Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks.</p>
</div>
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<p>I number 36, mostly firm, deals around the region.</p>
</div>
<div>
<p>More below the fold.</p>
</div>


This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks.


I number 36, mostly firm, deals around the region.


More below the fold.


Asia-Pac Weekly Risk Arb Summary: Sydney Airport, Aussie Pharma, Milton, Shinsei Bank

<div>
<p>This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks.</p>
</div>
<div>
<p>I number 37, mostly firm, deals around the region.</p>
</div>
<div>
<p>More below the fold.</p>
</div>


This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks.


I number 37, mostly firm, deals around the region.


More below the fold.


Asia-Pac Weekly Risk Arb Summary: Shinsei Bank, Soho China, Nippo Corp, Rhipe, Oil Search/Santos

Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<p>The decision to take NIPPO private is a rather elaborate one, as ENEOS Holdings is currently restructuring its business and, in line with its medium-term management plan, is selling off assets while accelerating investment in the growth areas of renewable energy and new materials, which it sees as growth drivers. The fact that ENEOS Holdings is not directly TOBing NIPPO, but rather TOBing it through SPC, is presumably a strategy to buy money and time. Rather than investing a large amount of money directly in the TOB to fund investments in the growth areas of renewable energy and new materials, the difference between the sale of NIPPO shares and the investment in the SPC can be used to fund investments in the growth areas mentioned above. In the future when the growth areas are on track (since the growth of the domestic road paving business itself is slowing down), we speculate that there is a possibility of selling NIPPO.</p>

The decision to take NIPPO private is a rather elaborate one, as ENEOS Holdings is currently restructuring its business and, in line with its medium-term management plan, is selling off assets while accelerating investment in the growth areas of renewable energy and new materials, which it sees as growth drivers. The fact that ENEOS Holdings is not directly TOBing NIPPO, but rather TOBing it through SPC, is presumably a strategy to buy money and time. Rather than investing a large amount of money directly in the TOB to fund investments in the growth areas of renewable energy and new materials, the difference between the sale of NIPPO shares and the investment in the SPC can be used to fund investments in the growth areas mentioned above. In the future when the growth areas are on track (since the growth of the domestic road paving business itself is slowing down), we speculate that there is a possibility of selling NIPPO.

Japan's Governance: Parent-Subsidiary Listing and ENEOS, Toho Titanium, Hitachi Construction Update

Travis Lundy

<p>An <a href="https://diamond.jp/articles/-/281267" target="_blank" rel="noopener">article</a> in Diamond Online late Monday after the close suggested that <a href="https://www.smartkarma.com/entities/eneos-holdings-inc" target="_blank" data-smartkarma-citation="entities:638:1" rel="noopener">ENEOS Holdings (5020 JP)</a>, which is a 57%+ owner of road works and contractor <a href="https://www.smartkarma.com/entities/nippo-corp" target="_blank" data-smartkarma-citation="entities:2583:1" rel="noopener">Nippo Corp (1881 JP)</a> would set up a Special Purpose Corporation, perhaps with the help of Goldman Sachs, and would bid for the rest of its subsidiary. It would then sell its current stake in the company back to the company. </p><p>Late last night the two companies said that they were not the source of the article and that their boards would meet on 7 September to discuss. The stock traded limit up at ¥4215 today. I thought that would have been a great place to be long for a takeout. </p><p>But after the close, ENEOS and Nippo <a href="https://www.nippo-c.co.jp/ir/kessan_pdf/2021_0907_3.pdf" target="_blank" rel="noopener">announced</a> a transaction where a slightly convoluted org chart of entities will do just that - try to buy out minorities of Nippo - but at ¥4,000/share. </p><p>The Tender Offer is likely to start between mid-October and mid-November, but in the meantime, Nippo has come out to support the Tender Offer and we have all the supporting documentation. </p><p>Other than today's limit up price, ¥4,000/share is a lifetime high as far as I know. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/336/original/Screenshot+2021-09-07+at+5.02.37+PM.png?1631005799" class="editor-image img-responsive" data-smartkarma-image-id="228336"></figure></section><div class="content-highlight">
<p><strong>Given the capital construct, I could imagine some shareholders could get upset at this valuation.</strong> It looks underpriced to me. You can think of it the following way:</p>
<ul>
<li>ENEOS currently owns 57% of Nippo. </li>
<li>Some combination of ENEOS and Goldman Sachs are going to spend ¥200bn and small change to buy out minorities (the 43% ENEOS doesn't own). It will be financed by non-recourse loans. ENEOS will have control. </li>
<li>Then ENEOS will sell its currently-owned 57% back to the company.</li>
</ul>
<p>To recap... if we imagine ENEOS was the sole buyer, this transaction allows ENEOS to gain 100% of the shares, take out a net $600mm in cash, and own the equity free and clear at 8x ex-cash and securities PER. </p>
<p><em><strong>Just phrasing it that way tells you it is probably being done too cheaply. </strong></em></p>
</div><p>The company has seen its share of scandals over the years which has left both it and <em>all</em> the road building companies (which have also shared these scandals) at low valuations. They were so low that the parents of Obayashi Road and Maeda Road saw fit to buy out the minorities of their subsidiaries (Obayashi in 2017, discussed in <a href="https://www.smartkarma.com/insights/obayashi-road-another-in-a-string-of-underpriced-takeovers-by-a-japanese-parent" target="_blank" data-smartkarma-citation="insights:10608" rel="noopener">Obayashi Road: Another in a String of Underpriced Takeovers by a Japanese Parent</a> and <a href="https://www.smartkarma.com/entities/maeda-road-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:2168:1" rel="noopener">Maeda Road Construction Co (1883 JP)</a> last year in a whole series of insights around the hostile takeover of the majority then the second squeezeout merger, so historical trading price is logically of less import when determining "fair value".</p><div class="content-remarks">
<p>I'd note that the usual construct that companies use to "prove" that their bid is adequate, or prove that their bidder's bid is "not detrimental to minority interests" is to use a mixture of recent stock price, recent peers' stock prices and multiples, and a DCF, which is often dodgily mashed together to create a number which the two parties have otherwise agreed upon behind the scenes. There is rarely any common sense involved. Non-operating rental real estate portfolios, cash, equity, and bond portfolios are sometimes valued to a discount rate of 10%, and sharp changes in forecasts and cash holdings are ignored. </p>
<p>In addition, despite the METI Fair M&amp;A Guidelines introduced in June 2019 which suggest in situations where there is a parent or founder family taking over a company that there should be a majority of minority condition, a full independent committee, a fairness opinion, and abundant care taken to treat minority investors appropriately given the inherent information asymmetry and conflict of interest, we rarely get those, and the extent to which a "control premium" is assessed is whether or not it ends up being a premium to recent traded price, which could be low precisely because investors have come to expect suspect governance from the company due to its status as a listed "child" company beholden to its parent.</p>
</div><p>However while the largest non-ENEOS holder <em>appears</em> to be sometimes-activist Silchester International, because they reported a 7+% position on 25 September 2020 and have not reported a subsequent position (which they would have had to do had they changed their position by more than 1% of shares outstanding), it is to note that their <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1630999744307&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=1881&amp;lpr=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100JR3W" target="_blank" rel="noopener">last report last year</a> was to <em>sell</em> 1% of the company at prices between mid ¥2700s and high ¥2900s from July to September. </p><p>There is some time between now and the start of the Tender Offer, which means there will be time for people to decide what they think. </p><p>To help with the process, I offer some details and brief valuation notes below.</p>

An article in Diamond Online late Monday after the close suggested that ENEOS Holdings (5020 JP), which is a 57%+ owner of road works and contractor Nippo Corp (1881 JP) would set up a Special Purpose Corporation, perhaps with the help of Goldman Sachs, and would bid for the rest of its subsidiary. It would then sell its current stake in the company back to the company. Late last night the two companies said that they were not the source of the article and that their boards would meet on 7 September to discuss. The stock traded limit up at ¥4215 today. I thought that would have been a great place to be long for a takeout. But after the close, ENEOS and Nippo announced a transaction where a slightly convoluted org chart of entities will do just that - try to buy out minorities of Nippo - but at ¥4,000/share. The Tender Offer is likely to start between mid-October and mid-November, but in the meantime, Nippo has come out to support the Tender Offer and we have all the supporting documentation. Other than today's limit up price, ¥4,000/share is a lifetime high as far as I know. 
Given the capital construct, I could imagine some shareholders could get upset at this valuation. It looks underpriced to me. You can think of it the following way:

ENEOS currently owns 57% of Nippo. 
Some combination of ENEOS and Goldman Sachs are going to spend ¥200bn and small change to buy out minorities (the 43% ENEOS doesn't own). It will be financed by non-recourse loans. ENEOS will have control. 
Then ENEOS will sell its currently-owned 57% back to the company.

To recap... if we imagine ENEOS was the sole buyer, this transaction allows ENEOS to gain 100% of the shares, take out a net $600mm in cash, and own the equity free and clear at 8x ex-cash and securities PER. 
Just phrasing it that way tells you it is probably being done too cheaply. 
The company has seen its share of scandals over the years which has left both it and all the road building companies (which have also shared these scandals) at low valuations. They were so low that the parents of Obayashi Road and Maeda Road saw fit to buy out the minorities of their subsidiaries (Obayashi in 2017, discussed in Obayashi Road: Another in a String of Underpriced Takeovers by a Japanese Parent and Maeda Road Construction Co (1883 JP) last year in a whole series of insights around the hostile takeover of the majority then the second squeezeout merger, so historical trading price is logically of less import when determining "fair value".
I'd note that the usual construct that companies use to "prove" that their bid is adequate, or prove that their bidder's bid is "not detrimental to minority interests" is to use a mixture of recent stock price, recent peers' stock prices and multiples, and a DCF, which is often dodgily mashed together to create a number which the two parties have otherwise agreed upon behind the scenes. There is rarely any common sense involved. Non-operating rental real estate portfolios, cash, equity, and bond portfolios are sometimes valued to a discount rate of 10%, and sharp changes in forecasts and cash holdings are ignored. 
In addition, despite the METI Fair M&amp;A Guidelines introduced in June 2019 which suggest in situations where there is a parent or founder family taking over a company that there should be a majority of minority condition, a full independent committee, a fairness opinion, and abundant care taken to treat minority investors appropriately given the inherent information asymmetry and conflict of interest, we rarely get those, and the extent to which a "control premium" is assessed is whether or not it ends up being a premium to recent traded price, which could be low precisely because investors have come to expect suspect governance from the company due to its status as a listed "child" company beholden to its parent.
However while the largest non-ENEOS holder appears to be sometimes-activist Silchester International, because they reported a 7+% position on 25 September 2020 and have not reported a subsequent position (which they would have had to do had they changed their position by more than 1% of shares outstanding), it is to note that their last report last year was to sell 1% of the company at prices between mid ¥2700s and high ¥2900s from July to September. There is some time between now and the start of the Tender Offer, which means there will be time for people to decide what they think. To help with the process, I offer some details and brief valuation notes below.

ENEOS To Steamroll Nippo (1881 JP) Minorities

<p>As previously reported, a Bloomberg article on June 11 reported that NIPPO (1881), a subsidiary of ENEOS Holdings (5020), and Toho Titanium (5727), in which JX Nippon Mining &amp; Metals, a subsidiary of ENEOS Holdings, holds a majority stake, are considering options to dissolve the parent-subsidiary listing, such as making Toho Titanium a wholly owned subsidiary, selling shares, or going private. ENEOS Holdings made a negative announcement on the same day, posting, "This is not an announcement made by our company, and there is no specific fact that we are considering it.This time, I would like to think about this issue.</p>

As previously reported, a Bloomberg article on June 11 reported that NIPPO (1881), a subsidiary of ENEOS Holdings (5020), and Toho Titanium (5727), in which JX Nippon Mining &amp; Metals, a subsidiary of ENEOS Holdings, holds a majority stake, are considering options to dissolve the parent-subsidiary listing, such as making Toho Titanium a wholly owned subsidiary, selling shares, or going private. ENEOS Holdings made a negative announcement on the same day, posting, "This is not an announcement made by our company, and there is no specific fact that we are considering it.This time, I would like to think about this issue.

Japan's Governance: Parent-Subsidiary Listing and Review of ENEOS Holdings Subsidiary Strategy

Japan

NIPPO CORPORATION paves a variety of roads.  The Company manufactures and sells asphalt paving mixture.  Nippo also builds commercial residential, and institutional buildings such as sports facilities and condominiums.  The Company operates real estate and resort businesses such as hotels and golf country clubs.

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Nippo Corp (1881 JP)

Asia-Pac Weekly Risk Arb Summary: Sydney Airport, Aussie Pharma, Milton, Shinsei Bank

This insight provides a summary of gross/annualised spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and...

David Blennerhassett

Asia-Pac Weekly Risk Arb Summary: Shinsei Bank, Soho China, Nippo Corp, Rhipe, Oil Search/Santos

This insight provides a summary of gross/annualised spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and...

David Blennerhassett

Japan's Governance: Parent-Subsidiary Listing and ENEOS, Toho Titanium, Hitachi Construction Update

ENEOS announced that it will conduct TOB for its subsidiary NIPPO. I've covered this issue in a previous article, so I'll update it and also add...

Metrical Inc

ENEOS To Steamroll Nippo (1881 JP) Minorities

ENEOS is about to steamroll minorities of subsidiary Nippo Corp (1881). It is not a pretty picture. It is entirely too cheap, but they own 57%. A...

Travis Lundy

Japan's Governance: Parent-Subsidiary Listing and Review of ENEOS Holdings Subsidiary Strategy

NIPPO and Toho Titanium, both subsidiaries of ENEOS Holdings raised the share prices on expectation of becoming wholly owned subsidiaries, or going...

Metrical Inc

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