Australia

In this briefing:

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans
2. Budweiser Brewing Company APAC IPO: A Solid PHIP Update
3. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans

• Bitcoin saw a correction during the first week of June but has recovered quickly. Bitcoin’s leading indicators remain positive, giving a bullish outlook for the market.  
• A number of public companies, including Visa Inc (V US), UBISOFT Entertainment (UBI FP), Legal & General (LGEN LN),  General Motors Co (GM US), Target Corp (TGT US), Panalpina Welttransport Holding (PWTN SW), Facebook Inc A (FB US) and Apple Inc (AAPL US) revealed their blockchain plans/initiatives during the past two weeks. 
• In other news, Justin Sun, the founder of the cryptocurrency company Tron, was the winner of this year’s “Power Lunch” with Warren Buffet, while major Korean banks show an appetite for blockchain based solutions.

2. Budweiser Brewing Company APAC IPO: A Solid PHIP Update

Budweiser Hong Kong Holding (0338867D HK)/Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. On Thursday, Budweiser APAC received HKEX approval for a Hong Kong IPO to raise $5-10 billion, according to press reports.

3. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• Plus, other events, CCASS movements and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

In this briefing:

1. Are Risky Assets Overvalued?
2. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering
3. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?
4. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios
5. The Next Liquidity Crisis

1. Are Risky Assets Overvalued?

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

2. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering

Last Week in Event SPACE …

• As expected, Chiyoda Corp (6366 JP) is out of the Nikkei. Unexpectedly, Bandai Namco Holdings (7832 JP) is the replacement. 

• Unizo Holdings (3258 JP)‘s unilateral and hostile Tender Offer to go from sub 5% to 45% promises to be interesting.

• The Ascott Residence Trust (ART SP) and Ascendas Hospitality Trust (ASCHT SP)‘s merger was well telescoped – is Ascendas Real Estate Investment Trust (AREIT SP) next?
• Villa World Ltd (VLW AU)‘s agreed Scheme with AVID looks clean; however, Ho Bee Land Ltd (HOBEE SP)‘s recent stake increase is odd.

• International investors tend to like these kinds of properties but Health Management Intl (HMI SP) is small and relatively illiquid in the grand scheme of things. Nobody will really miss it.

• Natura’s Offer for Avon Products (AVP US) is a beauty but there are Real risks

• If Telford Homes (TEF LN) has accepted its own demise by agreeing to sell itself to Cbre Group Inc A (CBG US) at GBP 3.50/share, someone else could go a little higher.
• Rumours circulate on Sia Engineering (SIE SP)‘s privatisation by Singapore Airlines (SIA SP).
• Plus, other events, CCASS movements and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Chiyoda Corp (6366 JP)  (Mkt Cap: $729mn; Liquidity: $15mn)

Travis Lundy calculated the total shares to be sold at 48-50m accounting for 20% of outstanding and 30% of float in Chiyoda’s upcoming removal from the Nikkei (and now confirmed – see Travis insight below) and Topix indexes, and referenced the exclusion trades resulted in Toshiba Corp (6502 JP) falling 24% and Sharp Corp (6753 JP) falling 31%. But Mio Kato, CFA feels that the company’s situation could skew the timing compared to what would be “normal”.

• Mio believes that it may be more interesting to look for a reversion trade in the event that the stock price declines significantly into the exclusion. He feels that the fall may not be quite as steep as that for Toshiba or Sharp. In both Toshiba and Sharp’s cases there was still significant uncertainty surrounding the names as Toshiba had not completed or even announced its capital raise at the time and the sale of its memory subsidiary was still being hotly contested; while in Sharp’s case Hon Hai was playing hardball on deal terms.
• In contrast, Chiyoda has already secured funding from a very stable and large partner and appears to have kitchen-sinked a lot of assumptions and faces a very bright operational outlook – its problems stem from poor risk management, which Mitsubishi is meant to solve, and not operations. 
• In addition, due to Chiyoda’s previous operational struggles and write-downs there is already a very significant short base. This could distort the usual timing of the fall in the stock price and the fact that the stock has recovered to just 3.5% below the level prior to more widespread reporting of the exclusion points to this eventuality. It does seem likely that the size of the required sell could push Chiyoda’s price down at some point – Mio argues this could happen much closer to the actual event than usual. If borrow is difficult to come by, there could be money to be made on the other side around the turn of the month.

(link to Mio’s insight: Chiyoda: Risks to the Index Kick-Out Trade and Potential Volatility at Earnings the Next Day)

Bandai Namco Holdings (7832 JP)  (Mkt Cap: $12.6bn; Liquidity: $28mn)

The Nikkei Inc announced its “Changes to the Nikkei Indices” this week  which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that Chiyoda Corp (6366 JP)‘s yuho (Annual Securities Report) had the company at a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. The Announcement surprised people. As expected, Chiyoda is Out – but Bandai is In.  Chiyoda closed down 2.6% on 2mm shares, and Bandai closed limit up +19.3% on 300k shares allocated at the limit on the close.

• There are still something like 50 million shares of Chiyoda to sell. The significant shorts – which are likely well in excess of the 23+ million shares shown and reported – are likely sourcing a lot of their borrow from the shareholders (passive funds) who have to sell. Those shareholders will have to recall their borrow. Earnings come out the day after the exclusion. I would not want to be short that earnings number. Plus read Mio’s insight above.
• There should be 27mm shares to buy in Bandai which is about 20% of float. However, if only half the foreigners and only half the individual holders would be willing to sell on a large jump in price in the next few weeks, then the net available to sell is probably closer to 80mm shares and 27mm to buy would be one-third. It’s a lot. Once it gets purchased by Nikkei 225 funds, it won’t come out anytime soon. This stock is likely to get squeezed.
• Dmg Mori Co Ltd (6141 JP) was flagged by many as a good bet to replace Chiyoda. Since then, roughly 14 million shares of excess volume have traded. If half of that is a real displacement of holdings based on this event, 7mm shares would need to be sold. That is 3% of shares out and 4-5% of float. It is among the larger excess positioning situations in the last five years in the stock. DMG closed -10% on 7.3mm shares in response to the index changes.

(link to Travis’s insight: Nikkei 225 – Bandai Namco IN, Chiyoda OUT)

Kcc Corp (002380 KS)  (Mkt Cap: $2.2bn; Liquidity: $6mn)

KCC will split itself into two companies in the form of an equity spinoff with KCC the surviving company and KCG the new company. KCC will mainly comprise the B2B business (silicone, paint and varnish); KCG will get the B2C business such as glass and interior. An EGM will be held on Nov 13 and shareholder approval can be obtained with 2/3 of attending votes and 1/3 of shares out. Both companies will be listed – KCC on Jan 21 next year, but KCG’s listing date hasn’t been fixed.

• Typically, demergers serve to streamline a business.  However, the major shareholder retains 40%, which Sanghyun Park considers to be weak. He believes the major shareholder intends to further solidify this controlling stake via a tender, possibly a month after the Jan 21 listing. 

(link to Sanghyun’s insight: KCC Corp Equity Spinoff: Summary & Mispricing Checkup)

R* Shares CPSE ETF (CPSEBE IN) 

The ETF is based on the Nifty CPSE index and currently includes 11 listed Central Public Sector Enterprises, declining to 10 after Rural Electrification (RECL IN) was kicked out this past Friday. The sixth tranche of the ETF is expected to open on July 18 to anchor investors and on July 19 to non-anchor investors. The new units are expected to start trading on July 29. The discount on the ETF will be 3%, opening up arbitrage opportunities to investors.

• The CPSE ETF does not trade big volumes on a regular day. However, there is a huge volume surge following fund offerings as many investors look to flip their allocation back into the market and lock in a profit. The anchor portion was oversubscribed almost 6 times in the last tranche issued in March this year, though the number may be smaller this time with the tighter discount being offered.

• The ETF will need to buy around 63m shares of Indian Oil Corp (IOCL IN) in the market on July 19. Brian Freitas estimates this number since the Government of India can only sell around 64m shares to the ETF as this will take their stake in the company down to 51.5%, the lowest percentage for the stock to remain in the Nifty CPSE index. Given the stock trades around 13m shares a day on average, he sees 4x of excess volume and expect the stock to rally in the lead up to July 19 and see buying over the day on July 19.

links to Brian’s insights:
The CPSE ETF Arb Is Back, but Tighter!
India – NIFTY CPSE Index Review.

Unizo Holdings (3258 JP) (Mkt Cap: $913mn; Liquidity: $4mn)

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer (commencing this past Friday) to purchase a 40+% stake in real estate and hotel business Unizo to raise its stake from ~4.8% to 45.0%. The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high. But, this is a hostile tender.

• A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan, it is even rarer. This is, however, the second in six months – the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP).  HIS has decided to buy 40% of a company it hadn’t talked to. At a 50+% premium. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal.
• Unizo has several possible responses it could give. The right thing to do would be to establish an independent committee immediately. A rights offering might kill the deal. But it would be fair to investors. A White Knight is not unthinkable. Travis expects the odds are pretty good that Unizo does not have a great defense here. That means the Tender likely goes through.
• Unless corporate and financial cross-holders tender, the pro-ration could end up being very high.  If crossholders tender, pro-ration goes way down and one is better off just selling everything in the market for a small loss. Travis is bullish that the tender goes through and bullish the profit opportunity. He thinks for the astute arbitrageur, there is a lot of room to play around the ranges here.

(link to Travis’s insight: HIS Hostile Tender for Unizo – Fun Ahead!)

Villa World Ltd (VLW AU)  (Mkt Cap: $203mn; Liquidity: $1mn)

VLW and AVID have (finally) entered into a Scheme Implementation Agreement at A$2.345/share yesterday, which is a 17.8% premium to the unaffected price of $1.99 on 14 March, and an A$0.115 bump over the initial pitch in March. Any final or special dividend paid on or prior to the implementation of the Scheme will reduce the Offer Price. The key nagging issue is Ho Bee Land Ltd (HOBEE SP).

• Ho Bee, VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$2.04/share – and a high of A$2.18/share – lifting its stake to 9.41% on the same day as the initial Offer. Ho Bee further bumped its stake to 10.45% on the 25 March at an average price of A$2.21; and finally, to 11.62% on the 15 April at an average of $2.17. Its overall average in-price is A$1.98/share.
• Would Ho Bee go to such extreme just to extract another 5% from the Offer? Maybe, but it is a little weird. Ho Bee did not buy over $2.23/share.
• On balance, this deal should get up. Pricing appears fair with respect to peers. Ho Bee receives a decent premium to its overall average position. This is also not a material holding for Ho Bee – the 11.62% stake is equivalent to ~2% of its market cap – while it remains directly invested in the Melbourne JV.  With a late November/ early December completion, this is trading very tight to terms at 0.6% gross.

(link to my insight: Villa World Greenlights AVID’s Offer)

Ascendas Hospitality Trust (ASCHT SP) (Mkt Cap: $844mn; Liquidity: $3mn)

On 3 July, Ascott Residence Trust (ART SP) and ASCHT jointly announced a proposed combination, which would result in the combined entity becoming the largest hospitality trust in the Asia Pacific region, one of the top ten globally, with an asset value of S$7.6bn. It would – using data from the end of June – become the 7th largest trust on the SGX.

• The deal is for Ascott to acquire ASCHT through a Scheme of Arrangement whereby ASCHT unitholders will receive what was – at the announcement – S$1.0868 per ASCHT Stapled Unit. The exact terms are S$0.0543 in cash and 0.7942 Ascott Reit-BT Stapled Units. That is a ratio of 0.836 but if you do the arithmetic, it comes out as a NAV-flat transaction. Neither ASCHT nor ART shareholders “overly benefit” at the expense of the other, but they both benefit from scale lowering future costs.
• The deal is another REIT consolidation to create a LARGER NewREIT. It was also totally obvious, after the Ascendas-Singbridge deal was signed earlier this year, that within the Capitaland group (which meant Temasek was going to own 51% of Capitaland when completed), this was going to happen (even though the deal meant there were no chained transactions for the REITs). It makes one wonder if there is a deal for Ascendas Real Estate Investment Trust (AREIT SP) to come. 
• The deal (at the time of the insight) showed a 4.5% spread being long ASCHT and short Ascott, which is slightly wide for a deal of ~five months. However, there is some uncertainty in the distributions. If you own Ascott and are in a position to switch out of Ascott into AREIT, Travis would do so. If you own ASCHT and you like the risk of owning the REIT, you own the right one. 

(link to Travis’s insight: Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy)

Dalian Port (Pda) Co Ltd H (2880 HK)  (Mkt Cap: $3bn; Liquidity: $1mn)

Back on the 4 June, Dalian Port (Pda) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform. The shareholding structure is a spider’s web and understanding the share transfers is probably best done by studying the diagrams in the document and the insight.

• The integration/consolidation process is complicated with local, provincial and central government holdings in port ownership. Further, local governments, which often trumpet their success in tandem with the performance of its port, may be less willing to forego such economic benefits by giving up absolute control.
• China Merchant Holdings already has effective control of Dalian Port (Pda) – (47.31%) direct and 21.05% via Team Able/China Merchants Port (144 HK). The equity transfers forming part of the restructuring are being hived out from one SASAC entity into another SASAC-controlled entity. This should all go through and the unconditional MGO will be triggered, and potentially wrap up in October, provided the ETA completes on the long stop date.
• Dalian Port (Pda) is trading in line with listed Hong Kong ports. You have a (likely) hard floor at $1.01, with expectations of further group restructuring, as the three Liaoning ports are integrated. However, HK port companies are down ~7.% in the past year, similar to Chinese-listed port companies.  The sentiment is decidedly downbeat as the trade war creates a less profitable business environment.

(link to my insight: Dalian Port – Rearranging The Deck Chairs)

Health Management Intl (HMI SP) (Mkt Cap: $844mn; Liquidity: $3mn)

The previous Friday, listed regional (Singapore, Malaysia, Indonesia) private healthcare provider HMI announced an Implementation Agreement for a privatisation by way of Scheme of Arrangement whereby private equity fund EQT would acquire HMI for S$0.73/share in cash or one share of the Acquirer. That price is a 25-30% premium to the 1, 3, 6, and 12-month VWAPs prior to the announcement and a 14% premium to the last “undisturbed” trading day.

• It is not overly generous. The premium is small, and the forecast Next 12 Month EV/EBITDA multiple at 17+x is OK but compared to the other private hospital operators out there in Asia it is not overwhelmingly high-priced. It seems a bit of a stretch to see someone come over the top when this has been negotiated. However, if one asked me whether the likelihood of bump or deal failure is more likely, Travis would tilt towards bump, but it would be just a kiss.
• It takes 75% of the 39% not owned by NSI and “concert parties” to get this done, but the 2018 Annual Report showed that 89.75% of the shareholders (i.e. 83.2% or so of the possible Scheme Shareholders) owned more than 1,000,000 shares. The top 40 shareholders determine the outcome of this deal as long as the rest generally are split 51/49 or better. It is difficult to see this one getting knocked down.
• Travis expects the timeline of this deal is about 4 months plus perhaps a week. That means at S$0.72 the gross spread at 1.39% gets you an annualised spread of about 4.15%. At S$0.715, the gross spread is 2.10% (before comms, etc) so 4 months is 6+% annualised.  The trade here is to get queue priority at S$0.715. 

(link to Travis’s insight: Health Management Int’l Privatisation – Easy Peasy)

Briefly …

Harbin Electric Co Ltd H (1133 HK) this week announced there will be no further extension of its Offer which closes on the 19 July. By my estimate, tendered shares total 71.86%. The tendering condition is 90%.

Telford Homes (TEF LN) (Mkt Cap: $335mn; Liquidity: $1mn)

On July 3rd, US-based commercial real estate services company, CBRE Group Inc A (CBG US), announced that they had reached an agreement with the board of London-based residential real estate developer, Telford, to acquire 100% of its shares by way of a Scheme of Arrangement at a price of GBP3.50/ share. The offer values the target at a market cap of GBP 265mn. 

• While the Offer Price translates to premia of 11.1%, 14.3%, and 21.3% to the undisturbed price, 1-month VWAP and 3-month VWAP respectively, it remains 3.4% lower than the 1-year VWAP of Telford shares. Furthermore, the offer price also translates to discounts of 28.8% and 38.8% to the stock’s 1-year and 2-year highs respectively.
• The company appears to have confidence its current build-plan and will come through on budget and so after a couple of project delays at the end of this past year, earnings will rebound and march higher. The few analysts who cover the stock are less bullish this year, but it appears they expect the company to meet its 2020 targets a year or two later. 8x EPS and 1.0x book seem quite low. It is below the mean of the selected comps.
•  If Travis had to bet right now, it’s 50/50 it does not get done. Brexit worries could get this over the line but he expects there are some unhappy shareholders. He is not sure there is enough time to get a competitor in there to see the price lifted.  The deal timeline is very short. The indicative timeline suggests the Target Scheme Meeting could be in just four weeks. 
  

(link to Travis’s insight: Telford Homes Takeout – A Disappointing End?)

Avon Products (AVP US) (Mkt Cap: $1.8bn; Liquidity: $41mn)

On May 22, 2019, Avon announced that it had entered into a merger agreement to be acquired in an all-stock transaction by Brazilian Holding Company Natura & Co (NATUR3 BZ).  Natura will exchange 0.30 of its shares for each AVP share on a fixed exchange ratio basis, currently valuing AVP at ~US$2 bn. The merger agreement deadline is set for July 22, 2020. On completion of the merger, NATU3 shareholders will own 76% of the combination with AVP shareholders owning 24%. The transaction catapults NATU3 to becoming the world’s sixth largest consumer goods company.

• Natura is paying ~10x consensus 2019 EBITDA for standalone AVP which is reasonable in comparison to prevailing peer group multiples averaging 17x and compares with Natura’s own standalone valuation multiple of ~14x.
• The transaction could attract particular scrutiny from the antitrust authorities in Brazil, which represents the single largest market for both Natura and AVP. According to data from Euromonitor, Natura maintains a commanding lead in Brazil’s direct sales market for cosmetics with an estimated 31% market share followed by a ~ 16% share for AVP. That being said, the direct sales market is based around independent consultants/reps, many of whom already offer both Natura and Avon products in Brazil. 
• The double-digits merger spread that prevails (14% at the time of the insight) could offer a lucrative opportunity for arbs. The complicating factor is that Natura is listed on the Brazilian Stock exchange (B3) and denominated in an historically volatile currency, the Brazilian Real, while AVP shares trade on the NYSE in US$. As some AVP shareholders may not want to own or are restricted from owning shares that trade on a non-US exchange, Natura will offer AVP shareholders the option to receive Natura shares in the form of Level-II ADRs to be traded on the NYSE or shares listed on B3. Natura does not currently have an ADR in issue.

(link to Robert Sassoon‘s insight: MergerTalk: Natura & Co/Avon Products -“Ding Dong, The Avon Spread Calling”)

Singapore Airlines (SIA SP) / Sia Engineering (SIE SP) 

SIE gained 15% the previous week, rekindling privatisation talks by SIA.  Despite the share price increase, SIE trades around November 2009 levels. SIE is not aware of any reasons for the jump. The stub is not terribly exciting with SIE accounting for 18% and 22% of NAV and market cap, and barely makes the grade with SIE trading ~US$1mn/day.

• Last year’s privatisation of HAECO (44 HK) at $72/share (63.2% premium to last close) by Swire Pacific Ltd Cl A (19 HK) – which held 74.9% prior to the Offer – is not lost on investors. The takeover PER was 35x vs. 19x currently for SIE. Peer comps trade at 24x. SIE only appears fairly valued on an EV/EBITDA metric on account of the earnings from associated companies and JVs.
• SIE is a maintenance, repair & overhaul company providing aircraft & component overhaul, fleet management and line maintenance services. The company also has material stakes in associated companies and JVs which contribute 71% of the Group’s profits in FY19, up from 58% in FY18.
• The outcome, should an Offer be pitched, would cost SIA ~S$700mn to take out the shares it does not own. Not chump change, and it might have a slightly negative impact on SIA as it removes one layer of transparency. But given the stub weakness, the focus would be on the SIE arbitrage. I would not want to be short SIE here.

(link to my insight: StubWorld: Just Rumours (For Now) As SIA Engineering Pops)

My share class monitor provides a snapshot of the premium/discounts for 322 share classifications –  ADRs, Korean prefs, dual class, Thai (F/L) & A/Hs – around the region.

• For liquid ADRs, Kt Corp Sp Adr (KT US), which trades $10m a day, is at a 1% premium which compares with its annual range of -1%/+13% and one-year average of 6%. For liquid Korean Prefs, Korean Air Lines (003490 KS), which trades $7m a day is at a 41% discount which compares with its annual range of -60%/+23%.
• Three A/H names trade at 100% of their 52-week range percentile including Maanshan Iron & Steel A (600808 CH), Sinopec Shanghai Petroche A (600688 CH) & Guotai Junan Securities (A) (601211 CH), with a further 11 names in the top decile. Both Shenzhen Expressway Company (600548 CH) and China Everbright Bank Co A (601818 CH) are trading in their lowest decile.

(link to my insight: Share Classifications: A Year In Review)

• The SGX has announced a change in the takeovers code. A Delisting Offer now requires 75% of independent shareholders voting for the resolution. The 10% block has been removed. The change takes immediate effect. This is a smart move.

• The AFR is reporting that Bravura Solutions (BVS AU) may reload on Gbst Holdings (GBT AU). That would raise this competitive bidding situation to 3 suitors. This looks like a buy here at $3.58.

• FNZ Group lobs an A$3.65/unit non-binding proposal for Gbst Holdings (GBT AU), above Ss&C Technologies (SSNC US)‘s A$3.60/share proposal. GBST’s board has resolved to continue to provide exclusive DD to SSNC. FNZ Group lodges an application with Australia’s Takeovers Panel citing unacceptable circumstances, and seeks to halt SSNC’s exclusive due diligence on GBST.

• Anta Sports Products (2020 HK) is down sharply as Muddy Waters publishes a short report.

• China Power New Energy Development Co (735 HK)‘s shareholders approved all resolutions at the Scheme Meeting. The expected effective date is the 19 August.
• Gordan Tang has given an irrevocable undertaking for his 6.3% stake in Ascendas Hospitality Trust (ASCHT SP) for the merger with Ascott Residence Trust (ART SP).

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges – like Madison Holdings Group Ltd (8057 HK) on the 5 July.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

3. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?

Alliance Mineral Assets (AMS SP) hosted an EGM to ask its shareholders for approval to issue shares to competitor Galaxy Resources (GXY AU). See details in my previous insight Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

The capital injection was approved by a majority of AMS’ investors and will make GXY the largest investor in AMS. AMS will also change its name to Alita Resources.

GXY paid 0.20 AUD/share which gives them an 11.81% stake in the company. Recently, AMS’ share price has been under continued selling pressure falling to 0.134 SGD, which equates to a market valuation of only 200M SGD. While sentiment among the lithium names is negative (for the bearish case read Lithium Market – Phlegmatic Growth, Terrible Investment! by Gaius King ) we note that Alliance has guaranteed offtake agreements for 50% of its production, has the highest quality spodumene available in the market and its contractual selling price is significantly higher ($700+) than its costs ($500-550). 

GXY is now ‘half-pregnant‘ and given the company’s low reserve life (less than 5 years) and AMS’ ongoing exploration program we predict it is only a matter of time before a full takeover of AMS is considered by GXY management. In this respect, we note that GXY’s new CEO, Simon Hay, just started his role on 01/07/19 and will surely need to consider GXY diminished market valuation and short mine life.

Should GXY fail to act we shouldn’t discount the possibility that larger players such as Wesfarmers Ltd (WES AU) could be looking to consolidate the space after its recent purchase of Kidman Resources (KDR AU). 

Fair Value is reduced to 0.30 SGD (was 0.35 SGD before dilution effect).

4. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios

Budweiser Brewing Company APAC (1876 HK)/Budweiser APAC has guided potential investors towards the bottom of the IPO price range (HK$40-47 per share), according to press reports. Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. 

5. The Next Liquidity Crisis

Liquidity events involve a shortage of market liquidity, funding liquidity or both.

The LF Woodford Equity Income fund collapse in June is a good example of both above.

Systemic liquidity crisis affect all market participants, and they are generally preceded by a flat or inverted yield curve, which reflects a shortage of credit in the system. 

After that, we are just some large event short of a full-fledged liquidity crisis.

In this briefing:

1. Budweiser Brewing Company APAC IPO: A Solid PHIP Update
2. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

1. Budweiser Brewing Company APAC IPO: A Solid PHIP Update

Budweiser Hong Kong Holding (0338867D HK)/Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. On Thursday, Budweiser APAC received HKEX approval for a Hong Kong IPO to raise $5-10 billion, according to press reports.

2. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• Plus, other events, CCASS movements and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

In this briefing:

1. Budweiser Brewing Company APAC IPO: A Solid PHIP Update
2. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech
3. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

1. Budweiser Brewing Company APAC IPO: A Solid PHIP Update

Budweiser Hong Kong Holding (0338867D HK)/Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. On Thursday, Budweiser APAC received HKEX approval for a Hong Kong IPO to raise $5-10 billion, according to press reports.

2. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• Plus, other events, CCASS movements and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

3. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

The Bucephalus Idea Generator (BIG) picks stocks by combining our work on Creative Accounting and our work on capex and valuation cycles to see which companies are forecast to generate extreme returns and/or are on extreme valuations. The model then creates performance outcomes to search for absolute and relative investment ideas.

We run the model every month to see what has changed and which companies are worthy of further investigation.

Click here to download a sample company overview from the Bucephalus Idea Generator.

In this briefing:

1. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering
2. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?
3. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios
4. The Next Liquidity Crisis
5. Trade War Takes Its Toll

1. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering

Last Week in Event SPACE …

• As expected, Chiyoda Corp (6366 JP) is out of the Nikkei. Unexpectedly, Bandai Namco Holdings (7832 JP) is the replacement. 

• Unizo Holdings (3258 JP)‘s unilateral and hostile Tender Offer to go from sub 5% to 45% promises to be interesting.

• The Ascott Residence Trust (ART SP) and Ascendas Hospitality Trust (ASCHT SP)‘s merger was well telescoped – is Ascendas Real Estate Investment Trust (AREIT SP) next?
• Villa World Ltd (VLW AU)‘s agreed Scheme with AVID looks clean; however, Ho Bee Land Ltd (HOBEE SP)‘s recent stake increase is odd.

• International investors tend to like these kinds of properties but Health Management Intl (HMI SP) is small and relatively illiquid in the grand scheme of things. Nobody will really miss it.

• Natura’s Offer for Avon Products (AVP US) is a beauty but there are Real risks

• If Telford Homes (TEF LN) has accepted its own demise by agreeing to sell itself to Cbre Group Inc A (CBG US) at GBP 3.50/share, someone else could go a little higher.
• Rumours circulate on Sia Engineering (SIE SP)‘s privatisation by Singapore Airlines (SIA SP).
• Plus, other events, CCASS movements and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Chiyoda Corp (6366 JP)  (Mkt Cap: $729mn; Liquidity: $15mn)

Travis Lundy calculated the total shares to be sold at 48-50m accounting for 20% of outstanding and 30% of float in Chiyoda’s upcoming removal from the Nikkei (and now confirmed – see Travis insight below) and Topix indexes, and referenced the exclusion trades resulted in Toshiba Corp (6502 JP) falling 24% and Sharp Corp (6753 JP) falling 31%. But Mio Kato, CFA feels that the company’s situation could skew the timing compared to what would be “normal”.

• Mio believes that it may be more interesting to look for a reversion trade in the event that the stock price declines significantly into the exclusion. He feels that the fall may not be quite as steep as that for Toshiba or Sharp. In both Toshiba and Sharp’s cases there was still significant uncertainty surrounding the names as Toshiba had not completed or even announced its capital raise at the time and the sale of its memory subsidiary was still being hotly contested; while in Sharp’s case Hon Hai was playing hardball on deal terms.
• In contrast, Chiyoda has already secured funding from a very stable and large partner and appears to have kitchen-sinked a lot of assumptions and faces a very bright operational outlook – its problems stem from poor risk management, which Mitsubishi is meant to solve, and not operations. 
• In addition, due to Chiyoda’s previous operational struggles and write-downs there is already a very significant short base. This could distort the usual timing of the fall in the stock price and the fact that the stock has recovered to just 3.5% below the level prior to more widespread reporting of the exclusion points to this eventuality. It does seem likely that the size of the required sell could push Chiyoda’s price down at some point – Mio argues this could happen much closer to the actual event than usual. If borrow is difficult to come by, there could be money to be made on the other side around the turn of the month.

(link to Mio’s insight: Chiyoda: Risks to the Index Kick-Out Trade and Potential Volatility at Earnings the Next Day)

Bandai Namco Holdings (7832 JP)  (Mkt Cap: $12.6bn; Liquidity: $28mn)

The Nikkei Inc announced its “Changes to the Nikkei Indices” this week  which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that Chiyoda Corp (6366 JP)‘s yuho (Annual Securities Report) had the company at a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. The Announcement surprised people. As expected, Chiyoda is Out – but Bandai is In.  Chiyoda closed down 2.6% on 2mm shares, and Bandai closed limit up +19.3% on 300k shares allocated at the limit on the close.

• There are still something like 50 million shares of Chiyoda to sell. The significant shorts – which are likely well in excess of the 23+ million shares shown and reported – are likely sourcing a lot of their borrow from the shareholders (passive funds) who have to sell. Those shareholders will have to recall their borrow. Earnings come out the day after the exclusion. I would not want to be short that earnings number. Plus read Mio’s insight above.
• There should be 27mm shares to buy in Bandai which is about 20% of float. However, if only half the foreigners and only half the individual holders would be willing to sell on a large jump in price in the next few weeks, then the net available to sell is probably closer to 80mm shares and 27mm to buy would be one-third. It’s a lot. Once it gets purchased by Nikkei 225 funds, it won’t come out anytime soon. This stock is likely to get squeezed.
• Dmg Mori Co Ltd (6141 JP) was flagged by many as a good bet to replace Chiyoda. Since then, roughly 14 million shares of excess volume have traded. If half of that is a real displacement of holdings based on this event, 7mm shares would need to be sold. That is 3% of shares out and 4-5% of float. It is among the larger excess positioning situations in the last five years in the stock. DMG closed -10% on 7.3mm shares in response to the index changes.

(link to Travis’s insight: Nikkei 225 – Bandai Namco IN, Chiyoda OUT)

Kcc Corp (002380 KS)  (Mkt Cap: $2.2bn; Liquidity: $6mn)

KCC will split itself into two companies in the form of an equity spinoff with KCC the surviving company and KCG the new company. KCC will mainly comprise the B2B business (silicone, paint and varnish); KCG will get the B2C business such as glass and interior. An EGM will be held on Nov 13 and shareholder approval can be obtained with 2/3 of attending votes and 1/3 of shares out. Both companies will be listed – KCC on Jan 21 next year, but KCG’s listing date hasn’t been fixed.

• Typically, demergers serve to streamline a business.  However, the major shareholder retains 40%, which Sanghyun Park considers to be weak. He believes the major shareholder intends to further solidify this controlling stake via a tender, possibly a month after the Jan 21 listing. 

(link to Sanghyun’s insight: KCC Corp Equity Spinoff: Summary & Mispricing Checkup)

R* Shares CPSE ETF (CPSEBE IN) 

The ETF is based on the Nifty CPSE index and currently includes 11 listed Central Public Sector Enterprises, declining to 10 after Rural Electrification (RECL IN) was kicked out this past Friday. The sixth tranche of the ETF is expected to open on July 18 to anchor investors and on July 19 to non-anchor investors. The new units are expected to start trading on July 29. The discount on the ETF will be 3%, opening up arbitrage opportunities to investors.

• The CPSE ETF does not trade big volumes on a regular day. However, there is a huge volume surge following fund offerings as many investors look to flip their allocation back into the market and lock in a profit. The anchor portion was oversubscribed almost 6 times in the last tranche issued in March this year, though the number may be smaller this time with the tighter discount being offered.

• The ETF will need to buy around 63m shares of Indian Oil Corp (IOCL IN) in the market on July 19. Brian Freitas estimates this number since the Government of India can only sell around 64m shares to the ETF as this will take their stake in the company down to 51.5%, the lowest percentage for the stock to remain in the Nifty CPSE index. Given the stock trades around 13m shares a day on average, he sees 4x of excess volume and expect the stock to rally in the lead up to July 19 and see buying over the day on July 19.

links to Brian’s insights:
The CPSE ETF Arb Is Back, but Tighter!
India – NIFTY CPSE Index Review.

Unizo Holdings (3258 JP) (Mkt Cap: $913mn; Liquidity: $4mn)

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer (commencing this past Friday) to purchase a 40+% stake in real estate and hotel business Unizo to raise its stake from ~4.8% to 45.0%. The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high. But, this is a hostile tender.

• A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan, it is even rarer. This is, however, the second in six months – the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP).  HIS has decided to buy 40% of a company it hadn’t talked to. At a 50+% premium. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal.
• Unizo has several possible responses it could give. The right thing to do would be to establish an independent committee immediately. A rights offering might kill the deal. But it would be fair to investors. A White Knight is not unthinkable. Travis expects the odds are pretty good that Unizo does not have a great defense here. That means the Tender likely goes through.
• Unless corporate and financial cross-holders tender, the pro-ration could end up being very high.  If crossholders tender, pro-ration goes way down and one is better off just selling everything in the market for a small loss. Travis is bullish that the tender goes through and bullish the profit opportunity. He thinks for the astute arbitrageur, there is a lot of room to play around the ranges here.

(link to Travis’s insight: HIS Hostile Tender for Unizo – Fun Ahead!)

Villa World Ltd (VLW AU)  (Mkt Cap: $203mn; Liquidity: $1mn)

VLW and AVID have (finally) entered into a Scheme Implementation Agreement at A$2.345/share yesterday, which is a 17.8% premium to the unaffected price of $1.99 on 14 March, and an A$0.115 bump over the initial pitch in March. Any final or special dividend paid on or prior to the implementation of the Scheme will reduce the Offer Price. The key nagging issue is Ho Bee Land Ltd (HOBEE SP).

• Ho Bee, VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$2.04/share – and a high of A$2.18/share – lifting its stake to 9.41% on the same day as the initial Offer. Ho Bee further bumped its stake to 10.45% on the 25 March at an average price of A$2.21; and finally, to 11.62% on the 15 April at an average of $2.17. Its overall average in-price is A$1.98/share.
• Would Ho Bee go to such extreme just to extract another 5% from the Offer? Maybe, but it is a little weird. Ho Bee did not buy over $2.23/share.
• On balance, this deal should get up. Pricing appears fair with respect to peers. Ho Bee receives a decent premium to its overall average position. This is also not a material holding for Ho Bee – the 11.62% stake is equivalent to ~2% of its market cap – while it remains directly invested in the Melbourne JV.  With a late November/ early December completion, this is trading very tight to terms at 0.6% gross.

(link to my insight: Villa World Greenlights AVID’s Offer)

Ascendas Hospitality Trust (ASCHT SP) (Mkt Cap: $844mn; Liquidity: $3mn)

On 3 July, Ascott Residence Trust (ART SP) and ASCHT jointly announced a proposed combination, which would result in the combined entity becoming the largest hospitality trust in the Asia Pacific region, one of the top ten globally, with an asset value of S$7.6bn. It would – using data from the end of June – become the 7th largest trust on the SGX.

• The deal is for Ascott to acquire ASCHT through a Scheme of Arrangement whereby ASCHT unitholders will receive what was – at the announcement – S$1.0868 per ASCHT Stapled Unit. The exact terms are S$0.0543 in cash and 0.7942 Ascott Reit-BT Stapled Units. That is a ratio of 0.836 but if you do the arithmetic, it comes out as a NAV-flat transaction. Neither ASCHT nor ART shareholders “overly benefit” at the expense of the other, but they both benefit from scale lowering future costs.
• The deal is another REIT consolidation to create a LARGER NewREIT. It was also totally obvious, after the Ascendas-Singbridge deal was signed earlier this year, that within the Capitaland group (which meant Temasek was going to own 51% of Capitaland when completed), this was going to happen (even though the deal meant there were no chained transactions for the REITs). It makes one wonder if there is a deal for Ascendas Real Estate Investment Trust (AREIT SP) to come. 
• The deal (at the time of the insight) showed a 4.5% spread being long ASCHT and short Ascott, which is slightly wide for a deal of ~five months. However, there is some uncertainty in the distributions. If you own Ascott and are in a position to switch out of Ascott into AREIT, Travis would do so. If you own ASCHT and you like the risk of owning the REIT, you own the right one. 

(link to Travis’s insight: Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy)

Dalian Port (Pda) Co Ltd H (2880 HK)  (Mkt Cap: $3bn; Liquidity: $1mn)

Back on the 4 June, Dalian Port (Pda) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform. The shareholding structure is a spider’s web and understanding the share transfers is probably best done by studying the diagrams in the document and the insight.

• The integration/consolidation process is complicated with local, provincial and central government holdings in port ownership. Further, local governments, which often trumpet their success in tandem with the performance of its port, may be less willing to forego such economic benefits by giving up absolute control.
• China Merchant Holdings already has effective control of Dalian Port (Pda) – (47.31%) direct and 21.05% via Team Able/China Merchants Port (144 HK). The equity transfers forming part of the restructuring are being hived out from one SASAC entity into another SASAC-controlled entity. This should all go through and the unconditional MGO will be triggered, and potentially wrap up in October, provided the ETA completes on the long stop date.
• Dalian Port (Pda) is trading in line with listed Hong Kong ports. You have a (likely) hard floor at $1.01, with expectations of further group restructuring, as the three Liaoning ports are integrated. However, HK port companies are down ~7.% in the past year, similar to Chinese-listed port companies.  The sentiment is decidedly downbeat as the trade war creates a less profitable business environment.

(link to my insight: Dalian Port – Rearranging The Deck Chairs)

Health Management Intl (HMI SP) (Mkt Cap: $844mn; Liquidity: $3mn)

The previous Friday, listed regional (Singapore, Malaysia, Indonesia) private healthcare provider HMI announced an Implementation Agreement for a privatisation by way of Scheme of Arrangement whereby private equity fund EQT would acquire HMI for S$0.73/share in cash or one share of the Acquirer. That price is a 25-30% premium to the 1, 3, 6, and 12-month VWAPs prior to the announcement and a 14% premium to the last “undisturbed” trading day.

• It is not overly generous. The premium is small, and the forecast Next 12 Month EV/EBITDA multiple at 17+x is OK but compared to the other private hospital operators out there in Asia it is not overwhelmingly high-priced. It seems a bit of a stretch to see someone come over the top when this has been negotiated. However, if one asked me whether the likelihood of bump or deal failure is more likely, Travis would tilt towards bump, but it would be just a kiss.
• It takes 75% of the 39% not owned by NSI and “concert parties” to get this done, but the 2018 Annual Report showed that 89.75% of the shareholders (i.e. 83.2% or so of the possible Scheme Shareholders) owned more than 1,000,000 shares. The top 40 shareholders determine the outcome of this deal as long as the rest generally are split 51/49 or better. It is difficult to see this one getting knocked down.
• Travis expects the timeline of this deal is about 4 months plus perhaps a week. That means at S$0.72 the gross spread at 1.39% gets you an annualised spread of about 4.15%. At S$0.715, the gross spread is 2.10% (before comms, etc) so 4 months is 6+% annualised.  The trade here is to get queue priority at S$0.715. 

(link to Travis’s insight: Health Management Int’l Privatisation – Easy Peasy)

Briefly …

Harbin Electric Co Ltd H (1133 HK) this week announced there will be no further extension of its Offer which closes on the 19 July. By my estimate, tendered shares total 71.86%. The tendering condition is 90%.

Telford Homes (TEF LN) (Mkt Cap: $335mn; Liquidity: $1mn)

On July 3rd, US-based commercial real estate services company, CBRE Group Inc A (CBG US), announced that they had reached an agreement with the board of London-based residential real estate developer, Telford, to acquire 100% of its shares by way of a Scheme of Arrangement at a price of GBP3.50/ share. The offer values the target at a market cap of GBP 265mn. 

• While the Offer Price translates to premia of 11.1%, 14.3%, and 21.3% to the undisturbed price, 1-month VWAP and 3-month VWAP respectively, it remains 3.4% lower than the 1-year VWAP of Telford shares. Furthermore, the offer price also translates to discounts of 28.8% and 38.8% to the stock’s 1-year and 2-year highs respectively.
• The company appears to have confidence its current build-plan and will come through on budget and so after a couple of project delays at the end of this past year, earnings will rebound and march higher. The few analysts who cover the stock are less bullish this year, but it appears they expect the company to meet its 2020 targets a year or two later. 8x EPS and 1.0x book seem quite low. It is below the mean of the selected comps.
•  If Travis had to bet right now, it’s 50/50 it does not get done. Brexit worries could get this over the line but he expects there are some unhappy shareholders. He is not sure there is enough time to get a competitor in there to see the price lifted.  The deal timeline is very short. The indicative timeline suggests the Target Scheme Meeting could be in just four weeks. 
  

(link to Travis’s insight: Telford Homes Takeout – A Disappointing End?)

Avon Products (AVP US) (Mkt Cap: $1.8bn; Liquidity: $41mn)

On May 22, 2019, Avon announced that it had entered into a merger agreement to be acquired in an all-stock transaction by Brazilian Holding Company Natura & Co (NATUR3 BZ).  Natura will exchange 0.30 of its shares for each AVP share on a fixed exchange ratio basis, currently valuing AVP at ~US$2 bn. The merger agreement deadline is set for July 22, 2020. On completion of the merger, NATU3 shareholders will own 76% of the combination with AVP shareholders owning 24%. The transaction catapults NATU3 to becoming the world’s sixth largest consumer goods company.

• Natura is paying ~10x consensus 2019 EBITDA for standalone AVP which is reasonable in comparison to prevailing peer group multiples averaging 17x and compares with Natura’s own standalone valuation multiple of ~14x.
• The transaction could attract particular scrutiny from the antitrust authorities in Brazil, which represents the single largest market for both Natura and AVP. According to data from Euromonitor, Natura maintains a commanding lead in Brazil’s direct sales market for cosmetics with an estimated 31% market share followed by a ~ 16% share for AVP. That being said, the direct sales market is based around independent consultants/reps, many of whom already offer both Natura and Avon products in Brazil. 
• The double-digits merger spread that prevails (14% at the time of the insight) could offer a lucrative opportunity for arbs. The complicating factor is that Natura is listed on the Brazilian Stock exchange (B3) and denominated in an historically volatile currency, the Brazilian Real, while AVP shares trade on the NYSE in US$. As some AVP shareholders may not want to own or are restricted from owning shares that trade on a non-US exchange, Natura will offer AVP shareholders the option to receive Natura shares in the form of Level-II ADRs to be traded on the NYSE or shares listed on B3. Natura does not currently have an ADR in issue.

(link to Robert Sassoon‘s insight: MergerTalk: Natura & Co/Avon Products -“Ding Dong, The Avon Spread Calling”)

Singapore Airlines (SIA SP) / Sia Engineering (SIE SP) 

SIE gained 15% the previous week, rekindling privatisation talks by SIA.  Despite the share price increase, SIE trades around November 2009 levels. SIE is not aware of any reasons for the jump. The stub is not terribly exciting with SIE accounting for 18% and 22% of NAV and market cap, and barely makes the grade with SIE trading ~US$1mn/day.

• Last year’s privatisation of HAECO (44 HK) at $72/share (63.2% premium to last close) by Swire Pacific Ltd Cl A (19 HK) – which held 74.9% prior to the Offer – is not lost on investors. The takeover PER was 35x vs. 19x currently for SIE. Peer comps trade at 24x. SIE only appears fairly valued on an EV/EBITDA metric on account of the earnings from associated companies and JVs.
• SIE is a maintenance, repair & overhaul company providing aircraft & component overhaul, fleet management and line maintenance services. The company also has material stakes in associated companies and JVs which contribute 71% of the Group’s profits in FY19, up from 58% in FY18.
• The outcome, should an Offer be pitched, would cost SIA ~S$700mn to take out the shares it does not own. Not chump change, and it might have a slightly negative impact on SIA as it removes one layer of transparency. But given the stub weakness, the focus would be on the SIE arbitrage. I would not want to be short SIE here.

(link to my insight: StubWorld: Just Rumours (For Now) As SIA Engineering Pops)

My share class monitor provides a snapshot of the premium/discounts for 322 share classifications –  ADRs, Korean prefs, dual class, Thai (F/L) & A/Hs – around the region.

• For liquid ADRs, Kt Corp Sp Adr (KT US), which trades $10m a day, is at a 1% premium which compares with its annual range of -1%/+13% and one-year average of 6%. For liquid Korean Prefs, Korean Air Lines (003490 KS), which trades $7m a day is at a 41% discount which compares with its annual range of -60%/+23%.
• Three A/H names trade at 100% of their 52-week range percentile including Maanshan Iron & Steel A (600808 CH), Sinopec Shanghai Petroche A (600688 CH) & Guotai Junan Securities (A) (601211 CH), with a further 11 names in the top decile. Both Shenzhen Expressway Company (600548 CH) and China Everbright Bank Co A (601818 CH) are trading in their lowest decile.

(link to my insight: Share Classifications: A Year In Review)

• The SGX has announced a change in the takeovers code. A Delisting Offer now requires 75% of independent shareholders voting for the resolution. The 10% block has been removed. The change takes immediate effect. This is a smart move.

• The AFR is reporting that Bravura Solutions (BVS AU) may reload on Gbst Holdings (GBT AU). That would raise this competitive bidding situation to 3 suitors. This looks like a buy here at $3.58.

• FNZ Group lobs an A$3.65/unit non-binding proposal for Gbst Holdings (GBT AU), above Ss&C Technologies (SSNC US)‘s A$3.60/share proposal. GBST’s board has resolved to continue to provide exclusive DD to SSNC. FNZ Group lodges an application with Australia’s Takeovers Panel citing unacceptable circumstances, and seeks to halt SSNC’s exclusive due diligence on GBST.

• Anta Sports Products (2020 HK) is down sharply as Muddy Waters publishes a short report.

• China Power New Energy Development Co (735 HK)‘s shareholders approved all resolutions at the Scheme Meeting. The expected effective date is the 19 August.
• Gordan Tang has given an irrevocable undertaking for his 6.3% stake in Ascendas Hospitality Trust (ASCHT SP) for the merger with Ascott Residence Trust (ART SP).

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges – like Madison Holdings Group Ltd (8057 HK) on the 5 July.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?

Alliance Mineral Assets (AMS SP) hosted an EGM to ask its shareholders for approval to issue shares to competitor Galaxy Resources (GXY AU). See details in my previous insight Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

The capital injection was approved by a majority of AMS’ investors and will make GXY the largest investor in AMS. AMS will also change its name to Alita Resources.

GXY paid 0.20 AUD/share which gives them an 11.81% stake in the company. Recently, AMS’ share price has been under continued selling pressure falling to 0.134 SGD, which equates to a market valuation of only 200M SGD. While sentiment among the lithium names is negative (for the bearish case read Lithium Market – Phlegmatic Growth, Terrible Investment! by Gaius King ) we note that Alliance has guaranteed offtake agreements for 50% of its production, has the highest quality spodumene available in the market and its contractual selling price is significantly higher ($700+) than its costs ($500-550). 

GXY is now ‘half-pregnant‘ and given the company’s low reserve life (less than 5 years) and AMS’ ongoing exploration program we predict it is only a matter of time before a full takeover of AMS is considered by GXY management. In this respect, we note that GXY’s new CEO, Simon Hay, just started his role on 01/07/19 and will surely need to consider GXY diminished market valuation and short mine life.

Should GXY fail to act we shouldn’t discount the possibility that larger players such as Wesfarmers Ltd (WES AU) could be looking to consolidate the space after its recent purchase of Kidman Resources (KDR AU). 

Fair Value is reduced to 0.30 SGD (was 0.35 SGD before dilution effect).

3. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios

Budweiser Brewing Company APAC (1876 HK)/Budweiser APAC has guided potential investors towards the bottom of the IPO price range (HK$40-47 per share), according to press reports. Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. 

4. The Next Liquidity Crisis

Liquidity events involve a shortage of market liquidity, funding liquidity or both.

The LF Woodford Equity Income fund collapse in June is a good example of both above.

Systemic liquidity crisis affect all market participants, and they are generally preceded by a flat or inverted yield curve, which reflects a shortage of credit in the system. 

After that, we are just some large event short of a full-fledged liquidity crisis.

5. Trade War Takes Its Toll

The strength of the dollar and the US-China trade war have taken their toll on the world economy The erosion in global US dollar purchasing power is translating in weaker demand for Asian exports. The easing of US-China trade tensions following the G20 meeting is welcome. However, of equal importance is where the US dollar heads from here. The biggest risk here is that the ECB and the BoJ expand extraordinary monetary policy measures, and in doing so spark another round of competitive devaluation by non-US dollar areas and a further erosion in global US dollar purchasing power

In this briefing:

1. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?
2. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios
3. The Next Liquidity Crisis
4. Trade War Takes Its Toll
5. Big Issues Holding Down AUD/NZD Have Flipped

1. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?

Alliance Mineral Assets (AMS SP) hosted an EGM to ask its shareholders for approval to issue shares to competitor Galaxy Resources (GXY AU). See details in my previous insight Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

The capital injection was approved by a majority of AMS’ investors and will make GXY the largest investor in AMS. AMS will also change its name to Alita Resources.

GXY paid 0.20 AUD/share which gives them an 11.81% stake in the company. Recently, AMS’ share price has been under continued selling pressure falling to 0.134 SGD, which equates to a market valuation of only 200M SGD. While sentiment among the lithium names is negative (for the bearish case read Lithium Market – Phlegmatic Growth, Terrible Investment! by Gaius King ) we note that Alliance has guaranteed offtake agreements for 50% of its production, has the highest quality spodumene available in the market and its contractual selling price is significantly higher ($700+) than its costs ($500-550). 

GXY is now ‘half-pregnant‘ and given the company’s low reserve life (less than 5 years) and AMS’ ongoing exploration program we predict it is only a matter of time before a full takeover of AMS is considered by GXY management. In this respect, we note that GXY’s new CEO, Simon Hay, just started his role on 01/07/19 and will surely need to consider GXY diminished market valuation and short mine life.

Should GXY fail to act we shouldn’t discount the possibility that larger players such as Wesfarmers Ltd (WES AU) could be looking to consolidate the space after its recent purchase of Kidman Resources (KDR AU). 

Fair Value is reduced to 0.30 SGD (was 0.35 SGD before dilution effect).

2. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios

Budweiser Brewing Company APAC (1876 HK)/Budweiser APAC has guided potential investors towards the bottom of the IPO price range (HK$40-47 per share), according to press reports. Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. 

3. The Next Liquidity Crisis

Liquidity events involve a shortage of market liquidity, funding liquidity or both.

The LF Woodford Equity Income fund collapse in June is a good example of both above.

Systemic liquidity crisis affect all market participants, and they are generally preceded by a flat or inverted yield curve, which reflects a shortage of credit in the system. 

After that, we are just some large event short of a full-fledged liquidity crisis.

4. Trade War Takes Its Toll

The strength of the dollar and the US-China trade war have taken their toll on the world economy The erosion in global US dollar purchasing power is translating in weaker demand for Asian exports. The easing of US-China trade tensions following the G20 meeting is welcome. However, of equal importance is where the US dollar heads from here. The biggest risk here is that the ECB and the BoJ expand extraordinary monetary policy measures, and in doing so spark another round of competitive devaluation by non-US dollar areas and a further erosion in global US dollar purchasing power

5. Big Issues Holding Down AUD/NZD Have Flipped

AUD/NZD is still languishing around record lows.  Pessimism over the AUD increased as the Australian economy stalled in the second half of last year, the Royal Commission into the financial sector unsettled confidence, the housing market downturn accelerated, political uncertainty peaked into the national election in May, and the RBA scurried to cut rates twice at back-to-back monthly meetings in June and July.  Now the regulatory, political and economic trends are moving in favour of the AUD and against NZD.  RBNZ is toughing capital requirements on NZ banks. The Australian housing market is stabilising, NZ’s is slowing.  The Australian political cycle is as positive as it has been for a decade, and tax cuts have been delivered.  Australian trade performance is much stronger, and its fiscal position has caught up to and over-taken NZ’s.  NZ is expected to cut rates in August and is largely pacing Australian rates lower. 

In this briefing:

1. Extreme Valuations: Global Stock Ideas Using the BORUC Yield
2. ACCC Raises Concerns With Ruralco/Nutrien
3. Budweiser Brewing Company APAC Pre-IPO – Refining Valuation for the Diverging Growth Prospects
4. April Semiconductors Down Again, 14.6% Year/Year

1. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

The Bucephalus Idea Generator (BIG) picks stocks by combining our work on Creative Accounting and our work on capex and valuation cycles to see which companies are forecast to generate extreme returns and/or are on extreme valuations. The model then creates performance outcomes to search for absolute and relative investment ideas.

We run the model every month to see what has changed and which companies are worthy of further investigation.

Click here to download a sample company overview from the Bucephalus Idea Generator.

2. ACCC Raises Concerns With Ruralco/Nutrien

On the 27 February, Ruralco Holdings (RHL AU) announced it had entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) had agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer valued Ruralco at A$469mn and an enterprise value of A$615mn. An interim dividend of A$0.10 (the ex-date was the 30 May) was to be added.

The scheme booklet was dispatched on the 5 June (the IE gave a fair & reasonable opinion), and in addition to requiring shareholder approval at a Scheme Meeting on the 17 July, the deal was contingent on the ACCC either approving the transaction on or around the 13 June; or releasing a Statement of Issues (SOI).

Yesterday, the SOI, raising preliminary competition concerns, was announced.

As expected, the ACCC is assessing the impact on prices, product range and services subsequent to the loss of Ruralco, a major national retail competitor. In addition, it is looking into the reduction of competitors at the wholesale level from the proposed acquisition, and whether the remaining players provide sufficient competition.

The key issue centers on merchandising and the dilution of competition from this transaction. The ACCC had fewer concerns over the amalgamated impact on the agency businesses. 

Ruralco continues to engage with the ACCC and notes the SOI is not a “final decision” and is confident the issues raised can be addressed satisfactorily.

ACCC’s final decision will be made on the 15 August and submissions are required to be submitted by the 27 June. The Scheme Meeting is expected to be delayed.

Shares closed down 3.15% to $4.15 yesterday and currently trade at $4.17, to give a gross spread to terms of 5.5% with an annualised spread of ~21% – assuming a revised late September completion – roughly similar to where the annualised spread was prior to the SOI (and with a then-expected implementation date of 6 August).

3. Budweiser Brewing Company APAC Pre-IPO – Refining Valuation for the Diverging Growth Prospects

Budweiser Brewing Company APAC (0338867D HK) (ABIAPAC) is looking to raise US$5bn+ in its Hong Kong IPO, which would make it one of the largest Hong Kong IPO’s this year.

I’ve covered the background and financial performance for the Asian operations in my earlier insights: 

• A brief history: Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
• Comparison with peers: Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
• 2018 and 1Q19 performance updates: Ab InBev Asia Pre-IPO – On Its Way to Potentially Being the Biggest HK IPO This Year
• Analysis of the application proof: Budweiser Brewing Company APAC Pre-IPO – It Will Be a US$5bn+ Raise Owing to Its Clean Balance Sheet
• Country performance and updated peer comparison: Budweiser Brewing Company APAC Limited Pre-IPO – Country Performance and Updated Peer Comparison

In this insight, I’ll talk about the company valuations based on the different growth prospects for its geographic segments. 

4. April Semiconductors Down Again, 14.6% Year/Year

The World Semiconductor Trade Statistics (WSTS) reveal that monthly semiconductor revenues for April were 14.6% below those of April 2018.  This painful point was to be expected in what will be a very oversupplied year following a year of high prices.

In this briefing:

1. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios
2. The Next Liquidity Crisis
3. Trade War Takes Its Toll
4. Big Issues Holding Down AUD/NZD Have Flipped
5. Villa World Greenlights AVID’s Offer

1. Budweiser Brewing Co APAC IPO: Price Guidance in the Context of Bull/​​​Bear DCF Scenarios

Budweiser Brewing Company APAC (1876 HK)/Budweiser APAC has guided potential investors towards the bottom of the IPO price range (HK$40-47 per share), according to press reports. Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. 

2. The Next Liquidity Crisis

Liquidity events involve a shortage of market liquidity, funding liquidity or both.

The LF Woodford Equity Income fund collapse in June is a good example of both above.

Systemic liquidity crisis affect all market participants, and they are generally preceded by a flat or inverted yield curve, which reflects a shortage of credit in the system. 

After that, we are just some large event short of a full-fledged liquidity crisis.

3. Trade War Takes Its Toll

The strength of the dollar and the US-China trade war have taken their toll on the world economy The erosion in global US dollar purchasing power is translating in weaker demand for Asian exports. The easing of US-China trade tensions following the G20 meeting is welcome. However, of equal importance is where the US dollar heads from here. The biggest risk here is that the ECB and the BoJ expand extraordinary monetary policy measures, and in doing so spark another round of competitive devaluation by non-US dollar areas and a further erosion in global US dollar purchasing power

4. Big Issues Holding Down AUD/NZD Have Flipped

AUD/NZD is still languishing around record lows.  Pessimism over the AUD increased as the Australian economy stalled in the second half of last year, the Royal Commission into the financial sector unsettled confidence, the housing market downturn accelerated, political uncertainty peaked into the national election in May, and the RBA scurried to cut rates twice at back-to-back monthly meetings in June and July.  Now the regulatory, political and economic trends are moving in favour of the AUD and against NZD.  RBNZ is toughing capital requirements on NZ banks. The Australian housing market is stabilising, NZ’s is slowing.  The Australian political cycle is as positive as it has been for a decade, and tax cuts have been delivered.  Australian trade performance is much stronger, and its fiscal position has caught up to and over-taken NZ’s.  NZ is expected to cut rates in August and is largely pacing Australian rates lower. 

5. Villa World Greenlights AVID’s Offer

On the 14th March 2019, Australian property developer Villa World Ltd (VLW AU) announced it had received an unsolicited proposal, by way of a Scheme, from AVID Property Group Australia at an offer price of A$2.23, or a 12% premium to last close. 

The Indicative Offer translated to an LTM PER and P/B of 6.4x and 0.9x. At the time, I didn’t believe VLW would want to engage. VLW was (and still is) paying out one of the highest yields among its peers, and with ~21% of the register potentially defending their position – one of which was actively buying – there was likely upside. 

Ho Bee Land Ltd (HOBEE SP) , VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$2.04/share – and a high of A$2.18/share – lifting its stake to 9.41% on the same day as the initial Offer. Ho Bee further bumped its stake to 10.45% on the 25 March at an average price of A$2.21; and finally, to 11.62% on the 15 April at an average of $2.17.

VLW’s directors unanimously recommended AVID’s revised indicative proposal of $2.345/share by way of a Scheme announced on the 2 May. Exclusive due diligence was extended on the 20 June for a “short time” to facilitate a binding proposal, before continuing on a non-exclusive basis on the 2 July. 

This has all (finally) culminated in VLW and AVID entering into a Scheme Implementation Agreement at A$2.345/share yesterday, which is a 17.8% premium to the unaffected price of $1.99 on 14 March. Any final or special dividend paid on or prior to the implementation of the Scheme will reduce the Offer Price.

An anticipated bump has unfolded and VLW’s board unanimously supports the Offer. The question is whether Ho Bee will vote for the Scheme. My bet is they will.

Quiddity’s new Quiddity Australia M&A Guide 2019 is now published with guidelines to the relevant rules, regulations, documentation, and pointers to the Australia M&A landscape. There are several others in the series, and watch for more to come.

In this briefing:

1. ACCC Raises Concerns With Ruralco/Nutrien
2. Budweiser Brewing Company APAC Pre-IPO – Refining Valuation for the Diverging Growth Prospects
3. April Semiconductors Down Again, 14.6% Year/Year
4. Vocus Group’s Tilt from AGL Energy Is Attractive but Not a Sure Thing

1. ACCC Raises Concerns With Ruralco/Nutrien

On the 27 February, Ruralco Holdings (RHL AU) announced it had entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) had agreed to take Ruralco private at $4.40/share – a 44% premium to last close and the one-month VWAP. The Offer valued Ruralco at A$469mn and an enterprise value of A$615mn. An interim dividend of A$0.10 (the ex-date was the 30 May) was to be added.

The scheme booklet was dispatched on the 5 June (the IE gave a fair & reasonable opinion), and in addition to requiring shareholder approval at a Scheme Meeting on the 17 July, the deal was contingent on the ACCC either approving the transaction on or around the 13 June; or releasing a Statement of Issues (SOI).

Yesterday, the SOI, raising preliminary competition concerns, was announced.

As expected, the ACCC is assessing the impact on prices, product range and services subsequent to the loss of Ruralco, a major national retail competitor. In addition, it is looking into the reduction of competitors at the wholesale level from the proposed acquisition, and whether the remaining players provide sufficient competition.

The key issue centers on merchandising and the dilution of competition from this transaction. The ACCC had fewer concerns over the amalgamated impact on the agency businesses. 

Ruralco continues to engage with the ACCC and notes the SOI is not a “final decision” and is confident the issues raised can be addressed satisfactorily.

ACCC’s final decision will be made on the 15 August and submissions are required to be submitted by the 27 June. The Scheme Meeting is expected to be delayed.

Shares closed down 3.15% to $4.15 yesterday and currently trade at $4.17, to give a gross spread to terms of 5.5% with an annualised spread of ~21% – assuming a revised late September completion – roughly similar to where the annualised spread was prior to the SOI (and with a then-expected implementation date of 6 August).

2. Budweiser Brewing Company APAC Pre-IPO – Refining Valuation for the Diverging Growth Prospects

Budweiser Brewing Company APAC (0338867D HK) (ABIAPAC) is looking to raise US$5bn+ in its Hong Kong IPO, which would make it one of the largest Hong Kong IPO’s this year.

I’ve covered the background and financial performance for the Asian operations in my earlier insights: 

• A brief history: Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
• Comparison with peers: Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
• 2018 and 1Q19 performance updates: Ab InBev Asia Pre-IPO – On Its Way to Potentially Being the Biggest HK IPO This Year
• Analysis of the application proof: Budweiser Brewing Company APAC Pre-IPO – It Will Be a US$5bn+ Raise Owing to Its Clean Balance Sheet
• Country performance and updated peer comparison: Budweiser Brewing Company APAC Limited Pre-IPO – Country Performance and Updated Peer Comparison

In this insight, I’ll talk about the company valuations based on the different growth prospects for its geographic segments. 

3. April Semiconductors Down Again, 14.6% Year/Year

The World Semiconductor Trade Statistics (WSTS) reveal that monthly semiconductor revenues for April were 14.6% below those of April 2018.  This painful point was to be expected in what will be a very oversupplied year following a year of high prices.

4. Vocus Group’s Tilt from AGL Energy Is Attractive but Not a Sure Thing

Vocus Communications (VOC AU) is Australia’s fourth largest telecom operator which is in the midst of a three-year turnaround plan. Today, Vocus announced a non-binding proposal from AGL Energy Ltd (AGL AU) for A$4.85 cash per share. AGL’s proposal values Vocus at a market cap of A$3.0 billion and FY19 EV/EBITDA of 11.4x (CY2019 EV/EBITDA of 10.9x).

In this briefing:

1. Afterpay Touch Placement – Still Expensive

1. Afterpay Touch Placement – Still Expensive

Afterpay Touch (APT AU) is looking to raise about US$208m to fund its mid-term GMV growth. There will also be a concurrent secondary placement of up to 4.5m shares by the founders to Tiger Management and Woodson Capital.

The deal scored marginally positive on our framework bolstered by its strong price momentum but offset by its expensive valuation relative to peers. Even though the August 2018 placement was small, representing on 3 days of ADV, it still struggled in the first three months post-placement. It had only held up in its week because the placement coincided with its FY18 results report which had beaten revenue estimates. Valuation remains expensive, trading at 22.7x and 11.8x FY19E and FY20E EV/Revenue.