Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

True to the sentiment expressed by the <a href="https://www.smartkarma.com/entities/idemitsu-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:109:1" rel="noopener">Idemitsu Kosan (5019 JP)</a> Finance Dept chief who spoke at the earnings news conference last week, Idemitsu Kosan did not change the price on its ¥2450/share Tender Offer for <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a>.Yesterday, the Tender Offer closed without fanfare. Today Idemitsu announced the results (<a href="https://ssl4.eir-parts.net/doc/5019/ir_material9/154414/00.pdf" target="_blank" rel="noopener">English</a>, <a href="https://www.idss.co.jp/content/100034505.pdf" target="_blank" rel="noopener">Japanese</a>). Because Idemitsu already owned 50+% it only needed 2,058,875 shares which was 16+% or roughly a third of the minority to get to 66.7% to squeeze out remaining minority shareholders. Idemitsu got 470,668 shares, or 3.82%. In my first insight <a href="https://www.smartkarma.com/insights/idemitsu-launches-lowball-tender-offer-for-subsidiary-toa-oil-5008" target="_blank" data-smartkarma-citation="insights:46384" rel="noopener">Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)</a>, I showed what I thought the shareholder structure breakdown for support looked like. In that table, I suggested at a minimum, it was likely to get support from financial and corporate crossholders 483,000 shares) and from directors (13,500 shares). They did not even get that much. Cornwall Capital, which had climbed from 18+% to 26.5+% during the course of the Tender Offer obviously did not tender, but neither did 99% of the other non-crossholder-held shares. This was an enormous failure for Idemitsu. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/189/093/original/Screenshot+2021-02-16+at+8.26.07+PM.png?1613478380" class="editor-image img-responsive" data-smartkarma-image-id="189093"></figure></section>What next? Read on.

True to the sentiment expressed by the Idemitsu Kosan (5019 JP) Finance Dept chief who spoke at the earnings news conference last week, Idemitsu Kosan did not change the price on its ¥2450/share Tender Offer for Toa Oil Co Ltd (5008 JP).Yesterday, the Tender Offer closed without fanfare. Today Idemitsu announced the results (English, Japanese). Because Idemitsu already owned 50+% it only needed 2,058,875 shares which was 16+% or roughly a third of the minority to get to 66.7% to squeeze out remaining minority shareholders. Idemitsu got 470,668 shares, or 3.82%. In my first insight Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008), I showed what I thought the shareholder structure breakdown for support looked like. In that table, I suggested at a minimum, it was likely to get support from financial and corporate crossholders 483,000 shares) and from directors (13,500 shares). They did not even get that much. Cornwall Capital, which had climbed from 18+% to 26.5+% during the course of the Tender Offer obviously did not tender, but neither did 99% of the other non-crossholder-held shares. This was an enormous failure for Idemitsu. What next? Read on.

Toa Oil (5008) - The Dog Has Caught the Car, But Beware Mangalores

At the end of January 2021 when <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a> announced its Q3 results and very big full-year forecast revision (discussed in <a href="https://www.smartkarma.com/insights/toa-oil-5008-tender-offer-updated-update-still-looks-bumpity" target="_blank" data-smartkarma-citation="insights:47625" rel="noopener">Toa Oil (5008) Tender Offer Updated Update - STILL Looks Bumpity</a>), the share price of Toa Oil was trading at ¥2800 which was just off a two-plus year high, and lead shareholder Cornwall Capital had reported upping their stake to 22.98% the day before. The change in annual forecast required a change in the Opinion Statement of the Target Company and that required a change in the Tender Offer Registration statement by Idemitsu, which required them to extend the Tender Offer Closing Date by 8 days to 15 February. In my last piece, I mooted the possibility that Idemitsu could announce a change in price at the time of its earnings on 9 February. It did not. I also put forth the problem of The Dog Catching The Car. If the dog chases the car, it's all fun. If the car stops and the driver gets out, the dog has to figure out what to do.Thinking Dogs can read on.

At the end of January 2021 when Toa Oil Co Ltd (5008 JP) announced its Q3 results and very big full-year forecast revision (discussed in Toa Oil (5008) Tender Offer Updated Update - STILL Looks Bumpity), the share price of Toa Oil was trading at ¥2800 which was just off a two-plus year high, and lead shareholder Cornwall Capital had reported upping their stake to 22.98% the day before. The change in annual forecast required a change in the Opinion Statement of the Target Company and that required a change in the Tender Offer Registration statement by Idemitsu, which required them to extend the Tender Offer Closing Date by 8 days to 15 February. In my last piece, I mooted the possibility that Idemitsu could announce a change in price at the time of its earnings on 9 February. It did not. I also put forth the problem of The Dog Catching The Car. If the dog chases the car, it's all fun. If the car stops and the driver gets out, the dog has to figure out what to do.Thinking Dogs can read on.

Toa Oil (5008) Tender - Has the Dog Caught the Car?

On 8 February 2021, in announcing <a href="https://ssl4.eir-parts.net/doc/2398/ir_material_for_fiscal_ym10/94981/00.pdf" target="_blank" rel="noopener">Q3 earnings</a>, <a href="https://www.smartkarma.com/entities/tsukui-corp" target="_blank" data-smartkarma-citation="entities:13727:1" rel="noopener">Tsukui Corp (2398 JP)</a> also announced that an entity called MBPK Life LLC - formed by MBK Partners.
The Tender Offer is struck at ¥924/share, which is well below the highs reached two years ago. 
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This has been structured by MBK and the #1 shareholder so that the #1 shareholder Tsukui Kikaku does not tender at ¥924/share, but instead sells shares back to the company after the deal is complete, doing so at ¥753/share. This is presented as an effort to maximize the profits of the ordinary shareholders, but there is tax planning going on in the background. 
The average weighted Adjusted EV is a few turns lower than the headline EV Tender Offer Price to minorities, but that means the buyer probably has room for manoeuvre if pushed. This is not as egregiously bad as some other recent MBOs and take-privates in the space. 
Some of it depends on the nature of the assets. Is it an asset play or a service play. Strangely enough, the service plays seem to get a higher multiple. 
</section>
More below the fold.

On 8 February 2021, in announcing Q3 earnings, Tsukui Corp (2398 JP) also announced that an entity called MBPK Life LLC - formed by MBK Partners.
The Tender Offer is struck at ¥924/share, which is well below the highs reached two years ago. 




This has been structured by MBK and the #1 shareholder so that the #1 shareholder Tsukui Kikaku does not tender at ¥924/share, but instead sells shares back to the company after the deal is complete, doing so at ¥753/share. This is presented as an effort to maximize the profits of the ordinary shareholders, but there is tax planning going on in the background. 
The average weighted Adjusted EV is a few turns lower than the headline EV Tender Offer Price to minorities, but that means the buyer probably has room for manoeuvre if pushed. This is not as egregiously bad as some other recent MBOs and take-privates in the space. 
Some of it depends on the nature of the assets. Is it an asset play or a service play. Strangely enough, the service plays seem to get a higher multiple. 

More below the fold. 

Tsukui Holdings (2398) - Another CHEAP Japan Nursing Care Take-Private Deal

<h3>The Idemitsu bid for Toa Oil looks bumpity. It is a weird situation though.</h3>In mid-December, <a href="https://www.smartkarma.com/entities/idemitsu-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:109:1" rel="noopener">Idemitsu Kosan (5019 JP)</a> - one of the two large refinery groups in Japan, formed from the merger of Idemitsu Kosan and Showa Shell Oil KK (the other large one being <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> formed from JX and Tonen General) - announced a Tender Offer for the minority portion of <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a>.Idemitsu had "inherited" the majority portion in the acquisition of Showa Shell a couple years ago, and had not wrapped it up yet. Toa Oil has for years been considered a jewel of an asset because of its extraordinarily high Nelson Complexity Index among refineries in Japan. This allows the company to get more, and more interesting products, out of every barrel of oil put in, and it allows the use of very heavy oil which is less expensive. Because the company gets 90% of its revenue acting as an outsourced refinery for Idemitsu's raw materials and output, it carries little inventory and earns a tolling spread, which normally would be negotiated on an arms' length basis. Given the replacement value of the asset, and the market value of the use of the asset, it would appear that the current agreement with the current level of income it affords Toa is not quite arms' length. That would be a good reason to object to the pricing of the deal. If the refinery asset were sold on the open market in an auction, it would likely fetch a higher price for shareholders, including Idemitsu. The original deal and all its parameters was discussed in <a href="https://www.smartkarma.com/insights/idemitsu-launches-lowball-tender-offer-for-subsidiary-toa-oil-5008" target="_blank" data-smartkarma-citation="insights:46384" rel="noopener">Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)</a> and was updated in <a href="https://www.smartkarma.com/insights/toa-oil-5008-tender-offer-update-looks-bumpity" target="_blank" data-smartkarma-citation="insights:46996" rel="noopener">Toa Oil (5008) Tender Offer Update - Looks Bumpity.</a> <h2>The NEW News</h2><ul>
<li>On 20 January, Toa Oil announced the record date for the EGM to be 10 February.</li>
<li>Since I last wrote, the largest shareholder has gotten larger, adding 2% to its position as of 21 January (and reported 28 January) and they now hold 22.98%. </li>
<li>On Friday 29 January, Toa Oil reported its <a href="https://www.toaoil.co.jp/investor/pdf/settlement_report_202103_3.pdf" target="_blank" rel="noopener">Q3 earnings</a>.</li>
<li>Toa Oil also announced a revision to its <a href="https://www.toaoil.co.jp/investor/pdf/20210129_gyousekiyosou_shusei.pdf" target="_blank" rel="noopener">full-year forecasts</a>.  The revenue forecast was revised by +7.7%. OP was revised by +509.8%. Net Profit was revised by +418.9%. Those are very big numbers. </li>
<li>Based on that revision, Toa Oil had to revise its <a href="https://www.toaoil.co.jp/investor/pdf/20210129_ikenhyoumei_henkou_english.pdf" target="_blank" rel="noopener">Target Opinion Statement</a>.</li>
<li>And because Toa Oil revised its Target Opinion Statement, pursuant to Article 27-8 Para 8 of the Financial Instruments and Exchange Act, Idemitsu had to <a href="https://ssl4.eir-parts.net/doc/5019/ir_material9/153752/00.pdf" target="_blank" rel="noopener">extend the Tender Offer</a> so there were 10 business days between the announcement and the tender close. The old close was 2 February. The new close is 15 February. </li>
<li>I expect that means Toa Oil will amend the record date for the EGM because Toa and Idemitsu would not want the EGM record date to be before Idemitsu had secured the extra shares.</li>
</ul>The quantum of the net change in the revision in earnings forecast should merit a little complaint by shareholders. The change in net income this year alone vs forecast is 5.1% of the Tender Offer Price Market Cap. Even if there is no change to future earnings EVER, that is 5.1% more. Given that the Tender Offer Price was the wrong price in the first place, I imagine shareholders who have seen the price trade above the Tender Offer Price every day since the shares were free to trade (on the first day after the announcement, the shares closed limit up but below the tender offer price), will be even less inclined to accept a low-ball price. More discussion below.

The Idemitsu bid for Toa Oil looks bumpity. It is a weird situation though.In mid-December, Idemitsu Kosan (5019 JP) - one of the two large refinery groups in Japan, formed from the merger of Idemitsu Kosan and Showa Shell Oil KK (the other large one being ENEOS Holdings (5020 JP) formed from JX and Tonen General) - announced a Tender Offer for the minority portion of Toa Oil Co Ltd (5008 JP).Idemitsu had "inherited" the majority portion in the acquisition of Showa Shell a couple years ago, and had not wrapped it up yet. Toa Oil has for years been considered a jewel of an asset because of its extraordinarily high Nelson Complexity Index among refineries in Japan. This allows the company to get more, and more interesting products, out of every barrel of oil put in, and it allows the use of very heavy oil which is less expensive. Because the company gets 90% of its revenue acting as an outsourced refinery for Idemitsu's raw materials and output, it carries little inventory and earns a tolling spread, which normally would be negotiated on an arms' length basis. Given the replacement value of the asset, and the market value of the use of the asset, it would appear that the current agreement with the current level of income it affords Toa is not quite arms' length. That would be a good reason to object to the pricing of the deal. If the refinery asset were sold on the open market in an auction, it would likely fetch a higher price for shareholders, including Idemitsu. The original deal and all its parameters was discussed in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008) and was updated in Toa Oil (5008) Tender Offer Update - Looks Bumpity. The NEW News
On 20 January, Toa Oil announced the record date for the EGM to be 10 February.
Since I last wrote, the largest shareholder has gotten larger, adding 2% to its position as of 21 January (and reported 28 January) and they now hold 22.98%. 
On Friday 29 January, Toa Oil reported its Q3 earnings.
Toa Oil also announced a revision to its full-year forecasts.  The revenue forecast was revised by +7.7%. OP was revised by +509.8%. Net Profit was revised by +418.9%. Those are very big numbers. 
Based on that revision, Toa Oil had to revise its Target Opinion Statement.
And because Toa Oil revised its Target Opinion Statement, pursuant to Article 27-8 Para 8 of the Financial Instruments and Exchange Act, Idemitsu had to extend the Tender Offer so there were 10 business days between the announcement and the tender close. The old close was 2 February. The new close is 15 February. 
I expect that means Toa Oil will amend the record date for the EGM because Toa and Idemitsu would not want the EGM record date to be before Idemitsu had secured the extra shares.
The quantum of the net change in the revision in earnings forecast should merit a little complaint by shareholders. The change in net income this year alone vs forecast is 5.1% of the Tender Offer Price Market Cap. Even if there is no change to future earnings EVER, that is 5.1% more. Given that the Tender Offer Price was the wrong price in the first place, I imagine shareholders who have seen the price trade above the Tender Offer Price every day since the shares were free to trade (on the first day after the announcement, the shares closed limit up but below the tender offer price), will be even less inclined to accept a low-ball price. More discussion below.

Toa Oil (5008) Tender Offer Updated Update - STILL Looks Bumpity

On 15 December, <a href="https://www.smartkarma.com/entities/idemitsu-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:109:1" rel="noopener">Idemitsu Kosan (5019 JP)</a> launched a Tender Offer for subsidiary <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a> at what was an extraordinarily opportunistic price - JPY 2450/share.Some might call this price insultingly low.It was apparently deemed "fair" because the non-arms' length contract signed with the parent (and Tender Offeror) provides for an exceptionally low ROA, and the next few years involves some shutdowns for longer-term maintenance, which will lower FCF. This pricing process fairness problem was discussed in some detail in <a href="https://www.smartkarma.com/insights/idemitsu-launches-lowball-tender-offer-for-subsidiary-toa-oil-5008" target="_blank" data-smartkarma-citation="insights:46384" rel="noopener">Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)</a>. There have been a few developments since the announcement.<ul><li>Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement. Since the offer has been made, they have filed two more amendments to quantity to lift their stake to 20.83% as of 24 December (reported 4 January). As seen from the chart, the shares have not traded below terms since they first freely traded pre-announcement, and Cornwall increased their stake by 2.6+% from 15-Dec to 24-Dec 2020 at prices ABOVE terms.</li></ul><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/182/218/original/Screenshot+2021-01-13+at+12.28.45+PM.png?1610512414" class="editor-image img-responsive" data-smartkarma-image-id="182218"></figure></section><ul>
<li>Since the 25th of December, another 5% of shares out have traded at prices above terms. Nobody else has yet announced a 5+% position. </li>
<li>Around year-end, specialty "business-politics" magazine Sentaku published an article talking about the oil refining business in Japan, JXTG/ENEOS's leading place in it, the Idemitsu deal for Toa which was termed odd, <a href="https://www.smartkarma.com/entities/fuji-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:12970:1" rel="noopener">Fuji Oil Co Ltd (5017 JP)</a>, <a href="https://www.smartkarma.com/entities/cosmo-energy-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:26565:1" rel="noopener">Cosmo Energy Holdings (5021 JP)</a>, and some speculation about what might be behind the Idemitsu deal for Toa. The conclusions of the article in that regard are striking. 
</li>
</ul><div class="content-highlight">
In the meantime, after a single day limit up ending below terms which saw 20,400 shares trade, the next 1.46mm shares (11.8% of shares out) have all traded above terms.
If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since announcement) plus the 9.2% which have traded above terms not purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake. 
</div>Discussion continues below.

On 15 December, Idemitsu Kosan (5019 JP) launched a Tender Offer for subsidiary Toa Oil Co Ltd (5008 JP) at what was an extraordinarily opportunistic price - JPY 2450/share.Some might call this price insultingly low.It was apparently deemed "fair" because the non-arms' length contract signed with the parent (and Tender Offeror) provides for an exceptionally low ROA, and the next few years involves some shutdowns for longer-term maintenance, which will lower FCF. This pricing process fairness problem was discussed in some detail in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008). There have been a few developments since the announcement.Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement. Since the offer has been made, they have filed two more amendments to quantity to lift their stake to 20.83% as of 24 December (reported 4 January). As seen from the chart, the shares have not traded below terms since they first freely traded pre-announcement, and Cornwall increased their stake by 2.6+% from 15-Dec to 24-Dec 2020 at prices ABOVE terms.
Since the 25th of December, another 5% of shares out have traded at prices above terms. Nobody else has yet announced a 5+% position. 
Around year-end, specialty "business-politics" magazine Sentaku published an article talking about the oil refining business in Japan, JXTG/ENEOS's leading place in it, the Idemitsu deal for Toa which was termed odd, Fuji Oil Co Ltd (5017 JP), Cosmo Energy Holdings (5021 JP), and some speculation about what might be behind the Idemitsu deal for Toa. The conclusions of the article in that regard are striking. 


In the meantime, after a single day limit up ending below terms which saw 20,400 shares trade, the next 1.46mm shares (11.8% of shares out) have all traded above terms.
If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since announcement) plus the 9.2% which have traded above terms not purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake. 
Discussion continues below.

Toa Oil (5008) Tender Offer Update - Looks Bumpity.

Japan

TOA OIL CO., LTD. refines oil on a consignment basis.  The Company also ties up with Tokyo Electric Power Company to distribute electric power as well as steam air.  Toa Oil is a member of Showa Shell Sekiyu.

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Toa Oil Co Ltd (5008 JP)

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Toa Oil (5008) Tender Offer Updated Update - STILL Looks Bumpity

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