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

Idemitsu/Showa Deal - Idemitsu Minorities Giving Up Value To Get Scale, Survivorship Bragging Rights

Idemitsu and Showa Agree To Merge - Interesting Side Agreements, Own the I/SS Ratio

Quiddity Advisors

Event-Driven

After 3+ years of negotiating with shareholders, capital partners, the government and anti-trust regulators, and then their shareholders again, in July <a href="https://www.smartkarma.com/entities/108" target="_blank" data-smartkarma-citation="entities:108:1">Showa Shell Sekiyu Kk (5002 JP)</a> and <a href="https://www.smartkarma.com/entities/109" target="_blank" data-smartkarma-citation="entities:109:1">Idemitsu Kosan (5019 JP)</a> came to an agreement with the Idemitsu family to obtain family support for a merger as long as certain promises were made. 14 weeks later, on October 16th, the two companies announced they had decided on a scrip ratio which came out at 0.41 shares of Idemitsu for every share of Showa Shell held. The dividend split is also quite remarkable because of the proposed change in fiscal year-end for Showa, so one cannot trade the ratio at 0.41.My opinion was that the ratio should have been lower. Idemitsu shareholders have given up serious value. Interestingly, as soon as the ratio was announced, both stocks cratered 10%, before rebounding most of the way. But the end of the week, however, Idemitsu was down 12+%. Since then, the shares are down further. Idemitsu is down more than a third in six weeks and Showa Shell shares are down similarly. This is despite significant buybacks providing more accretion.On Monday, both companies announced that their respective shareholder meetings would be on the 18th of December (where if approved, the companies would merge April 1 2019). The record date for these meetings was at the beginning of the month so there is no real appeal to changing one's position here because of more knowledge about the meeting date.<div class="content-highlight">Also on Monday, for the first time Showa Shell traded through terms on a cum-dividend basis. There are three good reasons for that.</div>The three possible reasons are...<ol>
<li>
A Deal-Break Bet: Since shares have fallen sharply, some investors expect there is significant risk that investors on one side will decide to not vote for the deal, meaning that on deal break, Showa Shell would significantly outperform Idemitsu.</li>
<li>
A Financing Spread Bet (which I don't see): Net financing costs favor going long Showa and short Idemitsu to lend out Showa shares at a significant borrow fee premium at term. Investors expect the deal to go through and are locking in the spread (which I cannot see the existence of, but it is theoretically possible).</li>
<li>The only reason why I would do this trade.</li>
</ol>

After 3+ years of negotiating with shareholders, capital partners, the government and anti-trust regulators, and then their shareholders again, in July Showa Shell Sekiyu Kk (5002 JP) and Idemitsu Kosan (5019 JP) came to an agreement with the Idemitsu family to obtain family support for a merger as long as certain promises were made. 14 weeks later, on October 16th, the two companies announced they had decided on a scrip ratio which came out at 0.41 shares of Idemitsu for every share of Showa Shell held. The dividend split is also quite remarkable because of the proposed change in fiscal year-end for Showa, so one cannot trade the ratio at 0.41.My opinion was that the ratio should have been lower. Idemitsu shareholders have given up serious value. Interestingly, as soon as the ratio was announced, both stocks cratered 10%, before rebounding most of the way. But the end of the week, however, Idemitsu was down 12+%. Since then, the shares are down further. Idemitsu is down more than a third in six weeks and Showa Shell shares are down similarly. This is despite significant buybacks providing more accretion.On Monday, both companies announced that their respective shareholder meetings would be on the 18th of December (where if approved, the companies would merge April 1 2019). The record date for these meetings was at the beginning of the month so there is no real appeal to changing one's position here because of more knowledge about the meeting date.Also on Monday, for the first time Showa Shell traded through terms on a cum-dividend basis. There are three good reasons for that.The three possible reasons are...

A Deal-Break Bet: Since shares have fallen sharply, some investors expect there is significant risk that investors on one side will decide to not vote for the deal, meaning that on deal break, Showa Shell would significantly outperform Idemitsu.

A Financing Spread Bet (which I don't see): Net financing costs favor going long Showa and short Idemitsu to lend out Showa shares at a significant borrow fee premium at term. Investors expect the deal to go through and are locking in the spread (which I cannot see the existence of, but it is theoretically possible).
The only reason why I would do this trade.


Three Reasons Showa/Idemitsu Should Trade Through Terms