Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Hitachi Construction Machinery / Event-Driven

<p>With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. </p>
<p>The filtering is conducted across two basic measures which seek to answer two basic questions:</p>
<ol>
<li>What might supply look like?</li>
<li>What might demand look like?</li>
</ol>
<p>The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder <em>wants</em> to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. </p>
<p>On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.</p>
<p>In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. </p>
<p>Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. </p>
<p>In short, screening can only go so far. But we try.</p>
<p>At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. </p>
<p>We find the thinking process and screening technology has thrown up some <em>previously less-than-obvious</em> candidates which deserve further work.</p>

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:

What might supply look like?
What might demand look like?

The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

<p>Back in early October 2016, the Nikkei carried an <a href="http://asia.nikkei.com/Business/Companies/Hitachi-gears-up-to-sell-power-tool-chipmaking-equipment-ops" target="_blank">article</a> saying <a href="https://www.smartkarma.com/entities/7797" target="_blank" data-smartkarma-citation="entities:7797:1">Hitachi Ltd (6501 JP)</a> was "gearing up to sell its power tool and chipmaking equipment operations", selling <a href="https://www.smartkarma.com/entities/18359" target="_blank" data-smartkarma-citation="entities:18359:1">Hitachi Koki Co Ltd (6581 JP)</a> and "a portion of" <a href="https://www.smartkarma.com/entities/2523" target="_blank" data-smartkarma-citation="entities:2523:1">Hitachi Kokusai Electric Inc (6756 JP)</a>. </p><div class="content-remarks"><p>Hitachi Koki shares responded by jumping from the low ¥700s to the low ¥800s, muddling around for a few weeks til late October, then steadily climbing through the next two months to the mid ¥1200/share level. At the end of December, the Nikkei <a href="http://asia.nikkei.com/Business/Companies/Hitachi-Koki-headed-for-sale-to-US-investment-company" target="_blank">reported</a> that a deal for KKR to buy Hitachi Koki for more than ¥150 billion had been agreed. The stock popped to ~¥1500/share and stayed there until mid-January when KKR announced a deal to buy all of the shares of Hitachi Koki at a gross total of ¥1,450 per share, including a Special Dividend and a TOB at a lower price. The total available to most shareholders was between  ¥1,330- ¥1,390, depending on how their tax treatment of the special dividend came out. </p></div><p>Hitachi Kokusai Electric jumped from ¥1800 to ¥1900+, muddled around there til late October, then started climbing, plateauing at ¥2600/share in January, then periodically dipping 5-10% below that level. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/025/032/original/30270426_HKEChart1.png?1493209355" class="editor-image img-responsive" data-smartkarma-image-id="25032"></figure><div style="text-align: left;" class="content-caption">data: Bloomberg</div><p>Yesterday morning, the Nikkei carried an <a href="http://asia.nikkei.com/Business/Deals/Hitachi-selling-chipmaking-device-unit-to-KKR-Japan-fund" target="_blank">article</a> saying Hitachi would sell the chip-making device company to KKR <em>"in a tender offer estimated to exceed 200bn yen."</em></p><p>The stock price rallied 11% on the news - the best performance in 25yrs - with many expecting that this deal might resemble the <a href="https://www.smartkarma.com/entities/15914" target="_blank" data-smartkarma-citation="entities:15914:1">Calsonic Kansei Corp (7248 JP)</a> deal where the Nikkei had said KKR would spend Amount X but a special dividend was announced meaning the amount available to shareholders was much higher. The stock traded 17% of the minority shares, and more like 22+% of what I'll call "Real Float," and spent much of the day with a headline market cap of ¥275-280bn and implied Enterprise Value of ¥225-230bn.</p><h2>The New News - A Tender, A Squeezeout, A Split, A Buyback, Then a Pref</h2><ul><li>Hours after the close, including a delay in announcing earnings, KKR, Hitachi Kokusai, and <a href="https://www.smartkarma.com/entities/7797" target="_blank" data-smartkarma-citation="entities:7797:1">Hitachi Ltd (6501 JP)</a> announced a deal with both an unexpected structure and a complicated process,</li><li><em>Overall Deal Value</em> is lower than the market obviously expected.</li><li>Minorities make out OK all things considered. Hitachi makes out less well. </li><li>KKR, through a vehicle called HKE Holdings, plans to launch a Tender Offer for a minimum of 24,816,632 shares of Hitachi Kokusai to start sometime in August.  This is a majority of the minority. There is no ceiling and if those who tender their shares tender more, all shares will be purchased.</li><li>Hitachi, which owns 53.07mm, or 51.67% of shares outstanding less treasury shares, will NOT tender.</li><li>The process from there is complicated. It doesn't matter much to minorities though for the sake of explaining an odd structure, it goes as follows: <ul><li>If HKE receives the minimum, HKE and Hitachi will squeeze out minorities so that HKE and Hitachi are the only owners.</li><li>Then Hitachi Kokusai will buy back all of Hitachi's shares in the company at ¥1,710.34/share - a discount of 31.67% from where KKR buys the shares of the company from minorities.</li><li>Then they will spin off the Thin-Film Process Solutions business from Hitachi Kokusai Electric, leaving everything else - the Video and Communication Solutions business (which is engaged in video security, IoT high-reliability wireless, and railroad solutions) - <em>inside</em> Hitachi Kokusai.</li><li>Then HKE will sell 20% of the remaining business of Hitachi Kokusai Electric to JIP and 20% to Hitachi.</li><li>Then Hitachi will invest ¥10.5bn into HKE in a preferred share (a kind of vendor financing). </li></ul></li></ul><h2>But none of that matters to minorities... </h2><p>Minorities have a choice here. </p><div class="content-highlight"><p>They can take the deal.</p><p>Or not.</p></div><p>Much more below the fold for subscribers...</p>

Back in early October 2016, the Nikkei carried an article saying Hitachi Ltd (6501 JP) was "gearing up to sell its power tool and chipmaking equipment operations", selling Hitachi Koki Co Ltd (6581 JP) and "a portion of" Hitachi Kokusai Electric Inc (6756 JP). Hitachi Koki shares responded by jumping from the low ¥700s to the low ¥800s, muddling around for a few weeks til late October, then steadily climbing through the next two months to the mid ¥1200/share level. At the end of December, the Nikkei reported that a deal for KKR to buy Hitachi Koki for more than ¥150 billion had been agreed. The stock popped to ~¥1500/share and stayed there until mid-January when KKR announced a deal to buy all of the shares of Hitachi Koki at a gross total of ¥1,450 per share, including a Special Dividend and a TOB at a lower price. The total available to most shareholders was between  ¥1,330- ¥1,390, depending on how their tax treatment of the special dividend came out. Hitachi Kokusai Electric jumped from ¥1800 to ¥1900+, muddled around there til late October, then started climbing, plateauing at ¥2600/share in January, then periodically dipping 5-10% below that level. data: BloombergYesterday morning, the Nikkei carried an article saying Hitachi would sell the chip-making device company to KKR "in a tender offer estimated to exceed 200bn yen."The stock price rallied 11% on the news - the best performance in 25yrs - with many expecting that this deal might resemble the Calsonic Kansei Corp (7248 JP) deal where the Nikkei had said KKR would spend Amount X but a special dividend was announced meaning the amount available to shareholders was much higher. The stock traded 17% of the minority shares, and more like 22+% of what I'll call "Real Float," and spent much of the day with a headline market cap of ¥275-280bn and implied Enterprise Value of ¥225-230bn.The New News - A Tender, A Squeezeout, A Split, A Buyback, Then a PrefHours after the close, including a delay in announcing earnings, KKR, Hitachi Kokusai, and Hitachi Ltd (6501 JP) announced a deal with both an unexpected structure and a complicated process,Overall Deal Value is lower than the market obviously expected.Minorities make out OK all things considered. Hitachi makes out less well. KKR, through a vehicle called HKE Holdings, plans to launch a Tender Offer for a minimum of 24,816,632 shares of Hitachi Kokusai to start sometime in August.  This is a majority of the minority. There is no ceiling and if those who tender their shares tender more, all shares will be purchased.Hitachi, which owns 53.07mm, or 51.67% of shares outstanding less treasury shares, will NOT tender.The process from there is complicated. It doesn't matter much to minorities though for the sake of explaining an odd structure, it goes as follows: If HKE receives the minimum, HKE and Hitachi will squeeze out minorities so that HKE and Hitachi are the only owners.Then Hitachi Kokusai will buy back all of Hitachi's shares in the company at ¥1,710.34/share - a discount of 31.67% from where KKR buys the shares of the company from minorities.Then they will spin off the Thin-Film Process Solutions business from Hitachi Kokusai Electric, leaving everything else - the Video and Communication Solutions business (which is engaged in video security, IoT high-reliability wireless, and railroad solutions) - inside Hitachi Kokusai.Then HKE will sell 20% of the remaining business of Hitachi Kokusai Electric to JIP and 20% to Hitachi.Then Hitachi will invest ¥10.5bn into HKE in a preferred share (a kind of vendor financing). But none of that matters to minorities... Minorities have a choice here. They can take the deal.Or not.Much more below the fold for subscribers...

Hitachi Kokusai TOB - Minorities Are Asked To Take It Or Leave It

Japan

Hitachi Koki Co., Ltd. manufactures electric tools and equipment.  The Company's products include power-driven hand drills, grinders, nailers, and cutters, as well as computer printers and scientific instruments such as centrifuges and vacuum pumps.

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Hitachi Koki (6581 JP)

A Potential Asian LBO Screening System

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the...

Travis Lundy

Hitachi Kokusai TOB - Minorities Are Asked To Take It Or Leave It

Back in early October 2016, the Nikkei carried an article saying Hitachi Ltd (6501 JP) was "gearing up to sell its power tool and chipmaking...

Travis Lundy

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