Category

Event-Driven

Event-Driven: Haidilao, FamilyMart Co Ltd, Toshiba Corp, LG Chem Ltd, COL PCL and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • HSCEI Index Rebalance Preview – December 2020: HUGE Number of Changes and Turnover Expected
  • Familymart: What’s Next? And Will Mitsubishi React?
  • Toshiba Is A Range Trade. Still.
  • LG Chem: Spinout, Likely ECO Later, & 1P Diversion, Caused by Irrational Sentiment
  • COL-Central Retail Corp: Thailand Delisting Offer Trading Tight

HSCEI Index Rebalance Preview – December 2020: HUGE Number of Changes and Turnover Expected

By Brian Freitas

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the 2020 Q3 review of the Hang Seng Family of Indexes on 6 November. The constituent changes will be effective after the close of trading on 4 December.

With only 3 changes permitted in the September Hang Seng China Enterprises Index (HSCEI INDEX) review post the methodology change that included WVR securities and Secondary Listings in the eligible Universe, there could be as many as 9 changes in the December review.

We see a high probability of China Overseas Land & Investment Ltd (688 HK), JD.com (HK) (9618 HK), Alibaba Health Information Technology (241 HK), Haidilao (6862 HK), China Feihe (6186 HK), Semiconductor Manufacturing (981 HK) and Evergrande Real Estate Group (3333 HK) being included in the Hang Seng China Enterprises Index (HSCEI INDEX), and of China Taiping Insurance Hldgs (966 HK), China Telecom Corp Ltd (H) (728 HK), China Minsheng Banking H (1988 HK), China Vanke Co Ltd (H) (2202 HK), Fosun International (656 HK), China Citic Bank Corp Ltd H (998 HK) and China Shenhua Energy Co H (1088 HK) being deleted from the index.

Depending on price movements between now and 30 September, NetEase (9999 HK) and Hansoh Pharmaceutical (3692 HK) could be included in the index, which would see Want Want (151 HK) and PICC Property & Casualty H (2328 HK) being deleted.

Estimated one-way turnover for the rebalance is 9.63% which is lower than the turnover at the September rebalance, but significant nonetheless.

The expected review changes will alter the sectoral composition of the index with an increase in the weight of the Consumer Discretionary, Information Technology and Health Care sectors at the expense of Financials and Energy. There will also be an impact on the HSCEI 2021 dividend futures, a large part of which has already been discounted by the market.


Familymart: What’s Next? And Will Mitsubishi React?

By Michael Causton

Itochu Corp (8001 JP) has completed its buyout of Familymart (see Travis Lundy’s insights here, here, here and here). Itochu has clearly taken full advantage of a depressed Familymart share price and an opportunity for the trading house to begin more adventurous diversification of the convenience store business.

This will include moving into more types of food format, including its nascent hybrid store collaborations with supermarkets and drugstores and an upcoming push into e-commerce, but will also mean more integration with Itochu’s food wholesale business – which when combined is bigger than that of its arch rival, Mitsubishi Corp (8058 JP).

Mitsubishi and Itochu have been playing catch-up with each other for the last two decades in a race to build Japan’s first integrated food wholesale-retail businesses.

Now that Itochu has succeeded in its bid, the question remains whether Mitsubishi will now look to consolidate its own food retail assets like Lawson Inc (2651 JP) and Life Corp (8194 JP).


Toshiba Is A Range Trade. Still.

By Travis Lundy

In my initial first piece on the Kioxia (6600 JP) IPO on 28 August 2020 called Kioxia IPO – The Flow Dynamics I talked about the nature of who was going to be buying (and who was going to be sold to).

I also noted my initial reaction that the price might be too high at ¥3,960/share and an EV of close to ¥3.5trln.

My initial reaction is that the price may be too high and it could be revised downward. Given the fact that 65% of the offering goes to international investors, who are more inclined to provide their pricing input in a negative way, I think it eminently possible that the offering could be priced lower. I would not be surprised to see an offering price 10-25% lower than the ¥3960 proffered.

A New IPO Price Range

On Thursday 17 September it was reported that the Kioxia Holdings IPO Price Range would be set at ¥2800-3500/share making the new offering size top out at ¥334.3bn and the market cap at IPO price be ¥1.88trln – both top figures year-to-date in 2020. 

That is a drop of 11.6-29.3%, which is a bit more aggressive than I had expected. It means the immediate uplift to Toshiba is considerably smaller compared to their in-price. 

Since I wrote bearishly on Toshiba Corp (6502 JP) exactly a month ago in Toshiba TOPIX Inclusion – Jack Be Nimble, Jack Be Quick… the shares are down 13.9%, but only down about 3% since Toshiba: Kioxia IPO Impact & Activist Positioning on 30 August.

If the market reacts not badly to the news of a possibly sharply reduced Kioxia IPO price and the corollary that lower price means lower proceeds (now and in future on a mark-to-market basis) will reduce the payout to Toshiba shareholders in terms of buying back stock could have a negative effect on Toshiba shares. 

That is worth watching for. It might be worth buying to cover the short. 

A bit lower down it is worth going long again. 

More below the fold. 


LG Chem: Spinout, Likely ECO Later, & 1P Diversion, Caused by Irrational Sentiment

By Sanghyun Park

LG Chem’s regulatory filing about the divestiture came out this morning.

As reported yesterday, it is a spinout (physical division) of the EV battery unit. So, the surviving entity, LG Chem, will wholly-own the spun-out entity, tentatively named LG Energy Solution.

It requires shareholder approval but doesn’t grant appraisal rights.

Overview
Name LG Chem Ltd
Ticker 051910
Surviving LG Chem Ltd
– Ticker 051910
– Bourse KOSPI
– Ratio N/A
– Type Operating company
– Business Petrochemical, advanced material, & bio
– Stock split 1.0
New LG Energy Solution
– Divestiture Spin-out (physical division)
– Ticker N/A
– Bourse Unlisted (wholly-owned)
– Ratio N/A
– Type Operating company
– Business Battery solution
– Stock split 1.0
Stock purchase N/A
Banker N/A
Source: DART

The company scheduled the general meeting for October 30. The effective date of the divestiture is December 1.

Timetable
BOD meeting September 17, 2020
Shareholder approval at EGM October 30, 2020
Trade suspension begins N/A
Trade suspension ends N/A
Effective date December 1, 2020
Source: DART

The new entity, LG Energy Solution, will carry equity of ₩6tril with a D/E ratio of 72.2%.

Financials – 2Q20(₩B) Surviving New Note
Name LG Chem Ltd LG Energy Solution Tentative
Split type Spin-out Wholly-owned subsidiary
Total assets 24,727.5 10,255.2 As of June 30, 2020
Total liabilities 7,912.7 4,297.1 As of June 30, 2020
Total equity 16,814.8 5,958.2 As of June 30, 2020
– Capital 391.4 100.0 As of June 30, 2020
Split ratio N/A N/A Physical division
FY19 de-consolidated sales 15,617.2 6,695.3 FY2019
Source: DART
Shareholding Common 1P Total
LG Corp 33.34% 0.00% 30.06%
LG Yeonam Cultural Foundation 0.03% 0.00% 0.03%
Special affiliated persons 0.00% 0.00% 0.00%
– Major shareholder 33.37% 0.00% 30.09%
Korea NPS 10.91% 0.00% 9.84%
Treasury shares 2.34% 0.21% 2.13%
Total 100.00% 100.00% 100.00%
Source: FnGuide

COL-Central Retail Corp: Thailand Delisting Offer Trading Tight

By Janaghan Jeyakumar, CFA

On 14th September 2020, Stationery and Office equipment retailer COL PCL (COL TB) announced they agreed to be acquired by Central Retail (CRC TB) in a Deal that valued the company at a market cap of ~US$390mn. 

CRC intends to delist the shares of COL following the completion of the Deal and this will require approvals from COL shareholders and the Stock Exchange of Thailand. 

Once approvals have been granted, a tender offer will be launched for 100% of the shares in COL. The transaction is expected to close in 1Q 2021. 

The Offer price will be THB19.00 per share in cash. At the time of writing, COL is trading just below Terms. 

As always, there is more below the fold.

For more about the rules and practices in Thai M&A, please refer to the Quiddity Thailand M&A Guide 2019


Before it’s here, it’s on Smartkarma

Event-Driven: Sina Corp (Class A), LINE Corp, Vedanta Ltd, Mitsubishi Corp, Genting Singapore, Fuchs Petrolub Se, CaixaBank SA and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Homecoming For Chinese Companies: Appraisal Rights & Fair Value
  • LINE: The Zombie Twilight Begins
  • Vedanta : More Fuel For The Fire
  • 🇯🇵 JAPAN • Analysing The “Buffett Trade”, Valuing the Sogo Shosha & The Return of Asian Inflation
  • StubWorld: Genting’s NAV Discount Plumbs New 2020 Low
  • Liquid Universe of European Ordinary and Preferred Shares: September Report
  • Caixabank-Bankia: Share Exchange Tug-Of-War, in a Merger of Unequals

Homecoming For Chinese Companies: Appraisal Rights & Fair Value

By David Blennerhassett

On 20 May 2020, the US Senate passed the  S. 945 the Holding Foreign Companies Accountable Act, an act which could force the delisting of US-listed Chinese companies should they be in noncompliance with US accounting standards. Shortly after, the U.S. House of Representatives introduced its version of the Bill which has yet to pass.

This bill requires certain issuers of securities to establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the Public Company Accounting Oversight Board (PCAOB) is unable to audit specified reports because the issuer has retained a foreign public accounting firm not subject to inspection by the board. Furthermore, if the board is unable to inspect the issuer’s public accounting firm for three consecutive years, the issuer’s securities are banned from trade on a national exchange or through other methods. 

This creates a conundrum, if not an impossibility, as Chinese regulators forbid foreign regulatory bodies, such as the PCAOB, from inspecting accounting firms based in China. 

The Act, which is still to be ratified by the House, reconciled with the Senate bill, and approved by President Trump, provides even greater impetus for “take private” transactions (often expecting to re-list elsewhere at higher valuations) and secondary listings in markets outside of the United States, such as Hong Kong and Shanghai.

Hong Kong is laying out the welcome mat. First the HKEx amended its listing rules in April 2018 to allow companies with multiple classes of shares with individual-controlled voting rights to sell shares in Hong Kong. This new listing regime enabled secondary listings for the likes of JD.com Inc (ADR) (JD US) / JD.com (HK) (9618 HK) and Alibaba Group (BABA US) / Alibaba Group (9988 HK). Further changes to the Listing Rules are anticipated to accommodate companies with corporate shareholders with weighted voting rights – such as Tencent Music (TME US).

But on occasion, the consideration paid under these take-private “homecoming” transactions are not always considered fair by the investment community.

The recently completed 58.Com Inc Adr (WUBA US) (58.com: Foregone Conclusion Amidst Proxy Advisor Pushback) faced considerable proxy advisor backlash. Similarly, Sina Corp (Class A) (SINA US)‘s preliminary non-binding “going private” proposal from its chairman/CEO,  is widely viewed as a low-balled, opportunistic Offer (Sina Corp: Management Buyout Offer). 

For Cayman Islands incorporated companies, such as SINA and 58.com, Section 238 of the Companies Law (2020 Revision) may provide scope for dissenting shareholders to a merger/take-private transaction to have the Grand Court determine the fair value of their shares.

That right to dissent also hinges off how these take-private transactions are undertaken,

As of today, four cases have resulted in final judgments handed down by the Grand Court of Cayman – Integra Group, Shanda Games Ltd Spons Adr (GAME US), Qunar Cayman Islands (QUNR US), and most recently, Nord Anglia Education (NORD US).

What’s Original?

This insight explores the mechanics of Section 238 of the Cayman Companies Law, the case history of four appraisal rights judgments, and what dissenting shareholders may expect when taking their merger objections to Court.


LINE: The Zombie Twilight Begins

By Travis Lundy

The life of LINE Corp (3938 JP) as a listed entity with a listed future is now entering its Zombie Twilight. The Tender Offer by Softbank Corp (9434 JP) and Naver Corp (035420 KS) to buy out minorities has ended and we now move on to the next stage. 

Today the results of the Tender Offer for LINE were announced and the Offerors managed to acquire a sum total of 31,234,670 shares leaving about 25,000,000 shares left over un-tendered (plus options and converts un-converted). That is 25,000,000 million shares worth of zombie shareholders who will roam the markets until the shares’ final retirement after the EGM. 

That is $1.25bn+ worth of zombies at the Tender Offer Price. 

The now-zombies defended their boundary, keeping the shares above the ¥5380 Tender Offer Price line from late June until the day before the Tender Offer went ex-.

 

The period between now and the delisting of LINE could be 4-5 months. It could take 5-6 months to get one’s money, unless one is going after appraisal rights. Then it will take a little longer, unless it takes a lot longer. 

This situation is different from the post-Tender trading situation of FamilyMart Co Ltd (8028 JP) and one should not expect the squeeze which happened there. 

Previous insights related to this situation and the names involved are listed below.

Relevant Insights

Date Author Title

About Cashless Payments

13 Mar 2019 Michael Causton  Loyalty Points In Japan: More Loyalty, More Points and the Conduit to Cashless Payments 
2 Apr 2019 Mio Kato, CFA  Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars 
28 Jun 2019 Supun Walpola  Paying with PayPay: A Deep Dive into Yahoo! Japan’s Mobile Payment Business 
6 Jan 2020 Michael Causton  Lawson and KDDI Join Forces in Cashless Payments War 
24 Jan 2020 Michael Causton  Mercari – Merpay Acquisition of Origami Pay Continues Cashless Consolidation 
15 Feb 2020 Michael Causton  Japan Payment Wars: NTT Docomo and Merpay/Origami to Attempt Catch up with PayPay and Rakuten 
20 Mar 2020 Michael Causton  Some Resistance to Cashless Payments in Japan 
28 Apr 2020 Michael Causton  Z Holdings and Yamato Create Fulfilment Service for All to Rival Rakuten and Amazon 
29 Jul 2020 Supun Walpola  Z Holdings [Alt Data]: PayPay Mall and PayPay Flea Market Continue to Disappoint 

About This Deal

14 Nov 2019 Travis Lundy Z and LINE, Sitting in a Tree… M.E.R.G.I.N… G…? 
18 Nov 2019 Travis Lundy LINE and Z, Sitting in a Tree… M.E.R.G.I.N.G! And a Tender Offer! 
26 Dec 2019 Travis Lundy NEW Deal for LINE (A Lot Like the Old Deal)
6 July 2020 Travis Lundy Market Is Pricing a LINE Bump – Should It? 
22 July 2020 Travis Lundy A LINE Bump – The Other Argument Against 
29 July 2020 Travis Lundy LINE (3938) – This Is Not the Kitchen Sink You Are Looking For 
3 August 2020 Travis Lundy The End of the LINE (3938) 

In addition to the above insights, Michael Causton’s The Zozo Revival: A New Private Brand of Many Names, Category Expansion, Merchants Return is worth a read to know more about Z Holdings going forward and Mio Kato, CFA‘s Zozo – Nice Results but It’s Just a COVID Bump takes the view that results announced last week were less impressive than the headline numbers.


Vedanta : More Fuel For The Fire

By Travis Lundy

Several days ago it was noted in the media that Vedanta Resources (VED LN) affiliates were looking to borrow an additional US$600 million in order to finance the take-private of Vedanta Ltd (VEDL IN). That sum would be added to the US$1.75bn of short-term loan facility set up in July, and the US$1.4bn borrowed in a bond issue in late August. 

That brings the prima facie total to be raised to US$3.75bn or roughly ₹275bn. 

Considering the public holding of 1.85358bn shares, that comes to ₹148 per Vedanta Ltd. share. 

That would be a low price for the Reverse Book Build. A very low price. 

At last traded price (₹219.25), Vedanta Ltd (VEDL IN)‘s shareholding in Hindustan Zinc (HZ IN) was worth roughly ₹161.8 per Vedanta share. Getting the rest of Vedanta for negative value would be a serious win. 

I had previously calculated that buying out the non-Hindustan Zinc portion of Vedanta Limited at 3x EV/EBITDA would be worth an additional ₹73/share. 

Assuming one ascribes a 20% discount to buying VEDL minorities out of their Hindustan Zinc position and pays 3x EV/EBITDA for the rest would get you a price of ₹191.4/share, but that too ends up being quite generous. Take zero discount for the HZL and it is ₹231+.

As discussed in Vedanta: Reaching The End Game, the money available would provide well more than that near-term to Vedanta Resources.  

But that ₹231+ number was ignoring the value of the inventory or any eventual rebound in any part of the business. It ignores the pre-paid tax on the dividend to come from HZL. It dismisses the idea that VEDL ex-HZL might be worth more than 3x EBITDA. It also ignores any number of legal situations which might favor Vedanta Limited going forward. 

One legal issue I had previously mentioned was the Supreme Court’s final hearing – due quite soon – to deal with Vedanta’s suit to win approval to have the government sell its remaining stake in Hindustan Zinc. The government wants to sell it. Vedanta wants to buy it. There are “complications” but positive news should come soon. 

The NEW News

One I had NOT mentioned was a suit Vedanta had brought with another party – Videocon – against the Government of India. This involves a historical dispute on developing and producing in an offshore oil field called Ravva off the coast of Andhra Pradesh where the interests started in 1993 and the works in question appear to date from 2000-2007. There was a complaint, a suit, an arbitration, a denial, then Vedanta took the GOI to court. Today they won.

The headline says US$500mm but the real number will be different. 

The ONGOING News

Q1 results continue to be delayed. The Annual Report for the last fiscal year has been delayed leading the NYSE to get upset with Vedanta. This may not be unplanned. The results of Vedanta Limited for Q1 were supposed to be approved yesterday but at the last minute Vedanta announced (on the 14th) that “due to the ongoing pandemic and other unforeseen circumstances which are beyond the Company’s control, the Company is unable to hold its Board Meeting on September 15, 2020 and accordingly we will reschedule the Board Meeting on or before September 30, 2020 for release of Q1 results for which the Company will give the intimation separately in due course.”

Helpfully, by that time, it is most likely that the Reverse Book Build auction schedule will be determined because if it is not, it is unlikely that Vedanta Limited would be able to complete the process in time to avoid a breach of the covenants of the US$1.4bn bond issue.

As always, more below the fold. 

Insights previously published in the timeline of the Vedanta Delisting Offer are listed below.

Relevant Insights To Date

Date Theme or Ticker Insight Title
2019 Indian M&A Guide Quiddity India M&A Guide 2019 
24 May 2020 Delisting Offers Indian Delisting/Exit Offers – Know Your Process and The Games Played 
19 Jun 2020 Failed Exit Offers Failed Exit Offers in India: Lessons for VEDL, ADANI, and HEXW? 
27 May 2020 Vedanta Ltd (VEDL IN)  Vedanta Delisting Offer – How It Goes From Here 
22 Jun 2020 Vedanta Limited Vedanta Delisting Offer: Opportunities and Timing 
25 Jun 2020 Vedanta Limited Vedanta Buyout Loan = HUGE Hindustan Zinc Div But May Change Vedanta RBB Timing 
14 Jul 2020 Vedanta Limited Putting Sightlines on the Vedanta Discovered Price 
18 Aug 2020 Vedanta Limited Putting Sightlines on the Vedanta Delisting Offer TIMING 
7 Sep 2020 Vedanta Limited Vedanta: Reaching The End Game 

🇯🇵 JAPAN • Analysing The “Buffett Trade”, Valuing the Sogo Shosha & The Return of Asian Inflation

By Campbell Gunn

Source for all charts & tables: Japan Analytics

THE BUFFETT TRADE – Much has already written on Berkshire Hathaway‘s purchase of stakes in Japan’s sogo shosha, including on this platform. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.

In this DETAIL section, we examine: –

  • the macro ‘logic’ driving these investments,
  • a more appropriate analytical and valuation methodology for these companies
  • the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. 

We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan’s trading houses are one of the world’s better deep value trades.


StubWorld: Genting’s NAV Discount Plumbs New 2020 Low

By David Blennerhassett

This week in StubWorld …

Genting Bhd (GENT MK)‘s discount to NAV touches as an all-time low, as does the implied stub against Genting Singapore (GENS SP), after Genting Malaysia (GENM MK) pours more cash into Empire Resorts. 

Preceding my comments on Genting are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.


Liquid Universe of European Ordinary and Preferred Shares: September Report

By Jesus Rodriguez Aguilar

Trends

There has been no obvious trend over the last two months regarding the discounts, although it has widened in some names. Some of the previous (May and June) recommendations have been bang on. Trading opportunities are less obvious, but some still exist.

Recommended trades

  • Carlsberg A/S (CARLB DC): close trade long B/short A shares (B are trading at 4.4% discount from 12% in June).
  • Bayerische Motoren Werke AG (BMW GR) : the discount has widened to 23% from 18% by mid-August, as a result of recent volatility. I would recommend setting up a trade long BMW prefs, short ords with a target of a 15% discount.
  • Fuchs Petrolub Se (FPE GR) ‘s premium of preferred shares is a whopping 33.6% currently. Remember that voting rights are valuable. Recommendation: long ords/short prefs, with a 10% target.
  • Henkel AG & Co Kgaa (HEN3 GR) The premium of the preferred shares is 15.4%. I would set up a trade long prefs/short common shares with a 10% discount target.
  • Voting rights are valuable in a company like Volkswagen (VOW GR) , so a 5.8% discount of the prefs. seems about right. If you believe that the higher liquidity of the prefs will, at some point, mean that the discount will close, then a long prefs/short ords may be an option; plus it can be executed in size. The discount tightened since the March selloff and has been moving within a tight range. 
  • Grifols SA (GRF SM) B shares are trading at a 41.9% discount (vs. 38% in June). The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. I recommend setting up the trade long B shares traded on Nasdaq, short A shares traded in Madrid. The target is a 27% discount. Please note there is FX risk, which can be hedged.
  • The discount in the Telefonaktiebolaget Lm Ericsso (ERICB SS) (Ericsson) B shares has tightened since my July recommendation: from 8.7% to 7.7%. I would keep the trade on with a 3% discount target.

Please read on for table and charts.


Caixabank-Bankia: Share Exchange Tug-Of-War, in a Merger of Unequals

By Victor Galliano

  • Caixabank and Bankia’s merger talks are intensifying, and share exchange terms could be announced later this week; the relative valuation discussions are being driven by Caixabank’s currently largest shareholder Fundacio Bancaria la Caixa (Caixa Foundation) with 40%, and the Spanish government’s bank fund FROB, which holds a 62% stake in Bankia
  • Caixa Foundation needs to hold a minimum 30% stake post-merger to retain its tax benefits as a foundation; according to press reports, FROB’s post-merger stake could reach 16%
  • The current market valuation is, in our view, skewed in favour of Bankia shareholders implying a relative valuation of 26% for Bankia and 74% for Caixabank; in post-merger terms, this would reflect a stake of 16% for FROB and 29.6% for Caixa Foundation; press reports suggest the Foundation could reach its 30% threshold post-merger by adding to its Caixabank holding pre-merger
  • Caixabank management may find the interests of minority shareholders compromised by pressure from the Spanish government, the ECB, the Bank of Spain to get the deal done, and as long as Caixa Foundation is not opposed
  • Current market valuations – 26% Bankia, 74% Caixabank – do not sufficiently factor in Bankia’s challenges, despite the long run cost savings which we estimate at 20%+ including the potential for Caixabank to drive digital banking efficiencies
  • Bankia’s poorer track record on credit quality, with its long run charge-off ratio is clearly higher than that of Caixabank; Bankia also has poor pre-provision profitability and ROAE and has also suffered from past corporate governance failures, not to mention a government bailout
  • We believe that Caixabank management should push for a valuation ratio of 22% Bankia to 78% Caixabank at merger, although we fear that under “bigger picture” pressures the chances of this are diminishing; if Bankia is valued at 25% or more of the merged group, this implies near term share downside risk for Caixabank
  • Risks to our positive view on Caixabank include an overly optimistic valuation for Bankia at merger, which would lead to worse-than-expected dilution for Caixabank shareholders, and the potential for worse than expected credit quality emerging, especially from the post-merger Bankia credit portfolio

Before it’s here, it’s on Smartkarma

Event-Driven: Kakao Games, Gremz Inc, Hexaware Technologies, Bangkok Commercial Asset Management, Altice Nv A and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Kakao Games: Current Selloff & KOSDAQ 150 Inclusion
  • TOPIX Inclusion Pre-Event Trade (3150 JP): Tachiaigai Bunbai Announced. It’s GREEN.
  • Hexaware Exit Offer Reverse Book Build Gets 90% & Discovered Price – Now We Wait
  • SET50 Index Rebalance Preview: Three Changes for Now, Could Be One More
  • Altice – Next Private Takeover Announcement

Kakao Games: Current Selloff & KOSDAQ 150 Inclusion

By Sanghyun Park

Kakao Games is undergoing the second day of a well-anticipated correction.

It is now down -7.7% this morning. The current TV is already one fourth that of yesterday, which soared to ₩1.5tril, 25% of the market cap.

Again, as well expected, the foreign short-term IPO money has all left Kakao G. As of the previous close, the FO % was 0.59%, down by 2.04 percent point from 2.63%. Presumably, it is even lower now.

Date Close (₩) % TV TV (₩B) Local inst. Foreign FO FO %
2020.09.15 68,100 -7.72% 5,400,000 367.7
2020.09.14 73,800 -9.00% 20,213,705 1,491.8 -578,393 -999,063 428,995 0.59%
2020.09.11 81,100 29.97% 5,013,124 406.6 -786,093 -397,435 1,428,058 1.95%
2020.09.10 62,400 30.00% 561,750 35.1 -100,870 -99,289 1,825,493 2.49%
– Opening price 48,000 100.00% 1,924,782 2.63%
– IPO price 24,000
Source: KRX

At the current price, the PERs range from 63.4x to 85.2x on FY20E earnings (an EPS band of ₩800~1,074).

PERs/FY20E earnings (₩B) Earnings EPS Price PER
1H20 annualized 65.0 ₩858 ₩68,100 79.36
Hanwha 68.7 ₩907 ₩68,100 75.11
Daishin 81.4 ₩1,074 ₩68,100 63.39
Shinyoung 75.0 ₩990 ₩68,100 68.80
– Case 1 60.6 ₩800 ₩68,100 85.15
– Case 2 66.9 ₩883 ₩68,100 77.13
– Case 3 73.2 ₩966 ₩68,100 70.49
Source: DART, KRX, & HK Consensus
Consolidated (₩B) 2020E 2021E
Sales 505.0 557.5 610.0 602.0 738.0 874.0
– Existing lineup 400.0 400.0 400.0 300.0 300.0 300.0
– Guardian Tales 75.0 112.5 150.0 180.0 270.0 360.0
: Release date July 29, 2020
: Daily est. sales 0.50 0.75 1.00 0.50 0.75 1.00
– Elyon 30.0 45.0 60.0 72.0 108.0 144.0
: Release date November 1, 2020
: Daily est. sales 0.50 0.75 1.00 0.20 0.30 0.40
– Other 0.0 0.0 0.0 50.0 60.0 70.0
OP 70.7 78.1 85.4 84.3 103.3 122.4
NP 60.6 66.9 73.2 72.2 88.6 104.9
Post-IPO SO 75,768,385 75,768,385 75,768,385 75,768,385 75,768,385 75,768,385
EPS (₩) (Case 1) 800 (Case 2) 883 (Case 3) 966 953 1,169 1,384
P/E multiple 34.90 34.90 34.90 34.90 34.90 34.90
Target price (₩) 27,915 30,817 33,719 33,277 40,795 48,313
– Lower-end discount 28.35% 35.10% 40.69% 39.90% 50.97% 58.60%
– Upper-end discount 14.03% 22.12% 28.82% 27.88% 41.17% 50.32%
– OTC price discount -179.42% -153.10% -131.32% -134.40% -91.20% -61.45%
Source: DART

Even at today’s harshly corrected price, Kakao G still stands at Korea’s most expensive game stock as even the lower end of the PER range is higher than Netmarble, which is the second over-inflated game company.

PERs/FY20E earnings (₩B) Sales OP Earnings PER OPM NPM
Netmarble Corp 2,597.3 272.7 270.3 58.25 10.50% 10.41%
NCSoft Corp 2,561.9 947.5 733.9 24.56 36.98% 28.65%
PearlAbyss Corp 524.6 185.3 150.4 17.48 35.32% 28.67%
Com2uS Corp 513.8 128.6 121.0 12.97 25.03% 23.55%
WE MADE Co Ltd 121.4 6.4 13.8 46.87 5.27% 11.37%
Webzen Inc 257.7 79.4 63.2 21.04 30.81% 24.52%
Neowiz 296.0 67.8 58.5 11.01 22.91% 19.76%
Doubleu Games Co Ltd 662.8 204.5 145.0 9.41 30.85% 21.88%
Kakao Games Corp 557.5 78.1 66.9 74.52 14.00% 12.00%
Source: KRX & DART

TOPIX Inclusion Pre-Event Trade (3150 JP): Tachiaigai Bunbai Announced. It’s GREEN.

By Janaghan Jeyakumar, CFA

Gremz Inc (3150 JP) announced (J-only) a tachiaigai bunbai (equity offering) today stating that they intend to work towards achieving the Section Transfer requirements to move from TSE2 to TSE1. 

The shares for sale will be coming from controlling shareholder Masaomi Tanaka’s holdings.  

The Offering will place up to 878,000 shares with a maximum limit of 800 shares per buyer. The Offering is scheduled to take place from 25th September to 2nd October 2020. The Offer Price will be set at a discount to the last close prior to the Offer Date. Usually the Offer Date is the first day in the period.

As always, there is more below the fold. 


Hexaware Exit Offer Reverse Book Build Gets 90% & Discovered Price – Now We Wait

By Travis Lundy

Hexaware Technologies (HEXW IN) took it down to the wire. The Reverse Book Build got to the 90.0% threshold at a little past 2:30pm local time, and small shareholders continued putting in offers until 5pm local time. 

It looks, from a combination of the BSE data and NSE data that we have a Discovered Price. 

Now we wait. 

More comment below the fold. 


SET50 Index Rebalance Preview: Three Changes for Now, Could Be One More

By Brian Freitas

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in mid-December and the changes will be effective after the close of trading on 30 December.

The review period for market cap calculations runs from 1 September to 30 November, while the liquidity calculations run from 1 December 2019 to 30 November 2020.

We see three potential changes at the current time with an estimated one-way turnover for the rebalance at 1.75%.

We see a high probability of Bangkok Commercial Asset Management (BAM TB) being included in the SET50 index and of Thanachart Capital (TCAP TB) being deleted from the index.

There is a lower probability of Com7 PCL (COM7 TB) and CK Power PCL (CKP TB) being included in the index and of Banpu Power PCL (BPP TB) and WHA Corp Pcl (WHA TB) being excluded.

There is a chance that TTW Pcl (TTW TB) fails the liquidity test in which case it will be deleted from the index, and WHA Corp Pcl (WHA TB) stays in the index.

Sri Trang Agro Industry (STA TB) could make the cut for inclusion if its stock rallies in the next couple of weeks, while Sri Trang Gloves (STGT TB) is not eligible for index inclusion in this review since it does not have a long enough listing history.


Altice – Next Private Takeover Announcement

By Jesus Rodriguez Aguilar

  • Patrick Drahi, through Next Private has launched an agreed takeover offer for the 22.42% shares of Altice Nv A (ATC NA) he does not already own, with the aim of taking it private and delisting the company. The minimum acceptance level to achieve this is 95%.
  • The bid price represents 2.8x EV/NTM Revenue, 7.2x EV/NTM EBITDA and 23.8x EV/NTM EBIT (Capital IQ consensus). 
  • Altice is one of Europe’s biggest HY issuers, rated B by S&P.
  • The offer price takes advantage of the dismal performance of European telcos on the stock market following the onset of the Covid crisis. It is difficult to believe that shareholders will accept an offer below recent highs in February, and there are chances of an improved offer. Performance is improving at SFR (France), the company’s biggest subsidiary.
  • The shares are trading between EUR 4.15 and 4.12, with a close on Tuesday 15 of EUR 4.14, with a volume traded of c. EUR 24 mn.
  • I recommend using this price levels of EUR 4.12-4.15 as an entry point and holding out for an improved offer.

Before it’s here, it’s on Smartkarma

Event-Driven: Softbank Group, Oriental Watch, Nam Tai Property Inc, Citadel Group, Gift Inc, Sri Trang Gloves and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Softbank – Interpreting the Arm Sale
  • Oriental Watch (398 HK): Conditional Partial Offer
  • Nam Tai Property – An Interesting Activist Situation
  • Citadel Group: Private Equity Partners’ Offer
  • TOPIX Inclusion (9279 JP): Gift Inc
  • FTSE GEIS December 2020 – Potential IPO Inclusions

Softbank – Interpreting the Arm Sale

By Mio Kato

So the Arm sale is finally here, as is the $40bn that Softbank was looking for… sort of. We had commented previously that we felt Softbank’s mark for Arm was optimistic (this could be debated now but we actually feel this acquisition lends credence to this view), the acquisition would probably be heavy on the share component, and that exclusion of Arm’s IoT business from the deal would be a no-confidence vote from Nvidia and a repudiation of Son’s “Vision”. On the latter point we believe we were correct.


Oriental Watch (398 HK): Conditional Partial Offer

By David Blennerhassett

After Oriental Watch (398 HK) (“OWH”) was suspended “pursuant to the Codes on Takeovers and Mergers and Share Buy-backs“, the immediate takeaway was to conclude the company would be subject to a Privatization Offer. But in what is becoming increasingly more common, OWH has announced a partial buyback from the company – 14.55% of shares out or 83mn shares, at HK$3.00/share, a 53.85% premium to last close.

This will cost the company HK$0.25bn (US$32mn). OWH had net cash on hand of ~HK$0.65bn as at Mar 2020.

Yeung Ming Biu & concert parties hold 30.85% of shares out and will not tender. That leaves 69.15% of the register subject to the buyback, implying a minimum pro-ration of 21.04%.

Should the partial buyback complete (i.e. fully exercised) Yeung & concert parties will hold 36.10% of shares out, before the exercise of any outstanding share options. That step-up in %-held oversteps Hong Kong’s “creeper rule”, and therefore Independent Shareholders are required, by way of a special resolution (75% vote), to approve a whitewash waiver such that Wong is not obligated to make a general offer for shares not held. 

As always, more below the fold. Plus Ye Olde Arb Grids.  


Nam Tai Property – An Interesting Activist Situation

By Travis Lundy

Nam Tai Property Inc (NTP US) has been the stomping ground for a small US-based activist and a few other shareholders since last year with one shareholder IsZo Capital LP there as the top independent shareholder since 2017, and “public” since filing a 13G in February 2019. 

Nam Tai Property – founded in 1975 – was originally an electronics company based in Shenzhen. It changed its name to Nam Tai Property in 2014. It is listed, somewhat oddly, on the NYSE.

In May, IsZo Capital – which at the time owned 9.8% of shares out vs 6.68% at end-December – sent the company a letter which it also released to the public. IsZo was upset that Nam Tai was trading at only about US$4.05 at the time, which was a 70% decline since the share price in January 2018, 28 months earlier, when Kaisa Group Holdings (1638 HK) replaced the CEO with Ying Chi Kwok who was the younger brother of the CEO of Kaisa (and himself owns 13.8% of Kaisa). Kaisa had themselves bought in at just under US$17/share, paying CNY 750mm for 6.5mm shares held by then-lead shareholders Koo Ming Kown and Cho Sui Sin. They bought another 1.1mm shares in the quarter and then another 1.583mm in Q4 2017 to get to the current position of 9.191mm shares. That was 25.01% when they got there but ESOP plans have dropped that to 23.61% now.

Before the letter in May, IsZo had been rallying shareholders to its cause, and the register saw significant turnover, presumably towards shareholders friendly to the activist cause. The letter WAS on a website (https://fixntp.com) that IsZo put up but it is no longer there. 

The letter itself explained issues with Kaisa’s history and conflicted ownership and called on shareholders to reconstitute the Board and remove Kaisa insiders from leadership roles, proposing a slate. Another fund, Railroad Ranch Capital, wrote a letter in June 2020 supporting IsZo’s proposals. They said they owned 4.5% in shares and derivatives.

While this situation has been on my radar I haven’t done much with it. I take a brief look below the fold. 


Citadel Group: Private Equity Partners’ Offer

By David Blennerhassett

Canberra-based IT services outfit Citadel Group (CGL AU) (“CGL”) has entered into a Scheme with Private Equity Partners (PEP).

The unsolicited cash consideration of A$5.70/share is a 43.2% premium to the last close of A$3.98/share. A scrip alternative will be made available. The proposal values CGL’s equity at A$448.6mn  (US$327mn). 

It is the intention of CGL’s board to declare a fully franked special dividend of up to A$0.15/share on or shortly before the Scheme implementation date, which theoretically could enable some shareholders to receive up to A0.064/share additional benefit. The cash consideration will be reduced by the special dividend.

The fully franked final dividend of A$.06/share, to be paid on the 1 October – for those shareholders who were on the register as at 3 September – is also added.

Apart from standard Scheme shareholder approvals, the Offer has limited conditionality – it is not subject to due diligence nor any funding condition. 

Currently trading at a gross/annualised spread of 2.4%/9.4%, assuming mid-late December completion.

As always, more below the fold.


TOPIX Inclusion (9279 JP): Gift Inc

By Janaghan Jeyakumar, CFA

TSE Mothers-listed noodle restaurant chain Gift Inc (9279 JP) announced (J-only) on Friday after market close it had received approval to move to TSE1 as of 18th September 2020. 

TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th October 2020. 

In this insight, we take a look at the Index Inclusion Parameters and the Fundamentals of the company to evaluate the upside potential of the TOPIX Inclusion Event. 


FTSE GEIS December 2020 – Potential IPO Inclusions

By Brian Freitas

The FTSE Global Equity Index Series (GEIS) quarterly rebalance in December is used to include IPOs which did not qualify as an immediate fast entrant to the indices at the time of listing and were not listed for at least 3 months by the following semi-annual review to be included in the indices.

The results of the December 2020 quarterly review will be announced on 20 November and all changes will be effective after the close of trading on 18 December.

Based on current market prices, we see a high probability of Smoore International (6969 HK), SK Biopharmaceuticals (326030 KS), Hygeia Healthcare Group (6078 HK) and Sri Trang Gloves (STGT TB) being included in the FTSE All-World index.

Kangji Medical (9997 HK) and Mindspace Business Parks REIT (MBP IN) could be added to the All-World index if their stock prices increase by around 15% by 11 November, else they will be added to the FTSE All-Cap index.

There are a few other HK listed stocks that could be added to the FTSE All-Cap index: Akeso Biopharma Inc (9926 HK), Yeahka Limited (9923 HK), Archosaur Games (9990 HK) and Peijia Medical (9996 HK)


Before it’s here, it’s on Smartkarma

Event-Driven: Haier Electronics Group Co, Allcargo Logistics, Masmovil Ibercom and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Haier (1169 HK): Back To Entry Levels
  • Allcargo Logistics (AGLL IN): Indian Delisting Offer Trading Cheap
  • MásMóvil: End of Acceptance Period

Haier (1169 HK): Back To Entry Levels

By David Blennerhassett

On the 31 July, Haier Electronics Group Co (1169 HK) (HEG) announced a pre-conditional Scheme such that HEG shareholder will receive 1.6 new Haier Smart Home (600690 CH) (HSH) H shares plus HK$1.95 in cash. 

The pre-condition concerned approval from HSH’s shareholders and CSRC approval. The pre-conditions were fulfilled on the 1 September. The next step in this process is for HEG shareholders to vote on the Scheme. The despatch of the Scheme Doc has now been extended to the 30 November, from 4 September previously.

 A 632-page Application Proof for the listing of HSH H-shares has now been lodged. This will be a listing by introduction.

The question at the time of the Scheme announcement, as it is now – is where will the HSH (as yet unlisted) H-shares trade with respect to the HSH A-shares? 

An independent valuer backed out an indicative value under the Scheme of HK$31.11-HK$31.90 – or $31.51 at the mid-point. However, this was just a valuer’s opinion. There is no guarantee this is where the Hs will trade. 

The market is assigning around a 37% discount (HSH Hs vs. HSH As). Relative to a basket of liquid A/Hs and listed A/H peers, this is a level to get involved.

More below the fold.


Allcargo Logistics (AGLL IN): Indian Delisting Offer Trading Cheap

By Janaghan Jeyakumar, CFA

Here is another interesting delisting situation in India. 

On 24th August 2020, India-based integrated logistics company Allcargo Logistics (AGLL IN) announced they had received a “Delisting Proposal Letter” from members of its Promoter Group (Shashi Kiran Shetty and Talentos Entertainment Private Limited).

The Promoters collectively hold 172.0mn shares in Allcargo representing a 70.01% stake and the Offer will be made to acquire the remaining 73.7mn shares representing a 29.99% stake. At the current share price, this translates to a deal size of ~USD120mn. 

The Final Offer Price will be determined upon completion of the Reverse Book Building (RBB) process. Following the completion of the transaction, the Promoters will voluntarily delist the shares of Allcargo from BSE Limited and National Stock Exchange of India Limited.

In this insight, we will look at the upside potential of the event. 


MásMóvil: End of Acceptance Period

By Jesus Rodriguez Aguilar

  • On 10 September, Lorca Telecom Bidco SAU communicated to the CNMV that the offer had been accepted by more than 50% of the shares of Masmovil Ibercom (MAS SM) (therefore meeting the minimum accepance condition).
  • On 11 September ended the acceptance period of the takeover bid by Lorca Telecom Bidco SAU for Masmovil Ibercom (MAS SM) .
  • MásMóvil last closed at EUR 22.42
    • a gross spread of 0.35% to the takeover offer.
  • Using ten estimates, the mean target price on Capital IQ consensus is 25.5 per share.
  • Polygon sent a second letter to the CNMV with valuation details backing its assertions and refuting PwC’s valuation, on which the CNMV based its judgment that Lorca’s bid was fair.
    • In a nutshell, regarding the price offered, Polygon has expressed its “complete disagreement” with the content and conclusions of the valuation report published as an annex to the brochure and issued by PwC on July 24.
    • Polygon believes that the PwC valuation is at least “seven or eight euros below a fair offer” (i.e. in the neighbourhood of EUR 30).
  • I believe that Polygon is going to fight this one. A EUR 3 per share improvement would mean additional spending by Lorca of EUR 394 mn.
  • According to the takeover law, investors have three months from the end of the acceptance period to request that the company buy its shares at the same price at which the offer was made.
  • While it makes complete sense to cash in the chips, and I guess most institutionals would have done so, staying long and holding for an improved offer (with a 15% upside) does not look a foolish option either.

(Please, see timetable in the note)


Before it’s here, it’s on Smartkarma

Event-Driven: Aarti Drugs Ltd, Vedanta Ltd and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • India Small Caps: Position for Outperformance Vs Large & Mid Caps
  • Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

India Small Caps: Position for Outperformance Vs Large & Mid Caps

By Brian Freitas

Late Friday evening, the Securities and Exchange Board of India (SEBI) published a blandly titled ‘Circular on Asset Allocation of Multi Cap Funds‘. The implications of the circular, however, are not as bland and will result in a big shift in allocation among market cap segments in Indian mutual funds and drive trading activity over the next few months.

SEBI has now mandated that Mutual Fund schemes classified as ‘Multi Cap Funds’ need to invest a minimum of 75% of their total scheme assets in equities and equity related investments with a minimum 25% allocation to each segment: large caps, mid caps and small caps. Currently, the top 11 multi cap schemes by assets (making up 85% of total multi cap assets) hold 78% of their assets in large cap stocks, 16.6% in mid cap stocks, and only 5.4% in small cap stocks.

All Multi Cap funds have till the first week of February 2021 to meet the new requirements. While there will not be a big impact on large cap stocks, there could be a very big impact on small cap funds. The Nifty Smallcap 250 index has underperformed the Nifty 100 and the Nifty Midcap 150 index over the last year and could outperform over the next few months.


Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

By David Blennerhassett

Last Week in Event SPACE …

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

M&A – ASIA

Vedanta Ltd (VEDL IN) (Mkt Cap: $6.6bn; Liquidity: $31mn)

VEDR theoretically has until the third week of September to file with the Exchange in order to complete but that is playing it as unsafe as possible. Travis would not be surprised to see an Approval In-Principle this week or next. Then the timeline is fixed, and VERY short. There is US$3.15bn of funding taken down. US$1.75bn of that is very short-term. Another US$0.6-1.1bn should probably be taken down near-term in terms of a letter of credit against the syndicated loan VEDL has taken down this past week. If VEDR wants, it could relatively easily pay ₹200/share. 

  • There is a non-negligible possibility that Vedanta does not attract 90% of the shares (i.e. 80% of the minorities). There are a very large number of very small shareholders who together hold about 6.95% of shares out. They may abstain. There was 4.37% of shares out held in the American Depositary Receipts. They cannot participate. The rest is institutional shareholders who likely will participate. If retail participates to half, this just gets to 90%, but the price may be “too high”.
  • If VEDL proposes too low a price, this won’t get done. Investors can see the value. The Value Per VEDL share of the Hindustan Zinc holding is – as of Friday 4 Sep – ₹164 per Vedanta share. That gets you the rest of Vedanta for free. The rest of Vedanta produces more EBITDA than Hindustan Zinc does and has a book value of roughly ₹89/share (wholly coincidental to the “Book Value” proposed last week). 
  • VEDL is worth more than people think it is. If VEDR buys Hindustan Zinc from VEDL minorities at a 20% discount to market price despite zinc trading near 52-week highs and HZL cash costs trading lower than ever, and silver at 6-8yr highs, that means the rest of VEDL is currently trading for ZERO.  The trade is still to be long.  If you want to play it super safe, buy the ADS and convert to onshore shares.  As we trade higher, it makes more sense to have something of a sector hedge on, but it doesn’t make tremendous sense. This is quite binary. The deal gets done and you get taken out – most likely at a higher price. OR… It doesn’t get done, the price probably falls, and VEDL will still be cheap to peers. If the deal fails, THEN you put on your sector hedge.

(link to Travis Lundy‘s insight: Vedanta: Reaching The End Game)

Cardinal Resources Ltd (CDV CN) (Mkt Cap: $0.4bn; Liquidity: $2mn)

CDV announced that Shandong Gold Mining Co., Ltd. (1787 HK) intends to increase its Offer Price to A$1.00/share. This Offer remains subject to a minimum acceptance condition of 50.1%.  Shandong’s offer is a 118% premium to Nordgold’s initial proposal back in March, and 300% above the one-day undisturbed price. The price of gold is up ~30% since Nordgold’s March Offer. The key question is – how much more are Nordgold and Shandong willing to pay? A starting point is estimating the NPV of the Namdini Project. 

  • My back-of-the-napkin calculation suggests the IRR was 24% at the time of Nordgold’s initial Offer. If using the current gold price, I estimate Shandong/Nordgold could theoretically pay up to A$1.25/share, assuming an IRR of 24% is desired. This is VERY sensitive to gold prices. 
  • If you are already in, then ride out the end game of this competitive bidding situation.  I believe any subsequent bidding increments will be in the order of 10% or single digits from here, should they unfold. There may be more to come, but a 194% premium to the 20-day VWAP to 13 March 2020, currently Shandong’s Offer, is full. And I question whether Nordgold can accept a lower IRR than SOE-backed Shandong.  Nordgold has extended its Offer to the 24 September. 

(link to my insight: Cardinal Resources (CDV AU): Shandong Trumps Nordgold’s Knockout Offer)

Capitaland Commercial Trust (CCT SP)  (Mkt Cap: $4.8bn; Liquidity: $14mn)

The original recommendation to be short Capitaland Mall Trust (CT SP) (“CMT”) or short CMT vs the rest of the S-REIT sector has worked well, with about 10-11% outperformance including dividends in the intervening 7+ months against the average basket of other S-REITs.

  • The Eight Deal-Related Documents released 4 Sep are linked here and here.  The approvals should be easy. It depends on the retail shareholders of CCT more than anything else, and they have been offered a DPU uplift. In all likelihood they say yes.  The vote will be here in just over 3 weeks, then we wait for the Court. This should be done by 6-7 weeks from now and CCT shareholders should get their cash and new shares in CMT in 7+ weeks (28 Oct). 
  • At this point, it is less interesting to go short, vs the comps, and with the variability and volatility of reopening and crowd uptake post COVID lockdowns, I am less convinced I know the right trade going forward. Travis’ inclination is to cover the CMT or CCT short vs the rest of the sector and reconsider.  While he would not consider myself BULLISH per se, the right way to label something where one is closing out a short or BEARISH trade is to say BULLISH, so this is labeled Bullish. 

(link to Travis’ insight: Capitaland Mall and CCT Merger: Circular Finally Out. Looks Done)

OptiComm Ltd (OPC AU)  (Mkt Cap: $0.4bn; Liquidity: $1mn)

Back on the 15 June, Adelaide-based outfit Uniti Group Ltd (UWL AU) tabled a cash/scrip Offer by way of a Scheme for fiber network operator OPC.  The consideration price under the Scheme was A$5.20/share, including a fully-franked $0.10/share dividend. The Offer appeared more than fair, and has largely traded around terms. The Scheme Booklet was registered with ASIC on the 7 August and a Scheme Meeting convened for the 10 September.  But on the 28 August, OPC responded to media speculation regarding a  potential alternative suitor. OPC said it has not received any competing proposal, nor has it been made aware of interest from any other party.

  • OPC has now announced it had received a non-binding and conditional competing proposal, by way of a Scheme, from First State Superannuation (FSS). The cash consideration under this competing proposal – which is subject to allowing FSS due diligence – is A$5.85/share, a 12.5% premium to Uniti’s Scheme price of A$5.20 under its all-cash consideration alternative (ignoring the potential scale-back). Not surprisingly, the Scheme Meeting has been postponed.
  • If successful, this would be the first privatisation where a super fund has stumped up 100% equity. It is also the first time a super fund is bidding on its own without an investment manager. Ironically, Uniti acquired LBNCo from a consortium comprising ROC Partners (a Sydney-based investment manager) and FSS last August. FSS is not a shareholder in either OPC or Uniti. 

  • Because of the value premium, OPC has given FSS limited due diligence – in line with that provided to Uniti – up until the 18 September, or 10 days all-in. FSS is requested to submit a binding proposal no later than the 18 September.  Uniti’s shares tanked 9.4% on FSS’s intervention. As Uniti’s Offer comprises scrip, this makes it more challenging for Uniti to compete with FSS. Trading tight. Given FSS’ last-minute intervention, and the unprecedented “go-it-alone-by-a-super-fund” proposal, on balance, a firm Offer is likely to unfold.

(link to my insight: OptiComm: First State Gatecrashes Uniti’s Offer)

Japan Retail Fund Investment (8953 JP) (Mkt Cap: $3.7bn; Liquidity: $24mn)

On 28th August 2020, J-REITs JRF and Mcubs Midcity Investment Cor (3227 JP) (“MMI”) announced an absorption-type Merger which is expected to form the largest diversified J-REIT based on current asset values. JRF will be the surviving corporation and MMI will be the dissolving corporation in the merger. The newly formed combined entity will be named Japan Metropolitan Fund Investment Corporation (JMF). The exchange ratio for the transaction has been set at 0.5 JRF Shares per MMI Share.  The Deal is conditional on receiving approval from the shareholders of both the Target and the Acquirer. Both shareholder meetings are expected to take place in October 2020 and the Deal is expected to complete in March 2021. 

  • The Deal seems to be reasonable for both parties. JRF has been looking to reduce their retail exposure. MMI shareholders are expected to experience strong DPU accretion following the completion of the merger according to official estimates.  Diversified REITs currently garner a better price/NAV multiple than do Retail Sector REITs.
  • The Deal requires approval from both MMI and JRF shareholders representing at least a two-thirds majority of the votes of the attending unitholders with the unitholders in attendance holding over half of the units outstanding. Considering the friendly nature of the transaction and the benefits of the Deal to either party, Janaghan Jeyakumar expects both sets of shareholders to vote in favour. 
  • Both MMI and JRF are currently trading at PBV multiples that are well below the peer average. The combined entity is expected to be the largest J-REIT by asset value. Considering this size factor and the benefits of a more-diversified asset composition post-merger, there is good reason to expect the combined entity to enjoy a PBV multiple that is at least as high as the average for Diversified J-REITs. Janaghan recommends going long JRF vs a diversified basket of large REITs.

(link to Janaghan’s insight: MCUBS Midcity (3227 JP): Scrip Deal Trading Tight But There’s a BETTER Trade)

Yuanshengtai Dairy Farm (1431 HK) (Mkt Cap: $0.4bn; Liquidity: $1mn)

YST announced the previous weekend a conditional voluntary general offer from China Feihe (6186 HK). The Offer Consideration is HK$0.63/share, a 1.6% premium to last close, and a 39.4% premium to the 90-day average close. The Offer price is final. The Offer has a low 50% acceptance condition. All other conditions can be waived. Feihe currently holds no shares in YST. No irrevocable commitments have been tabled.

  • It is surprising there are no irrevocables. This Offer will be difficult to get up if Zhao Hongliang (Chairman, 28.17% of shares out) does not tender. My bet is that he will tender in all or some of his shares such that Feihe gets over the 50% threshold – or when Feihe is close to the 50% threshold. 
  • No dividend has been declared. If a dividend was paid, it would be netted off the offer price.
  • You have a hard floor near-term. I would buy just below terms. This may well trade through terms on the expectation of closer ties with Feihe. But again this is not a terribly liquid arb situation.

Hinokiya Holdings (1413 JP)(Mkt Cap: $0.2bn; Liquidity: $1mn)

Yamada Denki (9831 JP), Japan’s largest electronics retailer, well-known for running large and shiny stores with more aisle space than the more aggressive electronics retailers like Bic and Yodobashi in urban areas, has agreed to buy 45.6-50.1% of Tokyo-based custom homebuilder  Hinokiya from the founder and his relatives in a Partial Tender Offer at ¥2,000/share which is ~12% premium to last. The price comes out to 4.5x EBITDA, 10x PER, and 1.3x book. It isn’t very impressive as a price

  • This deal appears odd, but it is less odd than you’d think. When houses get built, they get furnished with new TVs, kitchen equipment, furniture, etc. Yamada Denki sells a lot of that. And if you wanted to build your new house with all the modcons and wired to the rafters with ethernet, wifi, etc., you might want to have a house built in collaboration with someone who knew how to execute on a wired home. It isn’t necessary for a home builder to tie up with an electronics retailer, but I’ve seen worse ideas. 
  • For long onlies, if you like the stock, it will suddenly get a LOT more liquid (relatively speaking) around the Tender Offer price. That would be a time to buy more shares if you liked the company and were looking for liquidity.  For arbs, a priori Travis expects the trade is to buy shares at a few percent discount and tender them. If you can borrow shares, you can play the ex-date fall as well, but now that it is only two days, there isn’t much room to play that. There is every possibility that this trades illiquidly.

(link to Travis Lundy‘s insights: Yamada Denki Partial TOB For Hinokiya (1413 JP) & Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation)

Changshouhua Food (1006 HK) (Mkt Cap: $0.3bn; Liquidity: <$1mn)

After entering a trading halt on the 3 September “pursuant to the Hong Kong Code on Takeovers and Mergers”, CFC announced a privatisation by way of a Scheme. The Cancellation price of HK$4.19/share is a 16.4% premium to last close, but a 43.2% and 64.1% premium over the average closing price on a 30-day and 60-day basis. The price is Final. No dividends are expected to be paid. Optically, the offer is pitched at a key resistance level over the past four and a half years. It is also a 104% premium to its YTD low of HK$2.05/share on the 29 June. 

  • The Offeror, holding 52.14% of shares out, is a wholly-owned subsidiary of Sanxing Group. Independent Shareholders hold 46.82% of shares out.  Typical Scheme conditions apply: at least 75% of Independent Shares FOR & not more than 10% of ALL Independent Shares against. Therefore the blocking stake is 4.682% of shares out, or 26.85mn shares. Two shareholders have sufficient shares to block the vote – one has been a passive investor for almost five years; the other, FIL, was selling earlier this month at $3.50. The headcount test applies as CFC is Cayman incorporated. 
  • As at 30 June 2020, CFC had net cash of HK$2bn. It’s a self-funding deal for the Offeror. Almost 100% of the market cap prior to this Scheme announcement, and 83% of the market cap under the Offer. In effect, you are getting the edible oil business for free.   That simply indicates this Offer price is wrong. But CFC has perennially traded cheap to its net cash and business ops. 
  • The Offer price appears sufficient to get this deal up. Trading at a gross/annualised return of 4.5%/17.6%, reflecting the shareholder vote risk. And the fact this is arguably the wrong price. I’d buy here – although it’s not a particularly liquid arb situation.

Kirindo Holdings (3194 JP) (Mkt Cap: $0.4bn; Liquidity: $2mn)

Bain and the founding family (founder and son) are going to own the company via a Tender Offer. Currently, the founder and son own 11.2%. The founder is tendering a small bit, his company is tendering its shares, the family is tendering a lot more (or agreeing to sell afterward). The founder and his will own 10.1% of the shares out post-deal and that will get them 40% of the ownership of the Buyout Entity. Bain will own the other 60%.  This is yet another slightly offensively cheap MBO. Investors need to understand this will only continue. There are very specific reasons why this kind of structure works for inheritance/estate and succession planning. I expect this trend to only accelerate from here.

  • It is at a 39% premium to “undisturbed” and the price is just off a lifetime high close. That is painting the best picture there is for this deal.  The Cash Flow Return on Equity Check here is very, very high. The implied IRR to the buyers is VERY, VERY high. Some people may get upset.  Is it fairly priced? No.  Can they block it? Probably not. That would be difficult. 
  • This will trade very tight. Travis would buy just below terms. Someone might get upset and try to push for a bump a la Nichii Gakkan. That had a similar goal and similarly offensively high purchaser IRR. It also had weak governance and weak adherence to the METI Fair M&A Guidelines.  Travis doubts this one has the room for a bump though. Someone would have to be aggressive and public quickly. I simply think a block here is difficult. Not numerically impossible, but difficult. 

Allied Properties (H.K.) (56 HK) 

Back on the 20 April, Allied Group Limited (373 HK) (AGL) made an Offer for 75%-held APH, by way of a Scheme, at $1.92/share (cash), a 34.2% premium to last close. The Offer consideration was Final, and would be split between a $0.42/share Scheme Consideration and a $1.50 Scheme Dividend.  The Scheme Doc was despatched on the 19 June. The Court Meeting was held on the 15 July and the resolutions to approve the Scheme was approved. Shares continue to trade until the 14 August (inclusive). Cheques were supposed to be despatched on or before the 8 Sept. Then something went awry. 

  • The sanctioning of the Scheme has now thrice been delayed by the High Court. At the last session on the 7 September, submissions from APL were made to the Court “whether the Scheme was approved by a majority in a number of APL Shareholders present and voting in person or by proxy at the Court Meeting“. Huh? The headcount test doesn’t apply to Hong Kong-incorporated companies like APH.
  • What’s going on? The short answer is – I don’t know. Deferring the hearing thrice would suggest, to me, something was “off”. Perhaps the SFC received a complaint of voting irregularities or hidden controller-votes in the float? 
  • I assume all is okay and sanctioning will be forthcoming within a week or so, pushing the payment date out to late September. It is probably a tad premature to start making a grey market in APH …

(link to my insight: Allied Props (56 HK). Stalled At The Finish)

Hexaware Technologies (HEXW IN) (Mkt Cap: $1.7bn; Liquidity: $6mn)

On 3 September, Hexaware announced that the Exchange had granted In-Principle Approval the day before. Hexaware’s Public Announcement went out on the 3rd.  The completion of the Despatch of the Offer Letter was announced on 6 September. The Reverse Book Build Auction will open on the 9th of September and close on the 15th.  The last possible day to announce a counter-offer would be the 17th of September. Settlement would be expected to be the 29 September. 

  • The Reverse Book Build Auction is about to start and while share prices have gained over the last three months since the announcement, seen against 31 December 2019, or against the last quarter or half of 2019, or against the past three years, Hexaware shares have not outperformed its peers despite the possibility of a takeout. 
  • On a fundamental basis, Hexaware is not over-priced compared to its peers, local or global.  To get to the same average or median price/EV metric, Hexaware’s price would need to be 13-22% higher (i.e. INR 460-496). To get to a 20% premium to comps, it would have to be INR 550-595.  To get to a”healthy” Exit Multiple (say 2.4x Revenue, 14x EV/NTM EBITDA, or 22x PER) would mean getting to INR 500+/share. 
  • Travis thinks there is upside. He’d still be long and I’d buy more. You have a few days. On a fundamental basis, he does not see a lot of downside warranted. The stock has not materially outperformed its peers on price, or underperformed its peers in earnings growth expectations.

(link to Travis’ insight: Hexaware Technologies Reverse Book Build Auction – It’s On)

In Daelim Industrial Divestiture: Terms & Trading Situations (1P Diversion), Sanghyun Park discusses Daelim Industrial (000210 KS)‘s three-way demerger plan.

Doosan Heavy Industries & Construction (034020 KS) announced a major rights offering worth ₩1.3tn ($1.1bn), representing 32% of its total market cap of ₩4.1tn. The expected rights offering price of Doosan Heavy Industries is ₩10,700 , which is 34% lower than the current price of ₩16,100. The expected rights offering price of Doosan Fuel Cell is ₩34,200 , which is 42% lower than the current price of ₩59,300 . More info in Douglas Kim‘s insight: Doosan Heavy Industries & Doosan Fuel Cell (Rights Offerings of $1.1bn & $0.3bn).

Sembcorp Marine (SMM SP) reported the Results of the Rights Issue.  Sembcorp Industries (SCI SP) shareholders are going to get a lot of it. Today Sembcorp Industries confirmed the distribution to be 4.911 shares per 1 share of Sembcorp Industries held (subject to minor rounding differentials). Former minority owners of SMM get 11.7% of the company.  SCI minorities get 35.3%.  Other punters who bought the SMM shares get 10.0% of the company. Together, those who wanted to own new shares and put their money down total about 18% of the company. The rest own it because they owned it before and hadn’t sold, or get it from SCI. SCI at S$1.92/share is CHEAP. The SMM Rights Shares started trading on 11 September. Link to Travis’ insight: Sembcorp Marine Rights Issue Results : Looks Like a Scheme of Introduction

STUBS

I see the HSBC NAV discount at ~53% – a one-year low – versus the 12-month average of 35%. I’ve simply de-consolidated Hang Seng, and netted off associates (Bank Of Communications Co H (3328 HK) and Saudi British Bank (SABB AB) ) to arrive at my stub ops. It’s not a strong stub – the stake in Hang Seng accounts for 21% of HSBC’s market cap.  But the long-term implied stub (netting all listco investments) to de-consolidated/net book is at a multi-year low of 0.38x. vs the long-term average of 0.85x.

  • Political neutrality is a delicate line to walk, with allegations concerning  Huawei, US-China tensions, and Hong Kong’s new security law, all adding to a “challenging situation”  as HSBC’s Chairman Noel Quinn put it – plus the added fallout from COVID-19 and the cessation of the 4Q20 dividend as directed by the BoE.
  • HSBC reports ~50% of revenue from Asia, ~30% from Europe, and ~10% from North America. But HSBC makes in excess of 90% of its profits from Asia, especially from Hong Kong. Perhaps HSBC should be broken up, enabling HSBC to return to its root and focus on HK, China & Asia, and take on the slogan “Asia’s Local Bank”. 
  • From a fundamental angle, HSBC appears to have overshot to the downside. Since the stock market low in late March of this year, the market is assigning HK$232bn (US$29.7bn) LESS for HSBC’s unlisted stub ops. HSBC looks cheap here – I see 35% upside if bringing the implied stub level back to the 12-month average. 

(link to my insight: StubWorld: Walking The Fine Line With HSBC

Intouch Holdings PCL (INTUCH-R TB) / Advanced Info Service PCL (ADVANC TB) 

Athaporn Arayasantiparb looks into Intouch Holdings (INTUCH TB), ex-Advanced Info Service (ADVANC TB). After all, Intouch owns Invent, the largest venture capital firm in Thailand. Reality Check XXVI: How Much Are the Other Intuch VC Investments Worth?

M&A – EUROPE/UK

Tiffany & Co (TIF US) (Mkt Cap: $13.9bn; Liquidity: $185mn)

In a very brief press release, LVMH said it will not be able to complete the Tiffany acquisition, in compliance with a directive from the French European and Foreign Affairs Minister to defer the merger. LVMH also said Tiffany had undergone a Material Adverse Affect (MAE). In a strongly-worded, detailed response, Tiffany said it has no choice but to file a lawsuit to enforce the Merger. LVMH said it would lodge its own lawsuit. But, oddly, will still lodge its EU submission. 

  • There are some fighting words on both sides of the Atlantic. Did LVMH procure the letter? Was the letter a directive or advice?  Doesn’t the US tariff sanctions have zero bearings on LVMH – in fact, buying Tiffany would help it to diversify its geographic footprint? Can a pandemic trigger an MAE? WAs LVMH in non-compliance with respect to antitrust filings?
  • The MAE is somewhat opaque and open to interpretation – which is why MAEs are not often triggered, and considered watertight without a specific carve-out to hang your hat on. It is not at all clear the merger can be unwound by LVMH due to the pandemic. Clearly Tiffany believes there is no force majeure. And unlike in Metlifecare Ltd (MET NZ), where the target had a strong hand but opted to compromise to expedite proceedings, LVMH/Tiffany is a much bigger deal, one in which Tiffany is unlikely to concede/negotiate.  
  • The Trade?  I like Tiffany’s chances of getting this deal back on track. And at the full Offer price of US$135/share. I recommended getting involved at US$114/share.

(link to my insight: LVMH/Tiffany: In The Rough. Acts of God and Legal Restraint)

CaixaBank SA (CABK SM) and Bankia SA (BKIA SM)  announced that they were having conversations with the aim to merge both financial institutions (link to Bankia release). Due-diligence is being carried out. Both entities have recent experience in integration processes (CaixaBank acquired Banca Cívica and Banco de Valencia, whilst Bankia acquired Baco Mare Nostrum, and prior to that, CajaMadrid acquired Bancaja). This operation is in a fact a takeover of Bankia by CaixaBank. The operation has the blessings of the Bank of Spain, the European Central Bank and the Spanish Government. The parties are currently negotiating this ratio and the takeover premium for Bankia’s shareholders. More info in Jesus’ insight CaixaBank – Bankia Negotiations:La Caixa, Approvals, Badwill, Exchange Ratio and Synergies.

SIX Group has now communicated it had reached 95.315% of Bolsas Y Mercados Espanoles Sh (BME SM)‘s shares. SIX will now ask the suspension of trading of BME’s shares to occur after closing on 14 September and will squeeze-out the remaining shares on 14 September (at EUR 32.98 per share).More info in Jesus’ insight Bolsas Y Mercados – SIX Group: Squeeze-Out.

In  IAG’s Jumbo Rights Issue Takes Off, Jesus Rodriguez Aguilar discusses International Consolidated Airlines Group (IAG LN)‘s rights which were approved at the AGM on 8 September. The funds -EUR 2,741 mn (GBP 2,491 mn), c. 63% of its current market capitalisation – will be used to strengthen the balance sheet and reduce debt (increasing for solvency). This approach rules out state aid, as has happened with Lufthansa or KLM-AirFrance. Qatar Airways (25.1% holding), has irrevocably undertaken to subscribe for its pro-rata entitlement. The right issue would be expected to be completed by the end of September.

TOPIX INCLUSIONS!

Medpeer Inc (6095 JP)(Mkt Cap: $0.9bn; Liquidity: $36mn)

TSE Mothers-listed Medpeer announced (J-only) after market close today it had received approval to move to TSE1 as of 15th September 2020.  TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th October 2020. 

  • On both LTM and NTM bases, Medpeer’s EV/Revenue, EV/EBITDA, and PER multiples are much higher than the estimated means and medians for a selected group of peers which included other companies operating similar knowledge-sharing platforms.  More importantly, in its full-year presentation in December 2019, the company set a target to reach a market capitalization of over JPY50bn in FY09/20. At present, the company’s market cap is ¥96bn – almost double. This seems like a good reason to be cautious. 
  • Pure “TOPIX-Inclusion” Trade – AVOID: This seems like very low-impact event and although this event might have not been highly anticipated (due to long listed history and a lack of pre-event signals such as equity offerings) Janaghan feels the stock has overheated in recent months. 
  • Long-term Fundamental Angle – Bullish on prospects: Although Janaghan is not particularly excited by the TOPIX Inclusion event, he feels the business model is quite interesting. In the long term, stocks with comparatively larger market cap and better liquidity (than typical TSE1 promotion candidates) like MedPeer are also more likely to attract more analyst coverage and/or investor attention. At Forward EV/EBITDA of 50+x, this is “cheap” compared to its largest competitor M3 Inc (2413 JP) which trades at 80x. This is a covid-19 residual effect and it is not clear that is anywhere near the right price, HOWEVER, stocks like these can go from super-expensive to even more expensive on sentiment.

(link to Janaghan’s insight: TOPIX Inclusion (6095 JP): MedPeer Inc)

TSE’s LISTING CRITERIA REVISION

The only really important thing for the vast majority of institutional investors in Japan is how it changes the listing requirements for TSE1. Most people will not care about the listing requirements for MOTHERS and small caps loosening, or the governance hurdles going up. Those are generally salutary.
  • Travis expects the public comment to come up with little new or of note. 
  • He expects the only major change would be to clarify that Continuing Listing Requirements might be different from Initial Listing Requirements. It would not make much sense to exempt large companies from getting demoted immediately if they have negative equity in one year. That usually requires a “special loss” of some magnitude. Getting back that loss so that one meets the two-year requirement of JPY 2.5bn in profit over two years seems like a tall order, unless there is a grace period. Even with a grace period, it seems odd to allow grace periods which are then broken, then another grace period is applied, then met, then broken again… 
  • Unaddressed in this is the TSE’s ability to create derivatives on the TSE STANDARD section which will be important. Access to the style bias itself would be highly valuable, and the ability to create borrow baskets would be quite important. 
  • Longer-term the really big change will be the availability of borrow in what are currently the bottom 1000 or so names in TOPIX. 

PAIRS

In Japanese Household Goods Pair Trade: Let The Lion Pounce As The Pigeon Lands, Oshadhi Kumarasiri concludes that all things considered, with a target Pigeon Corp (7956 JP)/ Lion Corp (4912 JP) price ratio of 1.7x, a Long Short pair trade between Lion and Pigeon could yield about 30% in market-neutral returns.

INDEX REBALS

Sensex Index Rebalance Preview. At the current time, Brian Freitas see a high probability of Dr. Reddy’S Laboratories (DRRD IN) being included in the index, and of Oil & Natural Gas Corp (ONGC IN) being deleted. Depending on movements in the stock price from now to end October, Britannia Industries (BRIT IN) could also be included in the index, while Tata Steel Ltd (TATA IN) could be deleted.  Sensex Index Rebalance Preview: Early Look Sees One Change, Maybe Two

China STAR Board. If the market participants and FTSE  Russell choose to include the STAR market stocks into the indices, Brian sees around 76 of the 170 STAR Board listed stocks being included in the FTSE Emerging Market All Cap China A Inclusion Index. We do not see any stocks making the cut to be included in the FTSE China A50 Index (XIN9I INDEX) in the December review, but Ant Financial (1051260D CH) could be included in the index in the March 2021 review if it lists prior to 20 November this year. China STAR Board: Potential Inclusion in FTSE EM and China A50 Indices; GEIS Inclusion Needs Connect

OTHER M&A & EVENT UPDATES

CCASS

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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

33.56%
Yuet Sheung
Sinopac
Golden Throat (6896 HK)
17.43%
BNP
HSBC
21.41%
Haitong
Outside CCASS
23.98%
CIS
Morton
32.78%
Citi
China Merch
Time Intercom (1729 HK)
10.00%
Xin Yogan
China Ind
29.99%
Chong Hing
Get Nice
10.00%
Soochow
Outside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

29.76%
BNP
Outside CCASS
17.26%
ML
Outside CCASS
Jianzhong (589 HK)
10.67%
China Ind
Outside CCASS
China New Energy (1156 HK)
16.82%
Silverbricks
Outside CCASS
Macau E&M (1408 HK)
11.89%
Kingkey
Outside CCASS
11.17%
HSBC
CCB
Source: HKEx

Before it’s here, it’s on Smartkarma

Event-Driven: Healthcare Merger Corp, Asiana Airlines and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • MergerTalk: Healthcare Merger/SOC Telemed-Why This Deal Can Join The Exclusive SPAC Winners Club
  • HDC Hyundai Development Gives Up on the Asiana Airlines Acquisition – Privatization on the Way?

MergerTalk: Healthcare Merger/SOC Telemed-Why This Deal Can Join The Exclusive SPAC Winners Club

By Robert Sassoon

SPAC Healthcare Merger Corp (HCCO US) ‘s pending merger with SOC Telemed, a leader in high acute telemedicine looks like another good wave to catch by SPAC investors. As we highlighted in our Insight published on September 3, 2020 – MergerTalk: SPACs May Have Become The Hot New Trend, But SPAC Investment Requires A Health Warning – the majority of these SPAC merger transactions have turned out to be poor investments. In that piece, we argued for selectivity and caution.  Of the winners, it appears that investors are most excited about transactions in “emerging” trends such as green mobility or pandemic resistant areas such as online gaming and packaged/healthy foods. We would add the Telehealth industry as another emerging trend that has garnered investor enthusiasm this year.

While we have seen a couple of successful direct Telehealth IPOs this year, and a sizeable and high priced merger transaction in the sector  involving Teladoc Health, Inc. (TDOC US) and  Livongo Health Inc (LVGO US), the pending HCCO/SOC Telemed merger is the first of its kind in the SPAC investment space.  We believe that this somewhat differentiated Telehealth situation has the ingredients to join the exclusive club of winning SPAC related transactions. We detail our case for HCCO/SOC Telemed  as an attractive investment proposition below.


HDC Hyundai Development Gives Up on the Asiana Airlines Acquisition – Privatization on the Way?

By Douglas Kim

It was announced after the market close on Friday that HDC Hyundai Development Co-Engineering & Construction (294870 KS) has finally given up on its intentions to acquire Asiana Airlines (020560 KS), the second-largest airliner in Korea. Back in December 2019, HDC Hyundai Development initially agreed to acquire a 30.8% stake in Asiana Airlines, as well as new shares to be issued, and its affiliates for 2.5 trillion won (US$2.1 billion).

Following the cancellation of this M&A deal, the financial regulators approved a capital injection of 2.4 trillion won into Asiana Airlines to keep the company alive. The KDB and the Eximbank have already injected a combined 3.3 trillion won, including 1.7 trillion won this year, into Asiana Airlines in the past two years. HDC Hyundai Development paid 250 billion won in a down payment of this M&A deal. The company will file a lawsuit to recover part of this down payment but it is unlikely to recover them, in our view. 

The bottom line is that Asiana Airlines currently has a market cap of 0.9 trillion won and there is a looming probability of the creditors requesting for much bigger control of the company in return for 2.4 trillion won which could result in a sharp decline in the share price of Asiana Airlines in the coming weeks. 


Before it’s here, it’s on Smartkarma

Event-Driven: Ant Financial, Softbank Group, Yukiguni Maitake, Tiffany & Co, Allied Properties (H.K.), Lvmh Moet Hennessy Louis Vuitton, Kirindo Holdings, Big Hit Entertainment, International Consolidated Airlines Group, Hinokiya Holdings and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Ant Group – Index Inclusion Possibilities & Timeline
  • Softbank Group – Funding Secured by Masayoshi Musk?
  • The TSE’s Listing Criteria Revisions – Part I
  • LVMH/Tiffany: In The Rough. Acts of God and Legal Restraint
  • Allied Props (56 HK). Stalled At The Finish
  • LVMH-Tiffany: Oh Bernie, Not like This.
  • Kirindo (3194) – Another Cheap Bain MBO With Weak Adherence to Fair M&A Guidelines
  • Big Hit Entertainment IPO – Dynamite and Index Fast Entry Possibilities
  • IAG’s Jumbo Rights Issue Takes Off
  • Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation

Ant Group – Index Inclusion Possibilities & Timeline

By Brian Freitas

Ant Financial (1051260D CH) is looking to complete a dual listing on the Shanghai Stock Exchange’s STAR Market and the HKEX (388 HK). Media reports have indicated that the company is looking to raise US$30bn, with US$20bn being raised in China on the STAR Market and US$10bn in Hong Kong. In a filing, Ant said that it plans to sell no less than 10% of its enlarged share capital.

FTSE has started a market consultation to include the STAR Market to the list of eligible market segments within the non Stock Connect indices, and to introduce Fast Entry rules for China A-shares listed on the STAR Market where there are no pricing limits for the first 5 trading days.

In this Insight, we take a look at the timeline for inclusion of the A-shares and the H-shares in various indices and what it would take for the HK listed line to be included in the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX)


Softbank Group – Funding Secured by Masayoshi Musk?

By Mio Kato

The Japanese language Nikkei had an article out yesterday after the close discussing the possibility of a Softbank MBO. Of course, with Softbank you really never know, but to us this smells like an attempt to drive a short squeeze. We discuss why below.


The TSE’s Listing Criteria Revisions – Part I

By Travis Lundy

In late July, the Tokyo Stock Exchange issued Revisions to Listing Rules to Enhance Functions for Raising Funds through the Capital Market. 

The Revisions To The Rules

Document Language
Main Document Source Pages English, Japanese
Presentation English , Japanese
Details English , Japanese
Disclosure related to Business Matters & Growth Potential Preparations (Provisional Version) – MOTHERS-related Japanese

The presentation is the most useful of the documents. 

The presentation starts with something ubiquitously covid-19-related. This covid aspect is, of course, hogwash. 

As the Covid-19 outbreak severely impacts business activities and corporate performance, Tokyo Stock Exchange, Inc. (TSE) recognizes the urgent need to enhance capital market’s functions for companies raising funds in the market, thereby facilitating a swift recovery in the Japanese economy and sustained growth while strengthening the soundness of the market.

This announcement was made with an eye towards the planned equity market restructuring (as previously discussed in insights linked below) in order to re-define listing criteria for each of the three major future sections (A “blue chip” section, a “growth” section, and an “everyone else” section. This was principally RE-announced (because the content is the same as the 21 February announcement) to announce the beginning of the public comment period.

The major revisions are: 

  1. For the First Section (the “blue chip” section): raise minimum market cap, float market cap hurdle, net assets, and profitability hurdle, but lower the minimum number of shareholders, and, relax the criteria for large companies to not get demoted to TSE2 or delisted if the company goes to negative net worth (avoid automatic demotion of Sharp and Toshiba). [note that there are other enhancements in the cash market restructuring designed to garner further approval from international/domestic institutional investors with regard to improvements in governance, etc, for future “blue chip” section companies]
  2. For MOTHERS (the “growth” section): loosen listing criteria (accept even smaller companies with even fewer shareholders. “Improve shareholder confidence through enriching the disclosure system for business plans.”
  3. For TSE2/JASDAQ Standard (the “Everybody Else” section):  standardize listing criteria so that all of the relevant sections have the same criteria (because in the cash market restructuring they will become one), relax TSE criteria to be more like JASDAQ criteria (lower minimum float, lower minimum market cap, lower minimum #shareholders, lower minimum business performance before listing, etc, and then a requirement that JASDAQ-listed stocks adopt the corporate governance code. 

None of these changes are terribly ground-shaking at first glance. And the information was almost completely unchanged from the Overview of the Market Structure Review Outline of the New Market Segments published in February this year. 

  • It will make it possible to have less-liquid stocks all across the spectrum, but all stocks will start to comply with the corporate governance and reporting requirements of the main board.
  • Eventually, with the launch of the restructured market sections, there will be enhanced corporate governance, and there may be a revamped stock index to replace TOPIX, or TOPIX may be re-jigged.
  • Either way I expect that it will not be hugely consequential for years to come. I expect that a new index to replace the equivalent of TOPIX Small will be implemented to allow the transfer of capital into smallcaps – i.e. something akin to a Russell 2000 – which major domestic passive managers will be urged to use with a small allocation to it as they rotate to something like TOPIX Prime which only has large caps.
  • Foreign investors who currently use a large cap universe such as MSCI will not see any good reason to switch to the new TOPIX PRIME Index.
  • Done right, there will be revisions to the index futures, dividend futures, index options, etc products. 
  • Done REALLY right, there will be structured buybacks by companies leaving the indices in phased stages.

But this does create some near-term “issues” for TOPIX and those companies which would try to get in. More discussion below.


LVMH/Tiffany: In The Rough. Acts of God and Legal Restraint

By David Blennerhassett

Bernard Arnault, LVMH Moet Hennessy Louis Vuitton SE-UNSP ADR (LVMUY US)‘s Chairman/CEO, must rue the day his company pitched an Offer for Tiffany & Co (TIF US), a little under two months before COVID-19 first hit the news. 

LVMH and Tiffany reached a definite agreement on the 25 November 2019, wherein LVMH would acquire Tiffany for $135/share (7.7% premium to last close) in a US$16.2bn transaction. Tiffany shareholders approved the merger on the 4 February.

The two parties had initially set August 24 as the first deadline for completing the transaction,  with the possibility of extending the deadline to November 24 at the latest (see page 62 of the Merger Agreement lodged with the SEC) – one year from the initial agreement. This “Outside Date” was extended to the 24 November after the merger failed to close on the 24 August.

In a very brief press release yesterday, LVMH said it will not be able to complete the Tiffany acquisition, in compliance with a directive from the French European and Foreign Affairs Minister to defer the merger. LVMH also said Tiffany had undergone a Material Adverse Affect (MAE).

In a strongly-worded, detailed response, Tiffany said it has no choice but to file a lawsuit to enforce the Merger.

LVMH seeking non-compliance with its contractual obligation on account of a MAE, takes a leaf out of EQT’s gameplay for Metlifecare Ltd (MET NZ). And as in MET’s case (Metlifecare/EQT: The Retirement Solution), LVMH may find itself having to reconsider a new Offer.

More comment below the fold.


Allied Props (56 HK). Stalled At The Finish

By David Blennerhassett

Back on the 20 April, Allied Group Limited (373 HK) (AGL) made an Offer for 75%-held Allied Properties Hk (56 HK) (APH), by way of a Scheme, at $1.92/share (cash), a 34.2% premium to last close. The Offer consideration was Final, and would be split between a $0.42/share Scheme Consideration and a $1.50 Scheme Dividend.  The Scheme Doc was despatched on the 19 June. The Court Meeting was held on the 15 July and the resolutions to approve the Scheme was approved. Shares continue to trade until the 14 August (inclusive). Cheques were supposed to be despatched on or before the 8 Sept.

Then something went awry. 

The sanctioning of the Scheme has now thrice been delayed by the High Court. At the last session on the 7 September, submissions from APL were made to the Court “whether the Scheme was approved by a majority in a number of APL Shareholders present and voting in person or by proxy at the Court Meeting“.

Huh? The headcount test doesn’t apply to Hong Kong-incorporated companies like APH.

As always, more below the fold.

(Shares are currently suspended, so there is no trade here. Look away now if this is not your thing – it will save you time).


LVMH-Tiffany: Oh Bernie, Not like This.

By Rickin Thakrar

In a somewhat bizarre three-paragraph press release, Bernard Arnault owned Lvmh (MC FP) yesterday attempted to renege on its deal with Tiffany (TIF US) on the basis that it received a letter from the French government asking it to delay its purchase until January 2021 due to strained trade relations with the US. Based on this request by the French government, LVMH stated it would not be able to complete the transaction by November 24th, the outside date in the completion documents.

Tiffany has quickly responded – filing suit in a Delaware court stating that LVMH has been ‘deliberately stalling to avoid completing the deal and saying that LVMH had ‘unclean hands.’ Tiffany has also sought an expedited ruling prior to the November 24th deadline.  

We previously argued that LVMH could accrue walkaway rights through an attempt at a regulatory delay (LVMH/​Tiffany – Could Regulatory Delays Give LVMH a New ‘out’? ) However, rather than accruing these rights, we believe LVMH may have inadvertently undermined this argument by claiming it can not complete due to a request from the French government. We believe LVMH’s best argument to exit this deal was through the accrual of walkaway rights. We believe litigation surrounding these arguments will only expedite the reasoning for the regulatory delay and LVMH may not accrue rights if it is determined that LVMH caused the delay itself, and ahead of the November 24th deadline. Our updated view on the deal is below.


Kirindo (3194) – Another Cheap Bain MBO With Weak Adherence to Fair M&A Guidelines

By Travis Lundy

At 9pm last night, basically a full day after Kyodo carried a news story that Kirindo Holdings (3194 JP) was going to be taken private by Bain, the company dropped a load of documents onto the TDNet exchange document filing system indicating that indeed Bain would conduct a Tender Offer to privatise the company and delist it. 

I imagine bankers spent all day putting the information together. It’s kind of a complicated document and structure – more so than normal. But at heart, it is an MBO where at the end, Bain Capital will have about 60% of the resultant enterprise, and the Teranishi family will have about 40%. Given that the two familymembers who will 

The founder and current chairman Teranishi Tadayuki (91) does not appear to be selling in the end, but his son Teranishi Toyohiko, the president (63) appears to be the solid leader through the next stage. This appears to be a kind of succession planning construct, not unlike the Nichii Gakkan Co (9792 JP) MBO and several others in the past couple of years.

Succession-planning MBOs are all the rage. There are good reasons for this. I expect this trend to only accelerate from here. 

More below the fold. 


Big Hit Entertainment IPO – Dynamite and Index Fast Entry Possibilities

By Brian Freitas

Established in 2005, Big Hit Entertainment (1255064D KS) is an entertainment company that manages the popular seven member boy band BTS. ‘Dynamite‘, BTS’ first full English single has topped the Billboard charts for the second consecutive week.

The IPO will see 7.13m shares being offered at a price range of between KRW 105,000-135,000 per share and will raise between US$629m and US$809m. The offering price will be be decided on 28 September based on institutional investor demand, and shares are expected to start trading in October.

At the upper end of the price band, the shares could just about make it into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX). With retail demand expected to be extremely high, shares could rise substantially on listing day and and if they stay there for the next 15 trading days would make the stock eligible for inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX), though the inclusion would only happen at the regular rebalance on 10 December.

Fast entry inclusion in the MSCI GIMI and FTSE GEIS looks a lot tougher, especially given there will be a lock-up on some of the institutional allocation, though a huge jump in the stock price could just about make the stock eligible.


IAG’s Jumbo Rights Issue Takes Off

By Jesus Rodriguez Aguilar

IAG launched the rights issue announced on 31 July and approved at the AGM on 8 September.

  • EUR 2,741 mn (GBP 2,491 mn), c. 63% of its current market capitalisation.

The funds will be used to strengthen the balance sheet and reduce debt (increasing for solvency). This approach rules out state aid, as has happened with Lufthansa or KLM-AirFrance. Qatar Airways (25.1% holding), has irrevocably undertaken to subscribe for its pro-rata entitlement.

The right issue would be expected to be completed by the end of September.

This rights issue will have a positive impact in the cost of debt for IAG, allowing 2020 losses to be shared among a larger number of shares; and be highly dilutive in 2021.

Upon announcement, the discount to TERP was 35.86%. Discount and dilution (60%) are higher than what was expected by the market.

Vs. peers, IAG is hit by the higher dependency of profits on premium long-haul traffic, especially the North Atlantic corridor, where some analysts estimate that IAG obtains almost half of its profits.

On today’s session, there has been high volatility in the share price with a day high/low of 207.7p/190.7p, and closed at 200.0p vs a prior closing of 200p, with roughly GBP 30 mn traded in London; similar story in Madrid, a day range of EUR 2.1-2.28, with roughly EUR 23 mn traded there.

The theoretical value of the subscription rights is EUR 0.7716 (according to my calculations), therefore IAG should trade around EUR 1.43 ex-rights. The low subscription price should ensure the success of the rights issue, but high volatility is to be expected. The rights will start trading on 14 September and I will update on any further developments.


Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation

By Travis Lundy

The first insight in this event coverage was Yamada Denki Partial TOB For Hinokiya (1413 JP). In that insight I wrote that this was a transaction where the founding family was selling and the company was getting a new sponsor. If the forecasts for this year and the Medium Term Plan are anywhere near accurate, this is a very cheap stock. 

If you can buy it cheap to terms (say 3-4% below terms), because of the structure of the shareholder base and the conditions of the Offer, I expect this will leave one with a very attractive net average breakeven buy price. 

This insight contains the Arb Grids showing breakeven forward price, breakeven PER, breakeven PBR based on market price, pro-ration, and company guidance. 

More detail below. 


Before it’s here, it’s on Smartkarma

Event-Driven: Colowide Co Ltd, Mitsubishi Corp, OptiComm Ltd, Lion Corp, Bankia SA and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • 🇯🇵 Japan • Colowide (7616 JP) – A Bite Too Far
  • A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons
  • OptiComm: First State Gatecrashes Uniti’s Offer
  • Japanese Household Goods Pair Trade: Let The Lion Pounce As The Pigeon Lands
  • CaixaBank – Bankia Negotiations:La Caixa, Approvals, Badwill, Exchange Ratio and Synergies

🇯🇵 Japan • Colowide (7616 JP) – A Bite Too Far

By Campbell Gunn

Source for all charts: Japan Analytics

LISTED RESTAURANTS – Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both create restaurants (3387 JP), and Colowide (7616 JP) have positioned themselves as consolidators, but have become highly leveraged in the process.

Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed ‘diversified’. Furthermore, there are only five listed take-out/delivery specialists, of which Ride On Express (6082 JP) has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months – a third quartile performance. Colowide’s 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for OOTOYA (2705 JP).

YUTAI KEN One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company’s restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.

100,000+ CLUBYoshinoya (9861 JP), Atom (7412 JP), Zensho (7550 JP), Kappa Create (7421 JP), Komeda (3543 JP), and create (3387 JP) are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders –  beef-bowl chain Yoshiniya has 308,265 exceeding Mitsui (8031 JP) which has twenty-four times the capitalisation.

In this DETAIL below, we shall review Colowide’s long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains – Kappa Create (7421 JP) and Atom (7412 JP) and the franchise chain Reins International which also operates in Asia and the US.


A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons

By Mio Kato

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the Japanese market overall offers value investors rich pickings relative to valuations that had been getting more stretched by the day in other regions, especially the US. Below, we provide a quick synopsis of the trading companies’ business models and our thoughts on other potential investments that could attract Berkshire.


OptiComm: First State Gatecrashes Uniti’s Offer

By David Blennerhassett

Back on the 15 June, Adelaide-based outfit Uniti Group Ltd (UWL AU) tabled a cash/scrip Offer by way of a Scheme for fiber network operator OptiComm Ltd (OPC AU)

The consideration price under the Scheme was A$5.20/share, including a fully-franked $0.10/share dividend. This backed out a 13.6x EV/EBITDA and 24.5x PER.  Plus a 160% gain for shareholders since OPC’s listing in August last year.

OPC shareholders were afforded five alternatives under the Scheme: an all-cash payment; an all-scrip settlement (3.4228 Uniti shares for every OptiComm share), or three different cash/scrip combos. Cash and scrip were capped at A$407mn and 84mn Uniti shares, respectively, implying a 77%/23% cash/scrip split. 

The Offer appeared more than fair, and has largely traded around terms. The Scheme Booklet was registered with ASIC on the 7 August and a Scheme Meeting convened for the 10 September. 

But on the 28 August, OPC responded to media speculation regarding a  potential alternative suitor. OPC said it has not received any competing proposal, nor has it been made aware of interest from any other party.

The New News

OPC announced yesterday it had received a non-binding and conditional competing proposal, by way of a Scheme, from First State Superannuation (FSS). The cash consideration under this competing proposal – which is subject to allowing FSS due diligence – is A$5.85/share, a 12.5% premium to Uniti’s Scheme price of A$5.20 under its all-cash consideration alternative (ignoring the potential scale-back).

Not surprisingly, the Scheme Meeting has been postponed.

As always, more below the fold.


Japanese Household Goods Pair Trade: Let The Lion Pounce As The Pigeon Lands

By Oshadhi Kumarasiri

Unicharm Corp (8113 JP), Pigeon Corp (7956 JP) and Lion Corp (4912 JP) are three closely related companies in the Japanese household products market. Although their core competencies are somewhat different, all three of them specialises in health and hygiene related household products.

The correlation of the share price movement of these three companies over the years were very tight. However, Pigeon’s and Lion’s share prices have moved in opposite directions for some time since 30th July 2020, which is contrary to the directions of the guidance revisions during that time.

This divergence in share price performance has created an opportunity for a long short pair trade between Lion and Pigeon. We discuss the details below.


CaixaBank – Bankia Negotiations:La Caixa, Approvals, Badwill, Exchange Ratio and Synergies

By Jesus Rodriguez Aguilar

The markets have enthusiastically greeted the merger conversations between CaixaBank SA (CABK SM) and Bankia SA (BKIA SM) . This operation is in fact, a takeover of Bankia by CaixaBank.

  • This merger seems wise from both strategic and cost-savings perspectives. On the day of announcement, Bankia share price increased by 32.9% while that of CaixaBank increased 12.4%.

This follow-up note contains some background information about the former Spanish savings banks.

Foundation La Caixa, the third largest foundation in the world, and is seeking a stake of at least 30% in the merged entity. The current market caps (9 September) imply a conversion ratio of 0.68 CaixaBank shares per each Bankia share. CaixaBank should press for a lower exchange ratio: for a 30% stake of the Foundation, the exchange ratio would be 0.646 (at 9 September closing prices). The FROB would own 15.37% using this ratio.

The parties are currently negotiating this ratio and the takeover premium for Bankia’s shareholders.

Regarding approvals, the CNMC (the Spanish competition watchdog) will be notified. There may be some issues regarding branch networks in some regions and pension plans market share, but with some minor remedies, the merger should pass muster. The merger has already the blessings of the Ministry of Finance, the ECB and the Bank of Spain.

The merger will generate over EUR 8 bn of badwill (which will partly compensate for the cost of synergies). A quick calculation of synergies would take 45% of LTM Bankia non-interest expense, EUR 1,701 mn, to yield EUR 536 mn of net synergies by 2023e.

The interloper risk would mean a competing offer for Bankia. I consider this low risk.


Before it’s here, it’s on Smartkarma

Event-Driven: Changshouhua Food, Hinokiya Holdings, Hexaware Technologies, Medpeer Inc, Douzone Bizon and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Changshouhua (1006 HK): What’s Cooking?
  • Yamada Denki Partial TOB For Hinokiya (1413 JP)
  • Hexaware Technologies Reverse Book Build Auction – It’s On
  • Changshouhua Food’s Privatisation Bid
  • TOPIX Inclusion (6095 JP): MedPeer Inc
  • Korean New Deal Fund – Could This Be a BBIG Deal?

Changshouhua (1006 HK): What’s Cooking?

By David Blennerhassett

After entering a trading halt on the 3 September “pursuant to the Hong Kong Code on Takeovers and Mergers“, Changshouhua Food (1006 HK) (“CFC”) announced late last night a privatisation by way of a Scheme.

The Cancellation price of HK$4.19/share is a 16.4% premium to last close, but a 43.2% and 64.1% premium over the average closing price on a 30-day and 60-day basis. The price is Final. No dividends are expected to be paid.

The Offeror, holding 52.14% of shares out, is a wholly-owned subsidiary of Sanxing Group. Independent Shareholders hold 46.82% of shares out. 

Typical Scheme conditions apply: at least 75% of Independent Shares FOR & not more than 10% of ALL Independent Shares against. Therefore the blocking stake is 4.682% of shares out, or 26.85mn shares.

Two shareholders have sufficient shares to block the vote – one has been a passive investor for almost five years; the other, FIL, was selling earlier this month at $3.50.

The headcount test applies as CFC is Cayman incorporated. 

The Offer price appears enough to get this over the line. 

As always, more below the fold


Yamada Denki Partial TOB For Hinokiya (1413 JP)

By Travis Lundy

Japan’s largest electronics retailer, well-known for running large and shiny stores with more aisle space than the more aggressive electronics retailers like Bic and Yodobashi in urban areas, has agreed to buy 45.6-50.1% of Tokyo-based custom homebuilder Hinokiya Holdings (1413 JP) from the founder and his relatives in a Partial Tender Offer at ¥2,000/share which is ~12% premium to last. 

This is really a two-party transaction. Buyer and Seller. The company and its minority shareholders are effectively bystanders but the company will have a cooperative relationship with Yamada Denki. Yamada Denki will then own and most likely consolidate the company. At ¥2,000/share it is not an expensive purchase and given the breadth of Yamada Denki’s coverage, there may actually be some interesting follow-on effects. 

This is an interesting situation for long-only investors and arbitrageurs for reasons wholly unlike normal partial tender situations. More below the fold. 


Hexaware Technologies Reverse Book Build Auction – It’s On

By Travis Lundy

On Thursday 3 September at mid-day, Hexaware Technologies (HEXW IN) announced that the Exchange had granted In-Principle Approval the day before. Hexaware’s Public Announcement went out on the 3rd. 

The completion of the Despatch of the Offer Letter was announced on 6 September.

The Reverse Book Build Auction will open on the 9th of September and close on the 15th.  The last possible day to announce a counter-offer would be the 17th of September. Settlement would be expected to be the 29 September. 

It’s on. 

I see Mooar Gainz here.

Relevant Insights To Date

Date Theme or Ticker Insight Title
2019 Indian M&A Guide Quiddity India M&A Guide 2019 
24 May 2020 Delisting Offers Indian Delisting/Exit Offers – Know Your Process and The Games Played 
19 Jun 2020 Failed Exit Offers Failed Exit Offers in India: Lessons for VEDL, ADANI, and HEXW? 
8 Jun 2020 Hexaware Tech Hexaware Delisting Proposal – This Could Go Higher 
11 Jun 2020 Hexaware Tech Hexaware:  Dips and Doodles in the Delisting Proposal Process 

Changshouhua Food’s Privatisation Bid

By Arun George

Changshouhua Food (1006 HK) is principally engaged in the corn oil business, the production and sales of refined edible sunflower seed oil, olive oil, peanut oil and rice germ oil, and the production and sales of cornmeal. Last night, Changshouhua received a privatisation offer from SanXing Trade, the controlling shareholder with a 52.14% stake. SanXing Trade is an investment holding company which is a wholly-owned subsidiary of Sanxing Grease. SanXing Trade is taking private Changshouhua by offering HK$4.19 cash per scheme share. The bid price is a 16.4% premium over the closing price of HK$3.60 per share on the last trading day (2 September).  

The key conditions precedent is the headcount test and the scheme approved by at least 75% disinterested shareholders (<10% disinterested shareholders rejection). Overall, we believe that the privatisation proposal has a good chance of success. At the last close, the gross spread to the privatisation bid is 7.2%. 


TOPIX Inclusion (6095 JP): MedPeer Inc

By Janaghan Jeyakumar, CFA

TSE Mothers-listed Medpeer Inc (6095 JP) announced (J-only) after market close today it had received approval to move to TSE1 as of 15th September 2020. 

TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th October 2020. 

MedPeer is a health-tech company that mainly operates a “doctors-only” social-media platform that enables online knowledge sharing between doctors. This “collective medical intelligence” is then used to provide marketing solutions for pharmaceutical companies and medical device manufacturers. They also provide virtual healthcare solutions to online medical consultation and dietary coaching services. 

In this insight, we take a look at the Index Inclusion Parameters and the Fundamentals of the company to evaluate the upside potential of the TOPIX Inclusion Event and the trade on the follow.


Korean New Deal Fund – Could This Be a BBIG Deal?

By Brian Freitas

“A huge leap forward for South Korea” is how President Moon described the New Deal initiative that the Government launched to digitalise social infrastructure and jumpstart the transition to green energy.

The expected spend of KRW 160 trillion (US$134.45bn) over 5 years will be financed by the Government (KRW 114.1 trillion) and from local Governments and the private sector (KRW 46 trillion) and is expected to create 1.9m jobs over the period based on the Digital New Deal and the Green New Deal that look to strengthen employment and the social safety net.

The KRX has created 4 new indices tracking the secondary Battery, Bio, Internet and Gaming sectors that are expected to benefit from the New Deal initiative plus an additional index (BBIG) that includes the top 3 stocks from each sector. While the BBIG is an equal weighted index, the sector indices allocate 75% of the index weight equally among the top 3 stocks while the remaining 25% weight is allocated to the rest of the stocks based on free float market cap. This will create some very interesting trades if ETFs that are launched on these indices gather a lot of assets.

Some stocks that have been included in these indices have already started to run up in anticipation of index flows and investors will need to monitor ETF asset gathering in determining entry/exit trades on these stocks. There are existing ETFs that track these sectors so it is hard to fathom why ETFs on the new indices would gather a lot of assets especially with a skewed weighting scheme.


Before it’s here, it’s on Smartkarma