II review will be conducted within a 60-calendar day period - compared to 30 days under Phase I - to inquire whether there will be any substantial lessening of competition from the merger.

• There are evident concerns the merger will lead to SMC's dominant position in certain markets, leading to price increases of cement that will impact the construction of commercial, houses, and industrial buildings, thought to government infrastructure projects such as bridges, roads and school buildings. On the positives side of the ledger, the acquisition returns one of the largest cement players, currently foreign-held, back into the hands of Filipinos. The top three cement players, including HLCM, Republic and Cemex, controlling >70% market share, are foreign-affiliated.
• In response to the Holcim/SMC merger, the Department of Trade and Industry (DTI) Secretary Ramon M. Lopez said the imports of cement — which the DTI had imposed a temporary safeguard duty — can still provide “a healthy competitive environment for all the players.” The Philippines is the third-largest importer of cement, accounting for an estimated 35% of domestic demand.
• If this transaction were not taking place in the Philippines and did not involve the Ang family - Ramon Ang and Duterte are viewed as being good friends - many might consider it difficult to win anti-trust approval. For investors who view PCC approval as a major risk, the share price has already had a great run - up ~140% - since the beginning of the year.

(link to my insight: Holcim/San Miguel's Phase II Review And The Rebuttable Presumption)

Briefly ...

Tongil Nanum, a non-profit foundation and the second-largest shareholder of Daelim Corp, is selling its 33% stake in Daelim Corp. The value of this stake is estimated to be about ₩287bn ($240 million). Daelim Corp in turn is Daelim Industrial (000210 KS)'s largest shareholder with a 21.7%. Lee Hae-Wook, the Chairman of the Daelim Group, is the largest owner of Daelim Corp with 52.3%. Foreigners own 51.1% in Daelim Industrial, up from 43% at the end of 2018. Many investors in the company are probably looking at the low investment stake by Daelim Corp and view the situation as a potentially interesting long-term M&A target. (link to Douglas Kim's insight: Korea M&A Spotlight: Daelim Corp's 33% Stake Is Up for Sale)

London Stock Exchange (LSE LN) (Mkt Cap: $31bn; Liquidity: $67mn)

The HKEX (388 HK) has announced a possible offer for LSE. The proposed unsolicited transaction implies a value for each LSEG share of ~8,361 pence (a 22.9% premium to last close) comprising 2,045 pence in cash (~24% of the Offer Price) and 2.495 newly issued HKEX shares. A firm Offer, should it unfold, may be implemented by way of a Scheme of Arrangement or Takeover Offer.

• The transaction will require various regulatory approvals, which will stress-test the world's understanding of Hong Kong's "one country, two systems" constitution, a Basic Law principle currently at front of mind as various rallies and protests in the city result in a government response (which triggers more protests).
• The major shareholder of HKEx, and the only shareholder with >5%, is the Hong Kong Government. The Government also appoints 6 of the 13 board members, plus the CEO. The Securities and Futures Ordinance restricts investors exercising control of 5% or more of the voting power of HKEx, except with the Securities and Futures Commission’s approval.
• A key condition to HKEx's proposal is LSEG's £22bn deal to buy data firm Refinitiv - first announced on the 1 August - to either be voted down or scrapped/withdrawn. Subsequent to HKEx's announcement, LSEG stated HKEx's proposal was preliminary and highly conditional and it "remains committed to and continues to make good progress on its proposed acquisition of Refinitiv."
• When rumours of the LME acquisition first emerged in February 2012, HKEx's share price slumped. And HKEx closed down 3.5% (Thursday) on the news and clawed back 1.4% on Friday. This deal would be very difficult to get done given where things are right now. If one had shorted HKEx and then you bought back, that would have been a good trade.
  • UPDATE: The LSEG has now formally rejected HKEx's proposal late Friday (HK time). The HKEx announcement is short on detail, the LSEG's is not, citing fundamental flaws on the proposal such that it: 1) does not meet its strategic objective; 2) serious deliverability risks; 3) the consideration is unattractive, in that the majority of it is in scrip; and 4) the value of the proposal falls substantially short. One takeaway: "There is no doubt that your unusual Board structure and your relationship with the Hong Kong government will complicate matters." HKEx continues to believe that its proposal is in the best interests of shareholders.

links to:
my insight: HKEx's Tilt For LSE: This Will Get Political
Patryk Basiewicz's insight: LSE (LSE LN) / HKEX (0388 HK): A Very Long, but Determined, Shot

Melco International Development (200 HK) ​/ Melco Resorts & Entertainment (MLCO US)

Back in late June, I discussed in StubWorld: Melco Further Cleans House how the sale of the integrated casino in Cyprus (to MLCO) reduces the "noise" at the parent level, and the stub contribution to NAV. The result was that Melco would become a cleaner, single stock holding company, which should facilitate a narrowing in the NAV discount and/or a precursor to further group restructuring. I recommended to get long. Factoring in 1H19 figures, I now see the discount to NAV at 26%, a one-year low.

• Separately on the 5th June, Melco announced the privatisation of unlisted Aberdeen Restaurant Enterprise Limited - which is principally engaged in the Jumbo Kingdom restaurant in Aberdeen, Hong Kong - by way of a Scheme. That Scheme vote failed this past Friday, with >10% voting against the Scheme. This should have minimal impact on Melco - it still owns 86.678%.
• The remaining stub operation is Entertainment Gaming Asia, an owner and lessor of slot machines and a social gaming developer and privatised in early 2017 for an implied value of US$34mn (HK$265mn).
• Without additional monetization, it is questionable there is sufficient catalyst to narrow the NAV further from here. The remaining stubs op - EGT and Jumbo - have been privatised, or there exists overriding control. It is possible the streamlining of the stub asset, either via disposal or the removal of minorities, is potentially a pre-cursor to a larger restructuring - a privatisation of Melco, an in-specie distribution of MLCO (doubtful), a takeover of MLCO (also doubtful, too costly). But right now, I would look to exit at these levels.

(link to my insight: StubWorld: Further Narrowing in Melco’s NAV Discount Unjustified)

Briefly ...

Sanghyun Park flagged in (LG Corp Holdco/​Synthetic Sub: Classic Arb Opening with Holdco Currently At -3σ) LG Corp (003550 KS)'s mid-week decline and pointed to an arb trade opening up. My own calcs show LG at a discount to NAV of 55%, bang in line with its 52-week average.

Philip Morris International (PM US) / Altria Group (MO US)

On August 27, PMI and Altria confirmed that they were in discussions over a potential all-stock ‘merger of equals’ defined as a nil-premium transaction. The potential merger announcement comes a little over 11 years after the two companies separated from each other - Altria, effectively Philip Morris’s US business, spun out Philip Morris’ international arm on March 28, 2008.

• The original motivation behind the separation was to free-up PMI's faster-growing international business and to pursue emerging markets consumers who were trading up to premium brands such as PMI’s flagship brand Marlboro, and thereby shield shareholders from a slowing US cigarette market hobbled by multibillion-dollar lawsuits against US cigarette makers instigated by the federal and state governments seeking to recover billions of dollars in costs related to treating ill smokers covered by government health programs.
• The litigation risk from which Altria was trying to shield its shareholders by isolating the US business through the spin-off of PMI has dissipated with ultimately no major ill-financial consequences as highlighted by Altria's solid free cash flow profile since the spin-off. Therefore, a major motivation for the separation of the companies has become redundant.
• The technological disruption is also driving the agenda. PMI has spent ~$6bn in the past decade to develop IQOS, a product that heats rather than burns tobacco. Altria's main investment is its 35% stake in JUUL, acquired for $12.8bn last year, a product which has reignited interest in vaping and since 2017 has driven virtually all of the E-Vapor category volume growth to the extent that it has become by far and away the most popular (and most valuable) vaping brand.
• Conjoining the companies should pass regulatory muster particularly as they do not currently operate in the same geographic markets. Shareholder overlap will likely favour support for an agreed deal. The short term benefits of a potential merger for the shareholders of each company will ultimately depend on the terms of the merger. The true value of the merger is not about the short term, but the ability to maximize long-term returns.

(link to Robert Sassoon's insight: MergerTalk: Philip Morris Int/Altria - Back To The Future/Why A Merger May Make Sense Now)

Changyou.Com Ltd (Ads) (CYOU US) (Mkt Cap: $466mn; Liquidity: $2mn)

Sohu.com Inc (SOHU US) has tabled an Offer to buy out the minority shareholders in CYOU for US$5/share, or US$10/ADS in cash, or a 69% premium to last close. This Offer is preliminary and non-binding. It was concurrently announced Charles Zhang was no longer pursuing his own non-binding proposal - from two-and-a-half years ago.

• Sohu holds 67.4% of shares out in CYOU via its A and B shares and 95.3% of the voting rights given the disproportionate voting power of the B shares. Assuming a formal Offer is forthcoming - a potential big IF given the protracted timeframe under Zhang's earlier proposal - the Offer is expected to be in the form of a short-form statutory merger under Cayman Law. This means approval from CYOU 's shareholders is not required.
• CYOU declared two special dividends of US$9.40/ADS in April of this year and last. Sohu has pocketed ~US$675mn via the two special dividends, and as at 30 June, the company is sitting on net cash of US$1.5bn. This merger will cost ~US$150mn.

• With the Offeror flush with cash and due diligence all-but rubber-stamped - Zhang straddles the boards of both companies and is eminently aware of the CYOU's fundamentals - there shouldn't be any impediment to expeditiously finalising a merger plan. A recent short-form merger was wrapped up within 3 months. Assuming completion at the end of the year, this indicative Offer is trading at a gross/annualised spread of 11%/43%. That looks attractive.

(link to my insight: Cashed-Up Sohu To Freeze Out Changyou's Minorities)

Over the last couple of months, the premium on HDFC Bank (ADR) (HDB US) has dropped from around 23% to 11% - at the time of Brian Freitas's insight HDFC Bank - Case of the Collapsing ADR Premium. Over the same period the local stock HDFC Bank (HDFCB IN) is down 8% and the INR is weaker by 3.5% against the USD. Given the rapidly rising number of local shares available to foreign investors, the limited impact of the upcoming inclusion of the stock in the FTSE indices, and a potential small impact (if any) of the upcoming MSCI index review in November, Brian feels that the premium on the ADRs could drop further into the 5-6% range. The best way to play the trade is to short the ADR, buy the single stock futures on HDFC Bank and hedge the USDINR FX.

Sanghyun discussed in Korea >₩200bil MC Prefs: Interim Div-Adjusted Div Yield Estimates & Arb Trade Ideas, 10 large prefs heading into dividend season. S-Oil 1P and LG Chem 1P appear to be the ones to trade with their common as a hedge. Both are above 3% for interim div-adjusted year-end div yield. Also, both are currently in upside potential territory in terms of div yield diff to common yoy. He believes they are more likely to go higher relative to their respective common.

The Tata Motors Ltd A Dvr (TTMT/A IN) Differential Voting Rights (DVR) are trading at a huge discount of around 54% - at the time of Brian's insight Tata Motors - DVR Deep Discount Vs ADR Small Premium - to the Tata Motors Ltd (TTMT IN) ordinary shares. The premium on the Tata Motors Ltd Spon Adr (TTM US) is also beginning to perk up. There are a few catalysts that could cause the DVR discount to narrow. With short interest at around 9% of the number of ADRs issued, a squeeze could take the premium much higher. Brian prefers going long TTM US and short the TTMT IN single stock futures around parity with a view to exit at higher levels.

• EGII, the controlling shareholder of the Enn Energy Holdings (2688 HK), proposed to transfer 32.81% of ENN’s total issued share capital held by it directly and indirectly to Enn Ecological Holdings (600803 CH) (ENNEH) as part of an intra-group restructuring. The proposal for the Proposed Transfer has now been formulated and announced. It is still subject to the approval by the board of directors and shareholders of ENNEH, CSRC and NDRC. As announced on the 30 August, Hong Kong's SFC has granted a waiver to ENNEH from conducting an MGO for ENN.
• GBST Holdings (GBT AU)'s Scheme Booklet has been registered with ASIC. The IE concluded (page 79) the Offer is fair. The Scheme Meeting will be held on the 14 October and the Implementation Date is the 5 November.
• Not unsurprisingly, having given the green light for Ruralco Holdings (RHL AU) and & Nutrien Ltd (NTR CN) to merge, the ACCC is not opposed to Elders Ltd (ELD AU) and AIRR merging.
• Macquarie Media (MRN AU) has issued its Target Statement. Its Independent Directors unanimously recommend shareholders accept Nine Entertainment Co Holdings (NEC AU)'s Offer. The Offer period ends on the 14 October - unless extended.
• Tencent Holdings (700 HK)'s proposed takeover of Bitauto Holdings Ltd Adr (BITA US), Yixin Group Ltd (2858 HK)'s controlling shareholder, will trigger an unconditional MGO for Yixin. Pricing is still to be determined.

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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.