Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Thoughts on Amazon –What Does Its Valuation Tells Us?

Netflix & Amazon Expand in Korea – Not a Coincidence

Okja: The Fight Between Netflix Vs. CJ CGV

Quiddity Advisors

Event-Driven

On 1 February 2016, there was a press release from <a href="https://www.smartkarma.com/entities/961" target="_blank" data-smartkarma-citation="entities:961:1">Nippon Steel &amp; Sumitomo Metal Corp (5401 JP)</a> ("NSSMC") titled <a href="http://www.nssmc.com/en/ir/library/pdf/20160201_040.pdf" target="_blank">Commencement of Discussions Regarding Making Nisshin Steel a Subsidiary of Nippon Steel &amp; Sumitomo Metal and Regarding Nippon Steel &amp; Sumitomo Metal Supplying Steel Slabs to Nisshin Steel</a>. That led to speculation about a variety of ways such a deal could be constructed. My bet was a partial tender. It ended up being one. On the 13th of May such a deal was <a href="http://www.nssmc.com/common/secure/en/news/20160513_300.pdf" target="_blank">announced</a>. 10 months later it was complete (and it was a good ride for Smartkarma subscribers who got lots of lots of interim guidance on the deal and substantial updates for timing their trades well). <h2>The New News</h2>Yesterday, it was announced in the morning that NSSMC would hold a press briefing after the close. <a href="https://www.smartkarma.com/entities/15900" target="_blank" data-smartkarma-citation="entities:15900:1">Sanyo Special Steel Co Ltd (5481 JP)</a> (in which they hold 14.5%) and <a href="https://www.smartkarma.com/entities/10140" target="_blank" data-smartkarma-citation="entities:10140:1">Daido Steel Co Ltd (5471 JP)</a> (in which they hold 7+%) each rose sharply on expectations of a deal. In mid-afternoon, the Nikkei wrote that Nippon Steel had done a deal to buy Swedish specialty steel maker <a href="https://www.aist.org/AIST/aist/AIST/Publications/Monthly/18_jan_114_123.pdf" target="_blank">Ovako AB</a> (see link for an industry report on the company, which specializes in 'clean' steel for bearings, etc) and both stocks promptly fell sharply before the close.After the close yesterday we had another announcement:  <a href="http://www.nssmc.com/common/secure/en/news/20180315_200.pdf" target="_blank">Commencement of Discussions Regarding Making Sanyo Special Steel a Subsidiary of Nippon Steel &amp; Sumitomo Metal and Other Matters</a>. In the announcement, Nippon Steel points to its <a href="http://www.nssmc.com/common/secure/en/news/20180315_100.pdf" target="_blank">decision</a> to buy Ovako AB, and a desire to make Nippon Steel's specialty steel business global by integrating more fully the business of <a href="https://www.smartkarma.com/entities/15900" target="_blank" data-smartkarma-citation="entities:15900:1">Sanyo Special Steel Co Ltd (5481 JP)</a> with its own internal businesses. The announcement two years ago with <a href="https://www.smartkarma.com/entities/20606" target="_blank" data-smartkarma-citation="entities:20606:1">Nisshin Steel Co Ltd (5413 JP)</a> said the target date for disclosure of a deal (or not) was middle of May. It came out May 13th. This time it says the announcement target date is August 2018, with a proposed consummation of the transaction being March 2019.<ul><li>The <a href="http://www.nssmc.com/common/secure/en/news/20180315_200.pdf" target="_blank">announcement</a> suggests this deal could be done by Sanyo Special Steel issuing shares in a third party allotment, by a partial tender offer, a combination of the two, or other method. In the case of the Nisshin Steel deal, the language was similar (see <a href="http://www.nssmc.com/en/ir/library/pdf/20160201_040.pdf" target="_blank">p4</a>) but they clearly pointed at a tender offer. This time there is no stated preference.</li><li>In the Nisshin Steel situation, the proposed ownership level was "51-66%" and ended up being 51%. This time it is "envisaged to be greater than 51%" ("51%以上"). </li></ul>The question is how to trade it before you know deal structure, target ownership percentage, relative change in fundamentals, between now and then, and how Nippon Steel rates the stock. I have some ideas on that. <h2>A First Take</h2><ul class=""><li>This has likely been in informal discussions for a while. Nippon Steel treats Sanyo Special Steel as an equity method affiliate, and Nippon Steel's predecessor participated in the rehabilitation of SSS 50-odd years ago. They know each other. The decision to go down this road probably happened before the recent Trump tariffs on steel announcement. I do not know the effects yet but I would expect them to be minor on the Sanyo Special Steel as US sales are relatively low. And as consumers will pay higher prices, those consumers may move production offshore to obtain lower raw materials costs, then ship steel-included products into the US. </li><li>I think there is a chance there is a decision on structure and pricing earlier than August in order to allow sufficient time for anti-trust to opine to get a decision to allow the deal to close by end-March 2019 so Nippon Steel can consolidate starting April 1 in 2019.</li><li>At this point, I expect a Partial Tender Offer to get to 51%, not more. And I expect it to be well north of the current price. I expect a partial tender price at ¥3000 and above. </li><li>Even after the first day bump, given the tender pro-ration required, this looks like a low-risk long here, but it depends where you think the Tender Offer Price comes in. <ul><li>If you think the TOB comes in at ¥3000/share and the back end should be at ¥2500/share, at Friday's close the IRR of the trade (long-only) is 1.6% at arithmetic minimum pro-ration, and 5.4% at where I think the practical minimum comes.</li><li>If you think the TOB comes in at ¥3200/share, my expected minimum pro-ration gets you to an IRR of 10%. </li><li>I expect the IRR is higher at Friday's close, but there is path risk.</li></ul></li><li>I do not expect Sanyo Special Steel will need or want to raise equity through a third-party offering to get Nippon Steel to 51%. Nisshin Steel didn't and their debt was 7x EBITDA at the time of the announcement. NSSMC's net debt/EBITDA is &gt;3.5x. SSS' net debt to EBITDA is &lt;1.5x EBITDA. There is no need to de-lever the situation to do this deal. If the two companies did that, it would be to get a lower price for Nippon Steel at the expense of minorities, and I don't think that is Nippon Steel's style.</li><li>The first word italicized there - "need" - is key. But I expect it is a quality problem. </li></ul>More below the fold, including Ye Olde Patented Arb Grids™.

On 1 February 2016, there was a press release from Nippon Steel &amp; Sumitomo Metal Corp (5401 JP) ("NSSMC") titled Commencement of Discussions Regarding Making Nisshin Steel a Subsidiary of Nippon Steel &amp; Sumitomo Metal and Regarding Nippon Steel &amp; Sumitomo Metal Supplying Steel Slabs to Nisshin Steel. That led to speculation about a variety of ways such a deal could be constructed. My bet was a partial tender. It ended up being one. On the 13th of May such a deal was announced. 10 months later it was complete (and it was a good ride for Smartkarma subscribers who got lots of lots of interim guidance on the deal and substantial updates for timing their trades well). The New NewsYesterday, it was announced in the morning that NSSMC would hold a press briefing after the close. Sanyo Special Steel Co Ltd (5481 JP) (in which they hold 14.5%) and Daido Steel Co Ltd (5471 JP) (in which they hold 7+%) each rose sharply on expectations of a deal. In mid-afternoon, the Nikkei wrote that Nippon Steel had done a deal to buy Swedish specialty steel maker Ovako AB (see link for an industry report on the company, which specializes in 'clean' steel for bearings, etc) and both stocks promptly fell sharply before the close.After the close yesterday we had another announcement:  Commencement of Discussions Regarding Making Sanyo Special Steel a Subsidiary of Nippon Steel &amp; Sumitomo Metal and Other Matters. In the announcement, Nippon Steel points to its decision to buy Ovako AB, and a desire to make Nippon Steel's specialty steel business global by integrating more fully the business of Sanyo Special Steel Co Ltd (5481 JP) with its own internal businesses. The announcement two years ago with Nisshin Steel Co Ltd (5413 JP) said the target date for disclosure of a deal (or not) was middle of May. It came out May 13th. This time it says the announcement target date is August 2018, with a proposed consummation of the transaction being March 2019.The announcement suggests this deal could be done by Sanyo Special Steel issuing shares in a third party allotment, by a partial tender offer, a combination of the two, or other method. In the case of the Nisshin Steel deal, the language was similar (see p4) but they clearly pointed at a tender offer. This time there is no stated preference.In the Nisshin Steel situation, the proposed ownership level was "51-66%" and ended up being 51%. This time it is "envisaged to be greater than 51%" ("51%以上"). The question is how to trade it before you know deal structure, target ownership percentage, relative change in fundamentals, between now and then, and how Nippon Steel rates the stock. I have some ideas on that. A First TakeThis has likely been in informal discussions for a while. Nippon Steel treats Sanyo Special Steel as an equity method affiliate, and Nippon Steel's predecessor participated in the rehabilitation of SSS 50-odd years ago. They know each other. The decision to go down this road probably happened before the recent Trump tariffs on steel announcement. I do not know the effects yet but I would expect them to be minor on the Sanyo Special Steel as US sales are relatively low. And as consumers will pay higher prices, those consumers may move production offshore to obtain lower raw materials costs, then ship steel-included products into the US. I think there is a chance there is a decision on structure and pricing earlier than August in order to allow sufficient time for anti-trust to opine to get a decision to allow the deal to close by end-March 2019 so Nippon Steel can consolidate starting April 1 in 2019.At this point, I expect a Partial Tender Offer to get to 51%, not more. And I expect it to be well north of the current price. I expect a partial tender price at ¥3000 and above. Even after the first day bump, given the tender pro-ration required, this looks like a low-risk long here, but it depends where you think the Tender Offer Price comes in. If you think the TOB comes in at ¥3000/share and the back end should be at ¥2500/share, at Friday's close the IRR of the trade (long-only) is 1.6% at arithmetic minimum pro-ration, and 5.4% at where I think the practical minimum comes.If you think the TOB comes in at ¥3200/share, my expected minimum pro-ration gets you to an IRR of 10%. I expect the IRR is higher at Friday's close, but there is path risk.I do not expect Sanyo Special Steel will need or want to raise equity through a third-party offering to get Nippon Steel to 51%. Nisshin Steel didn't and their debt was 7x EBITDA at the time of the announcement. NSSMC's net debt/EBITDA is &gt;3.5x. SSS' net debt to EBITDA is &lt;1.5x EBITDA. There is no need to de-lever the situation to do this deal. If the two companies did that, it would be to get a lower price for Nippon Steel at the expense of minorities, and I don't think that is Nippon Steel's style.The first word italicized there - "need" - is key. But I expect it is a quality problem. More below the fold, including Ye Olde Patented Arb Grids™.

Nippon Steel Aiming at 51% of Sanyo Special Steel