Category

Event-Driven

Brief Event-Driven: Hansol Technics Rights Offer Summary and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Hansol Technics Rights Offer Summary
  2. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko
  3. Renault/Nissan:  Mangalore Alert!

1. Hansol Technics Rights Offer Summary

2

This post is a summary of Hansol Technics’s ₩52bil rights offer. Capital increases by 45.23%. Stockholders get new shares at a 0.37353 to 1 ratio. This is a standby underwriting. There is no cancellation risk. More details on this event are as follows.

2. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko

Spin2

Last Week in Event SPACE …

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

EVENTS

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Despite his initial conciliatory stance prior to his appointment to the board and as the new chairman of Renault, Jean-Dominique Senard said the Alliance needed to be re-balanced “in spirit” to counter fears among its Japanese partners that Renault wants to dominate the partnership. Subsequent to his ascension to the board, Renault has made a new proposal for integration. Indications are that proposal was rebuffed by Nissan. This was followed by Nissan’s CEO Hiroto Saikawa saying “What’s most important is Nissan’s future. The question is how we should use the alliance for our future, not how we should be used by the alliance.

A Yomiuri article said that Renault told Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. This is a serious escalation in tensions.

  • Renault is pushing at a time when they should not, and lobbing threats like flaming barrels of oil over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings of scale. Renault is acting now while Nissan is weak from the governance scandal and after Nissan has lowered its forecast for a second time this year. Yet Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises.
  • Nissan could sell new shares in itself to dilute Renault below 40%. Or buy more shares in Renault to own more than 25%. Or commence constructive disengagement. Renault could go hostile on Nissan, which would break the Alliance Agreement and start a war. All told, the possibilities for the Alliance look bleaker.
  • If Nissan engages in defense, the “attack to defend” trade is to own more Renault. If Nissan defends itself with good governance, the trade is to own more Nissan. It’s not an easy trade, but Travis Lundy tilts to Renault, for now. That could change quickly.

(link to Travis’ insight: Renault/Nissan: Mangalore Alert!)

STUBS & HOLDCOS

NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

Travis recommended a NTT/Docmo set up last October NTT Stub Vs MktCap Near 10yr Lows, Stub Earnings Vs Total Near 10yr High around the time of the “Docomo Shock” of lower pricing come April 2019. The stub – if you measure it that way – doubled from less than ¥600/share to ¥1200/share as of the close earlier this week. Since the initial recommendation, NTT Docomo has executed a large buyback and NTT has executed a smaller buyback and the market expectation is for another NTT buyback from the government sometime after earnings.

  • NTT Docomo has now released its new lower-priced and simpler pricing plans which start in June this year. The Nikkei released an article over the past weekend saying that OP would fall 20% this year. This was a full 11.5% below the consensus forecast. Shares ended up on both sets of news, but once again the stock ended up. That left NTT at a higher price vs Docomo than before but the ratio is almost 5% below recent highs despite worse than-expected forecasts for NTT Docomo’s OP and a promised four-year soft spot.
  • NTT Docomo trades at 12x its highest EPS for the next several years. NTT trades at sub 10x on a consolidated basis and well less than that on a parent-implied basis (leverage helps).
  • Travis was a buyer of the NTT/Docomo “dip”. He expected a 20% drop in OP at NTT Docomo would be absorbed in stride, but not really. However, ongoing cost-cutting, lower depreciation and writedowns of fixed line assets, and better profitability on a mature cash-cow business means NTT parent-only (i.e. NTT less Docomo and Data) earnings should continue to progress higher, and NTT should continue to distribute that capital to shareholders. 
  • A priori, there has been shorting of Docomo vs NTT for the past several months and that has now reached a point of “sell the news” where those short are buying back their Docomo. And near-term may favour Docomo vs NTT in regards to buyback flows as Travis expected a Docomo market buyback of ¥300-400bn.
  • After the close on Friday, Docomo released earnings forecasts – OP down 18% and NP down a little less. Docomo also announced a buyback of ¥300bn to be conducted in the market over the next year.

(link to Travis’ insight: NTT Vs Docomo: Where To From Here?)


Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

AC’s 8% decline (at the time of my note) since the beginning of the month, compared to ALI’s 5% gain, has resulted in the discount to NAV widening to ~13% against a one-year average of 4%. Although ALI’s exchangeable bond was cited as a possible cause for the recent bifurcation – the last day for conversion was the 22 April and was fully converted – the chief suspect is the unlocking of a recent placement by Mitsubishi Corp (8058 JP) and the possibility of a new placement.

  • On 20 March 2018, Mitsubishi placed 8.5mn shares of AC at ₱934/shares (~7.5% discount to last close). The placement reduced Mitsubishi’s stake to 8.75% from a little over 10% and was the first time it has sold since securing its stake in early 2007 when AC traded around ₱55.
  • On 15 January 2019, Mitsubishi placed 13mn Ayala shares at ₱900 per share (~7.3% discount). Allegedly Mitsubishi initially offered 9mn shares.  As with the shares sold in March, this shares placement had a 90-day lock-up on further sales, which expired last week.
  • Mitsubishi is a seller of AC – that is evident – and still holds 41.57mn or 6.58% of shares out. However, the urgency to sell more is not apparent – the most recent placements occurred ahead of their year-end. Stub earnings are tonking along, propped up by the energy division. All things considered, AC looks interesting here.

(link to my insight: StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”)


First Pacific Co (142 HK)

Curtis Lehnert revisits this holdco, having first propositioned a set-up trade back in early December. The trade is moving in the right direction and recent developments indicate there is room for a further narrowing in the discount.

  • In March, First Pac  announced it is exiting its 50% stake in the Goodman Fielder JV (GF) for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. But this is a significant step towards narrowing the discount to NAV as GF was the second largest component of the stub (~18% of NAV). 
  • Proceeds from the sale would be used to pay down debt and for share repurchases. The company also mentioned they have identified further assets for sale outside of emerging Asia. Curtis’ take on this statement is that the Pacific Light project that operates a LNG-fired power plant in Singapore may be the next to be sold as it is the only other significant asset that is not in “emerging” Asia.
  • There is also Indofood Sukses Makmur Tbk P (INDF IJ)‘s voluntary offer for Indofood Agri Resources (IFAR SP), which I discussed in PT Indofoods’ Voluntary Offer for 74% Held Sub IFAR.
    The impact on First Pac is minor, but it is a wider sign that the group is in the midst of restructuring and streamlining its shareholdings.

(link to Curtis’ insight: TRADE IDEA – First Pacific (142 HK) Stub: Assets Sales Pave the Way to a Narrower Discount to NAV)

M&A – ASIA-PAC

Kosaido Co Ltd (7868 JP) (Mkt Cap: $172mn; Liquidity: $2mn)

Kosaido came out with lower “forecasts” for the year to this past 31 March, which consisted of (possibly kitchen-sinking) writedowns in relations to the funeral parlor business and writedowns and weakness in the info business. The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share. 

So… Kosaido directors WERE able to recommend minorities sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) a few months ago, but now cannot recommend to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

  • The Murakami bid is ¥750. It is not supported by Kosaido, is still well below BVPS (which is now lower than at the start of the Tender) and the Murakami bid is not designed to squeeze out minorities. If you do not tender, even if it DOES succeed, there is zero guarantee that the backend will trade higher than the current price or the Tender Offer Price. 
  • The Bull Case here is that Minami Aoyama Real Estate gets 51%, then replaces all the directors at both Kosaido and Tokyo Hakuzen, and then embarks on an asset-lightening exercise to fund rehabilitation, then sells off the parts to deliver book value to investors. 
  • The Bear Case is that there is no successful tender, and the shares fall back to some level lower than here as punters bail and then the Murakami group scoops up more stock lower. The Worse Bear Case is that the company simply cannot rescue itself. It has had years to fix an obviously weak “info” business and it has not done so. 
  • The Base Case could be seen that the tender goes through, Murakami gets 51%, then it takes a while for anything to happen, things come out less than optimal, and because Murakami-san gets to consolidate, he doesn’t care about his mark-to-market. But you will.

(link to Travis’ insight: Kosaido: The Bull Case, The Bear Case, and the Base Case)


Automotive Holdings (AHG AU) (Mkt Cap: $560mn; Liquidity: $2mn)

Ap Eagers Ltd (APE AU) has now dispatched the Bidder’s Statement for its all-scrip (1 APE share for every 3.8 AHG shares) offer for AHG. The Offer is conditional on ACCC approval and no MACs. There is no minimum acceptance (shares tendered are irrevocable, which hasn’t stopped what appears to be Perpetual tendering in its 9.2% stake to the IAF) threshold nor finance condition or due diligence. AHG recommends shareholders take no action as it considers the proposal to be highly conditional and that AHG trades through terms.

  • The merged AHG/APE is expected to exact pre-tax cost synergies (according to APE) of $13.5mn annually.  Although he agrees the merger rationale to have merit, AHG’s CEO John McConnell argues synergies “may be a bit light by the way we’re looking at it”. APE’s CEO Martin Ward countered estimates may potentially increase with the benefit of a full operational review.
  • With AHG’s share price languishing, there is a hint of opportunism to APE’s Offer. But not a lot – the scrip ratio is not unreasonable when viewed from a 1M, 3M and 6M viewpoint. Only when the timeframe extends further out to one-year (3.52x) and beyond does the ratio appear to take advantage.
  • With car dealerships under the hammer amidst declining new vehicle sales, the benefits from a merger are apparent. This Offer may just require a small kiss to terms to get all parties on board. The premium to terms has come in since Perpetual tendered.

(link to my insight: AHG & AP Eagers – Smart Carma)


Yungtay Engineering (1507 TT) (Mkt Cap: $800mn; Liquidity: $1mn)

The tender results gets Hitachi ~39.7% of shares out. Hitachi got about 28% of the non-Hitachi and non-Hsu Cho-Li shares in the tender. 70+% of what was possible did not tender. This cannot be seen as a big victory for Hitachi and they know it. They do not have the “control” to consolidate as evidenced by the EGM spat. Travis expects this has now turned into a waiting game for them. 

  • At the EGM on the 18th April, the Hitachi/Yungtay side got three directors, the “Market Faction” led by the The Baojia Group and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of Schindler Holding Ag (SCHN SW) and United Technologies (UTX US)‘s Otis Elevators business – which combined have 11+% between them – obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The “opposition” had in some way “won” management rights.
  • Baojia Group and Hsu Tso-Ming plus Otis and Schindler will find it difficult to win enough to oust Hitachi. They can’t force capital decisions because Hitachi has negative control. They can only hope to greenmail Hitachi, or grow the company out from under them. A second tender offer by Hitachi was rumoured apparently, but Hitachi stomped on that rumour immediately.
  • Minority shareholders are left with a much less liquid instrument than before, which is expensive and has a kind of takeover premium built in when Travis expects there are few chances of a near-term takeover.

(link to Travis’ insight: Hitachi Deal for Yungtay Completes But Control Is Elusive)


SK Hynix Inc (000660 KS) (Mkt Cap: $47bn; Liquidity: $221mn)

On April 22nd, it was reported that SK Hynix is interested in acquiring MagnaChip Semiconductor Corp (MX US)‘s foundry business. Magnachip (market cap of US$316mn) employs about 2,500 people in the Cheongju and Gumi fab facilities and R&D centers in Korea. The foundry business currently represents about 45% of Magnachip’s sales.

  • In 2017, SK Hynix launched the SK Hynix System IC which focuses on the foundry business.  There have been numerous speculations about a potential M&A of various foundry businesses by either Samsung Electronics and SK Hynix in the past year. Recently, Global Foundries, the world’s third largest foundry player, has been looking for a buyer of its 300 mm fab (Fab 7) in Woodland, Singapore. Neither Samsung or SK Hynix have expressed interest.
  • It has been noted that the final bidders for the Magnachip foundry business may also include China’s Jian Guang Asset Management, and SMIC (China). Although this is a small scale deal, Douglas Kim believes SK Hynix would be the best fit as it would accelerate the company’s ambitions in the foundry business, which would be negative for the industry leaders Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) and Samsung. 

(link to Douglas’ insight: Korea M&A Spotlight: SK Hynix to Acquire Magnachip’s Foundry Business?)


Ki Holdings (6747 JP) (Mkt Cap: $169mn; Liquidity: $0.3mn)

Koito Manufacturing (7276 JP)  announced a Tender Offer to take out the minority shareholders in Ki Holdings. This has been long-awaited and long-needed. However, the modalities of how this is getting done are symptomatic of a shocking lack of good governance process. This deal effectively requires zero independent-thinking, economically-motivated investors to tender to make it a success and force minority squeezeout and delisting. This deal can almost certainly be accomplished with every single one of them refusing to participate.

  • The company needs 66.7% to get this over the hump and the combination of the parent and existing financial and corporate cross-holders would put this over 67% quite easily. This tender offer effectively requires zero non-crossholder shareholders to tender to make it a success.
  • Is the Tender Offer Price at least in the middle of the DCF range? No. Did either the Target or the Buyer obtain Fairness Opinions? No. Does the forward forecast for this year look like it is low-balled? Yes.

  • This is a done deal, and there is not much you can do about it unless you take the appraisal rights route.

(link to Travis’ insight: Koito Mfg (7276) Finally Announces TOB for KI Holdings (6747) Subsidiary)


Hanergy Thin Film Power (566 HK) (Mkt Cap: N/A; Liquidity: N/A)

The Scheme Document has been dispatched with a court meeting tabled for the 18 May 2018. The terms remain unchanged from the initial announcement on the 26 February – the proposal is one SPV share for each Scheme share. The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

  • We now know the SPV is incorporated in the BVI. Interestingly, “independent” shareholders now comprise 40.51% of shares out, up from 32.49% in the February announcement, after the Offeror’s stake (in concert with subsidiaries) has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage.  As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.
  • Questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles (a delisting procedure will commence if Hanergy does not resume trading before the end of July) or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.
  • For shareholders angling for the A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings – there is no guarantee – as it silos independent shareholders into a separate entity which, according to PRC law, facilitates the A-share application. On account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

(link to my insight: The Hanergy Dilemma: Vote For The Scheme)

M&A – US

Anadarko Petroleum (APC US) (Mkt Cap: $32bn; Liquidity: $400mn)

Occidental Petroleum (OXY US) announced a proposal to acquire Anadarko, potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko. OXY proposed a 50/50 cash/stock deal comprised of $38 cash plus 0.6094 OXY shares per APC share, or a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd.

  • OXY would need to issue about 309mn shares to fund the stock portion of its proposal, which is about 41% of its current share count, and would leave the combined company owned 71% by current OXY shareholders and 29% by current APC shareholders. Such a large share issuance will require the approval of OXY shareholders, which might present a challenge.
  • OXY’s CEO Vicki Hollub justified the pursuit of APC by claiming OXY is best equipped to exploit APC’s Permian Basin and DJ basin assets, stating that Oxy is “the right acquirer for Anadarko Petroleum because we can get the most out of shale.”
  • If the Board of APC determines that the OXY proposal is a Superior Proposal, CVX will have four business days to revise (improve) terms. If OXY then improves its proposal so it is a Superior Proposal, CVX will have a further three business days to further improve its terms.
  • CVX must now decide how badly it wants this deal. John DeMasi thinks there’s a decent chance they step up. With some upside to the OXY proposal and the possibility of CVX topping OXY’s terms by enough of a margin to put it firmly ahead, he thought APC was an attractive speculative merger arbitrage situation here.

(link to John’s insight: Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath)


Briefly …

On May 31, 2018,  Spirit Realty Capital (SRC US) spun-off its lower quality and debt encumbered assets into a vehicle Spirit MTA REIT (SMTA US), leaving SRC as a triple net lease REIT that is primarily focused on single tenant retail real estate in the US. Investors have yet to buy into the transformed SRC as the value gap between it and its closest peers has actually widened. Robert Sassoon delves into why this should reverse. (link to Robert’s insight: SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit)

OTHER M&A UPDATES

  • First Steamship (286.05mn) and Kuo Jen Hao (83.9mn) – collectively holding 24.66% in Summit Ascent Holdings (102 HK) – have sold their stakes to Suncity Group (1383 HK) @$1.94/share. After the transaction, Suncity holds 27.94% in Summit. This is still below the 30% MGO threshold. But outgoing ED John Wang also has 5% of shares out.

  • “‘Big bully’ Lynas Corp Ltd (LYC AU) must send waste home” is the headline in the AFR article (paywalled). This is quoting Malaysian government deputy minister and Kuantan MP Fuziah Salleh, who has been Lynas’ most outspoken critic.  She acknowledged Malaysia’s Cabinet is divided on the issue.

  • Indofood Agri Resources (IFAR SP)‘s Offer doc has been dispatched. The offer is now open and the first closing date is the 24 May. The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.

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

Name

% chg

Into

Out of

19.90%
Yue Xiu
Outside CCASS
22.00%
Prime
Outside CCASS
23.09%
Hang Seng
Outside CCASS
Dragon Mining (1712 HK)
15.15%
SHK
Outside CCASS
12.01%
HSBC
Outside CCASS
14.04%
Founder Sec
ABCI
DLC Asia (8210 HK)
11.00%
BEA
Outside CCASS
Source: HKEx

3. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: Nexon: Continuing Question Marks and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Nexon: Continuing Question Marks
  2. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted
  3. Nexon Sale: Market Talkings Update, Incl. Bid Schedule Extension
  4. SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power
  5. SPINOFF:  Xinyi Solar Spinoff of Xinyi Energy

1. Nexon: Continuing Question Marks

Screenshot%202019 05 24%20at%203.54.18%20am

The Nexon Co Ltd (3659 JP) control-change saga plods on. 

I continue to read all the news that’s fit to print in English, Japanese, and Korean if I can find some web service to translate the hangul. 

My continuing worry about the significant number of articles which get published is that the ‘updates’ provided are much more soap opera-esque than really significant news developments or even insightful commentary which could inform market observers and participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

For this, I have a lower expectation of “certainty” on this situation than I expected I would have by now, and because of the passage of time, the NPV of the trade is slightly lower with a higher volatility of jump risk on eventual outcome than I expected it would have (I expected the components of the NPV to change – certainty would raise NPV while time-decay before announcement would drag on deal NPV, but the lack of certainty has added drag).

More comments about news evolution, content, and trading strategy are below.

2. Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted

Cir%20business%20segments%20from%2010 k

On May 21, 2019 Crane Co (CR US) announced a proposal to acquire Circor International (CIR US), a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45 per share in cash, for a total equity value of $895 million and a total enterprise value of $1.55 billion ($1.7 billion if net pension liability is included). The proposal price of $45 represents a 47% premium over the May 20, 2019 CIR US closing price of $30.66. 

Crane held a conference call and released a slide presentation on its proposal with more details. In this piece I evaluate the proposal and the impediments standing in Crane’s way of winning this deal.

3. Nexon Sale: Market Talkings Update, Incl. Bid Schedule Extension

This is the latest update on Nexon. We had two Nexon related news reports, put out by Seoul Economic Daily and Invest Chosun, in the past two days, especially in relation to the bid schedule. We also had some market speculations. This post is my summary of these report and market speculations.

4. SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have made announcements they intend to spin-off certain divisions.

These spin-offs remain subject to Exchange approvals and market conditions.

While they are not yet “live” as situations, they deserve a look because spin-offs create new parent/subsidiary relationships, leading to Relative Value trade ideas going forward, which will be dependent on the spin-off’s liquidity and the % market cap held by the parent.

Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

5. SPINOFF:  Xinyi Solar Spinoff of Xinyi Energy

Xinyi%20stub

XSH is spinning off its subsidiary Xinyi Energy Holdings Ltd (3868 HK).

According to the prospectus, XEH will issue 1.88bn – or up to 2.165bn (inclusive of the over-allotment) new shares, at an issue price between HK$1.89-$2.35/share, raising US$456mn-US$652mn. After the listing, XSH will hold ~53.7%. 

My interest is whether these spin-offs create new parent/subsidiary relationships leading to relative value trade ideas going forward, which will be dependent on the spin-off’s liquidity and the % market cap held by the parent.

Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

At between 35-45% of Xinyi Solar market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH’s volume.

Discussion of the spinoff and stub valuations continues below.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing
  2. Korea M&A Spotlight: Aekyung – The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?
  3. Murakami Group Tender for Kosaido Fails… Spectacularly
  4. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?
  5. Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way

1. SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing

Haitongspinoff

A number of Hong Kong spin-offs, including  Haitong UniTrust International Leasing Co Ltd (1905 HK) and Xinyi Energy Holdings Ltd (3868 HK), have been announced recently. Clicking on the company names will take you to a home page providing a list of recent insights by various Smartkarma contributors.

There are other situations where they have been announced but conditions (approvals, market conditions) are unmet and they may never arrive.

My interest is whether these spin-offs create new parent/subsidiary relationships leading to relative value trade ideas going forward, which will be dependent on the spin-off’s liquidity and the % market cap held by the parent.

Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

The first to be addressed is Haitong Securities’ spin-off of Haitong UniTrust International Leasing.

2. Korea M&A Spotlight: Aekyung – The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?

Oilprice

More than a month has passed since Asiana Airlines (020560 KS) has been officially put up for sale by the Asiana Airlines’ main creditor (KDB) and Kumho Industrial (002990 KS), the leading shareholder of Asiana. Since then, a few chaebols that were initially mentioned as potential acquirers of Asiana including SK, Hanwha, CJ, Lotte, Hanjin, and Shinsegae groups have become very quiet in their willingness to purchase the company. 

We believe that Aekyung, CJ, and Shinsegae are likely to be the short-list candidates to potentially acquire Asiana Airlines.  Among these chaebols, Aekyung has shown the highest initial interest. It may require nearly 2.0 trillion won to 2.5 trillion won to acquire Asiana Airlines, which is very high and likely to involve additional rights offering/debt financing.

As such, Asiana Airlines (020560 KS) are likely to continue to trend lower in the next few weeks, as the potential buyers become more wary of the high debt amount and lofty purchase price. There is a strong support for Asiana Airlines shares in the low 5,000 won level, which means that there could be further 10-15% downside risk for Asiana Airlines over the next few weeks. 

3. Murakami Group Tender for Kosaido Fails… Spectacularly

Screenshot%202019 05 23%20at%209.12.28%20am

Yesterday was the long extended close of the Tender Offer for Kosaido Co Ltd (7868 JP) by renowned Japanese activist Yoshiaki Murakami and his affiliate companies. The Tender Offer was launched at ¥750 after the original bidder – a Bain Capital Japan entity – had launched a friendly MBO at ¥610 (0.55x book) and then revised higher to ¥700/share. 

This morning saw the following news:  

*KOSAIDO: TENDER OFFER BY MINAMI AOYAMA FUDOSAN FAILS

I had been bearish the stock once the Tender Offer was announced and the stock popped to the ¥850 area, and the shares did not trade below ¥750 for much time at all after the announcement, but even I did not expect the result of seeing only 427,000 shares (a bit over 1.7%) tendered. That is less than 2% of the shares they did not hold. 

In late April, when I last wrote Kosaido: The Bull Case, The Bear Case, and the Base Case, recommending to sell (¥771/share), I outlined what the possible outcomes of a Tender were. This outcome clearly falls into Bear Case territory, though as so few tendered, the combined shareholder body must not agree with me, and indeed prefers the spectre of a company which shows little transparency on it business, a board which has seen the problems for years and decided the most appropriate solution was an MBO at 0.55x book, despite opposition from the founder’s widow (a large shareholder) and a statutory auditor who made his case known after the original tender was launched. 

As I write, the shares have not fallen much in reaction to the Tender results and indeed 30 minutes after the open were actually trading up on the day. But I note that…

  • very few people who bought in the last three-plus months after Murakami-san went substantial then increased his price are in the money, 
  • the expected fundamental situation is worse now than it was pre-tender,
  • the company owns one business with earnings and net assets where the best year in the past five the business earned an ROE of 5%. All the rest of the businesses combined have negative equity as I calculate it, and they have combined earned nothing in the last few years. They need restructuring to survive, and may never be decent businesses on a standalone basis. 

I remain bearish as I expect the obvious opportunity for existing management to conduct a restructuring effort will take time and cost money, and I expect the traditional lack of transparency to shareholders to continue.


As a history, the following insights have been published on this event prior to today…

4. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?

Picture1

Sprint Corp has received approval from the Federal Communications Commission for their merger with T-Mobile to proceed following concessions. Justice Department approval is the next hurdle with the eventual outcome still remaining uncertain.

We reiterate our previous recommendation that investors should look to exit the bonds at current levels to mitigate deal risk as we believe that if the merger fails the company may face liquidity issues over the medium term given their deteriorating fundamental performance.

Specifically, Sprint Corp continues to generate negative free cash flow, if the proposed merger fails, the company may ‘burn’ cash within a few years.

5. Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way

12

This block deal was another nice exit point for Celltrion H short sellers to wrap up short position. Just, 6.5M offering was simply massive, and even more than what these short sellers could absorb. This was partly why it was priced at floor. Would we see another opportunity like this? 90 days lock up is on One Equity’s remaining 10% stake. But it is very possible that Ion will make a similar move. Apparently, many investors are disappointed and concerned about Seo Jung-ju’s bluffing tactic. So, if we can get the timing right, we will easily enjoy a 8~10% gain by shorting and taking deals to close the position.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala
  2. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?
  3. MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread
  4. Mallinckrodt – The Volatility Continues?
  5. Trump Trade Means Lynas Capex Easier

1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala

Got

Last Week in Event SPACE …

  • As Nexon Co Ltd (3659 JP)‘s soap opera-esque “updates” on the control-change plod on, the “certainty” on this situation is less than great.
  • In the next six weeks, two important games (BTS World and Seven Deadly Sins) for Netmarble Games (251270 KS) will be launched; the final bidder(s) for NXC Corp/Nexon should be known plus there should be clarity on the timeline for the Netmarble Neo IPO. 
  • Trump Trade Wars provide a positive backdrop for Lynas Corp Ltd (LYC AU) in the near-medium-term.
  • From a tick-the-box perspective, Nissan Motor (7201 JP)‘s new board looks highly diverse.  If they take their jobs seriously and learn about auto manufacturing and sales, the board holds promise.
  • Harbin Electric Co Ltd H (1133 HK)‘s Offer is expected to get up after an unprecedented extension provides a last-minute reprieve.
  • The Murakami Tender Offer for Kosaido Co Ltd (7868 JP) fails. Spectacularly so.
  • Crane Co (CR US)‘s proposal for Circor International (CIR US) will fail unless it bumps and opens up a dialogue with Circor’s board.
  • Ayala Corporation (AC PM) buys back shares from Mitsubishi, removing the placement overhang.
  • Plus other events, CCASS movements and Mood Spins.

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

EVENTS

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $37mn)

A lot of the media coverage of the Nexon situation appears to be a kind of breathless updating of possible changes in situation trafficked by gossipmongers. The level of trustworthiness to the “news” is low and outlets rarely note that what is now being reported does not report with what was previously being reported as “likely.” Travis Lundy suggests the level of confidence one should have about the expectations the media is implying needs to be checked. There is simply not enough meat in the “facts” as reported to strongly inform market observers & participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even whether there could be a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

Delays were to be expected. and the possibility of significantly longer delays exists. The structure is convoluted – less easy than just buying Nexon outright. The structure could easily deter many buyers unless it is crystal clear that the rest of the stuff inside NXC is excluded from the sale. If delays are being implemented because major bidders can’t get the funds, that is either bad news on its own, or there is something else going on. If KJJ really wants a great premium when he decides to sell, he may turn this deal down – whoever the winning bid comes from.

  • The constant refrains about how Disney, EA, or Amazon might bid are probably misplaced. Travis Lundy doesn’t see any of them bidding. The US-China Trade War means US corporate buyers are not going to be the best buyers of game assets where 50% of revenue and 100% of profits come from China.
  • MBK/Tencent or KKR/Tencent is probably still the bidder to beat, as that consortium has been since the beginning. MBK would find it the easiest to take a sharp knife to costs. Tencent would find it easiest to buy 30-40% and then stay on the sidelines while someone else made it better. Neither Netmarble nor Kakao are likely to be the best buyers for this.
  •  This opportunity has been a great one to range-trade. In general, it has been “buy the dips, lighten up after it pops 5-10%. Rinse. Repeat.” Travis now views this as a low-quality Bullish trade. It is lower quality than it was 3-4 months ago because of reduced ability to range-trade and harvest gamma before a decision is made. The time decay is perceived to be quite strong now. That means sizing would probably be smaller now than it was at the same price or slightly lower in January. 

(link to Travis’ insight: Nexon: Continuing Question Marks)


Netmarble Games (251270 KS) (Mkt Cap: $7.9bn; Liquidity: $20mn)

The three major drivers of Netmarble’s stock price include the upcoming IPO of 80.6%-held Netmarble Neo (and the official global launch of the mobile RPG The King of Fighters Allstar game on May 9th), the launch of the BTS World game, and the eventual resolution of the NXC Corp/Nexon M&A situation. 

  • Douglas Kim believes a non-Netmarble Games entity such as MBK or Tencent Holdings (700 HK) will be the final bidder for Nexon. It was reported in early May that the Netmarble and MBK partnership broke off at the last minute as MBK determined it may not need a strategic investor to manage Nexon – key personnel in Nexon (excluding the founder Kim Jung-Joo) already play significant roles in directing and managing the company.
  • The market has been concerned about Netmarble potentially overpaying for NXC Corp with overstretched debt financing, and if Netmarble fails to be the final bidder for NXC Corp, this is probably a positive for the company. If the final bidder is MBK (only), this will also have an added positive impact on Netmarble as there have been fears that if Tencent acquires NXC Corp, this will potentially add to the competitive pressures of the gaming industry in Korea. 
  • These events, followed by an announcement of the Netmarble Neo IPO and a successful launch of the BTS World game should also positively impact Netmarble. In terms of earnings pickup, the consensus expects Netmarble to experience a turnaround starting 2Q19, with operating profit estimates of ₩46bn in 2Q19, up from ₩34bn in 1Q19. The consensus expects the company to further improve its operating profit to ₩100bn in 3Q19. 

(link to Douglas’ insight: Netmarble Games: The Upcoming Netmarble Neo IPO, Launch of BTS World Game, and the Nexon M&A)


Lynas Corp Ltd (LYC AU) (Mkt Cap: $1.1bn; Liquidity: $9mn)

Travis Lundy discusses the Lynas situation which appears to have changed dramatically this week. Lynas believes Malaysia will decide things the right way, which will mean the infamous December 4th Letter from the AELB (Atomic Energy Licensing Board) will be withdrawn, Malaysia approves the CondiSoil route for disposal of the WLP residue there now, and tthe license will get renewed with adequate transition time to enable continued buildup of WLP before sourcing of cracked and leached material exported from Australia can be arranged. This is the bet here. 

  • Travis thinks Lynas will need to create a new pricing system for its product. Its customers should be willing to pay a price which is not explicitly tied to Chinese onshore pricing with all the risk that entails. If its customers want to ensure Lynas stays in business, Lynas has to be able to charge what it needs to in order to stay in business. Western and Japanese companies with good technology to increase processing expertise to enable better product and higher margins will be happy/willing to engage with Lynas for the basic reason that Lynas is not Chinese. I’d note that they’d engage with the buyer of Lynas assets as well if Lynas went under, but the issue here is not bankruptcy but speed of increased capacity rollout.
  • This would suggest that partner companies with cash to invest should be willing to project-finance some portions of the capital and/or expansion. If Lynas needed or wanted to raise capital by issuing a convertible bond of a few hundred million dollars, Travis expects doing so would be “easy” in the near-term.
  • Travis is bullish the stock price near-term, not because of fundamentals, but due to the a) Trump Trade Wars being a good thing for product pricing and demand for access, and b) Geopolitical issues helping Malaysia come to the “right” decision regarding license renewal. He would not want to be short here anymore. Because the growth and value of long-term product pricing is so far out in the future, what constitutes “fair” for the stock is obviously tough to calculate with any confidence, so the “Bullish” label is really about covering the short.

(link to Travis’ insight: Trump Trade Means Lynas Capex Easier)


Nissan Motor (7201 JP) (Mkt Cap: $26bn; Liquidity: $115mn)

The new board of Nissan, as proposed by Nissan’s Provisional Nomination and Compensation Advisory Council established after the independent committee on governance proposed its measures in March, has 11 members, with two each nominated from Nissan and Renault SA (RNO FP) and seven coming in as independent directors.

  • The board is now set up to be Team Renault, Team Nissan, and seven (theoretically) independents. The important angle here is to try to understand where the chips might fall if push comes to shove, because the Revised Alliance Master Agreement requires that Renault not propose measures to the shareholders which are not supported by the Nissan board, and not vote against measures which are proposed by the board. Doing so would breach the RAMA and would allow Nissan to buy more Renault shares.
  • Only at the end of June – assuming all goes to plan – will the seven new members of the new Board take their seats. Renault pushing hard now when the majority of current board members will change in June seems to be insensitive to the nature of boards and board members’ responsibilities.  Should there be a strong dispute between Renault and Nissan about the process and timing of discussing deeper capital ties, Travis expects the ball to fall in the court of “Not Now” and “Not Yet.”
  • At 0.57x book on Nissan, it is difficult to be bearish. And it seemed pretty clear from the earnings meeting that Saikawa-san and others thought that the low forecast for FY19 (to March 2020) was reasonably conservative and was designed to flush out all the bad news. Nissan has decided to shrink its volume presence in the US to raise profitability per vehicle, and it is clear that there have been measures to reduce costs through redundancies. 
  • Travis remained inclined to think that RNO is the right trade to be long here compared to Nissan but is surprised that Renault is now down to such a low PBR. He was inclined to think that the significant slowdown in the Chinese market is a net headwind to both Nissan and Renault, but expects that the heightening of trade friction between China and the US could favour Japanese brands at the expense of US brands.

(link to Travis’ insight: Nissan’s New Board and Management Developments)


Briefly …

One Equity placed out 6.5mn shares of Celltrion Healthcare (091990 KS) at a final price of ₩60,100, an 8% discount to last close, similar to the discount back in September last year. There is a 90-day lockup on One Equity’s remaining 10% stake and it is possible Ion will reload. (link to Sanghyun Park‘s insight: Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way

M&A – ASIA-PAC

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $991mn; Liquidity: $3.5mn)

With acceptances totaling 85.84% of shares out as at the Closing Date (20 May), just short of the 90% acceptance condition, in an unprecedented move, the SFC granted an extension for Harbin’s Offer until the 19 July (Second Closing Date). If you’re going to set a precedent, then make it a bold one. Two months of additional time provides ample room to source, locate, and encourage shares not tendered (4.16% of shares out) to tender.

  • The withdrawal clause (Rule 17 of the Code) has now been clarified on the HKEx – the right-of-withdrawal of acceptances is triggered 21 days after the Closing Date (i.e. shares tendered are not irrevocable through to 19 July, as previously speculated in this insight). This is a voluntary right to withdraw – not compulsory – and assumes the Offer does not become unconditional before the expiry of the 21 days.
  • ~28mn shares are required to be tendered for the Offer to get up and 27.5mn have changed hands since the extension announcement.  The acceptance condition is likely to be satisfied shortly. An additional 5.7mn shares or 0.84% of shares out tendered on Friday.

(link to my insight: Harbin Electric: This Could Get Squeezy After Unprecedented Offer Extension)


Kosaido Co Ltd (7868 JP) (Mkt Cap: $164mn; Liquidity: $1.5mn)

The long extended close of the Tender Offer for Kosaido by renowned Japanese activist Yoshiaki Murakami and his affiliate companies, ended in failure. Travis had been bearish the stock once the Tender Offer was announced and the stock popped to the ¥850 area, and the shares did not trade below ¥750 (the Offer price) for much time at all after the announcement, but even he did not expect the result of only 427,000 shares tendered. That is less than 2% of the shares they did not hold. 85% of shares out did not tender.

  • Most people who bought in the past three and a half months are now (at the time of the insight) underwater on their investment, at a 70+% premium to the undisturbed price, after worse-than-expected results. And we have no resolution.
  • It would be tough to sell the funeral parlor business for 1x book because in its best year in the past five it earned a 5% ROE. To trade at book it should be able to do a little better than that.  The rest of the business has negative equity and a dire need for restructuring, which costs money. 
  • Travis is still bearish here and would not buy the dip in near-space. Even if the stock does not drop hard, it is pretty much dead money for a while. And while the stock trades below book, and there is a significant likelihood of bootstrap restructuring, Travis is inclined to think that transparency for shareholders will be no better than it has been for the last five years, which is pretty abysmal.

(link to Travis’ insight: Murakami Group Tender for Kosaido Fails… Spectacularly)


Asiana Airlines (020560 KS) (Mkt Cap: $1bn; Liquidity: $48mn)

More than a month has passed since Asiana Airlines was officially put up for sale by the Asiana Airlines’ main creditor (KDB) and Kumho Industrial (002990 KS), the leading shareholder of Asiana. Since then, a few chaebols that were initially mentioned as potential acquirers of Asiana including SK, Hanwha, CJ, Lotte, Hanjin, and Shinsegae groups – all have been very quiet in their willingness to purchase the company. 

  • Among these chaebols, Aekyung has shown the highest initial interest. It may require nearly ₩2.0tn to ₩2.5tn to acquire Asiana Airlines, which will likely involve additional rights offering/debt financing.
  • Because of the uncertainty on timing and potential buyers wary of the high debt amount and lofty purchase price, expect Asiana to continue to trend lower in the next few weeks. There is a strong support in the low ₩5,000 level, meaning there could be a further 10-15% downside risk. 

(link to Douglas’ insight: Korea M&A Spotlight: Aekyung – The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?)

M&A – US

Circor International (CIR US) (Mkt Cap: $850mn; Liquidity: $8mn)

Crane Co (CR US) announced a proposal to acquire Circor, a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45/share (cash), for a total equity value of $895mn and an EV of $1.55bn ($1.7bn if net pension liability is included). The proposal represents a 47% premium to last close. Circor rejected the proposal on the 13 May, so Crane has gone public to “make our proposal known to Circor shareholders so they can express their views directly to the Circor Board.”

  • Circor’s EBITDA margins are lower than the mean/median of the comps and are the lowest of any company in the entire group, giving credence to Crane’s criticisms of Circor’s operating performance. From Crane’s presentation, Circor is the worst performer amongst its peer group and also missed all five-year targets (set in 2014).
  • John DeMasi reckons this deal will be an uphill battle for Crane if it decides to go “hostile” with a formal offer – it would fail without a board recommendation. The next step would be to increase their proposal to give Circor’s board an opportunity to show it is not totally intransigent. A $4 bump to $49 would be a meaningful interim increase (8.9%). If that doesn’t get Circor talking, the board would come under pressure from shareholders.  Other bidders could be drawn out if it gets Circor talking.
  • Even though this is a highly speculative situation (with downside of ~29% using Friday’s close), John liked it (sized appropriately at the then-current price $41.37) because of the potential upside and confidence that an independent, competent board will listen to its shareholders if enough of them are loud enough for long enough.

(link to John’s insight: Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted)


Mellanox Technologies Ltd (MLNX US) (Mkt Cap: $850mn; Liquidity: $8mn)

The past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratcheting up of trade tensions between the US and China – Nvidia Corp (NVDA US)‘s $125/share Offer is conditional on the receipt of antitrust clearance from China.  Financial media and pundits have been quick to reference Qualcomm Inc (QCOM US)‘s failed bid for  Nxp Semiconductors Nv (NXPI US) last year as why this may not bode well for the NVDA/MLNX transaction. But Robert Sassoon sets out a case as to why this deal may not be the right reference.

  • He believes the Marvell Technology Group Ltd (MRVL US)/Cavium Inc (CAVM US) deal provides a more positive perspective on the prospects for NVDA/CAVM deal completion than QCOM/NXPI. Furthermore, the merger agreement expires on December 10, 2019, which also accommodates two three-month extensions. This leaves a long runway for the deal to obtain the required regulatory approvals, and a time buffer for the current political heat to cool down either through some type of trade agreement between US and China or progress towards one. 
  • Friday’s closing price of $109.80 is only slightly above the pre-announcement price. In August-September 2018 period when speculation of a possible MLNX buy-out began, shares were trading in the $70-$80 range, at a valuation multiple of 9x-10x & 14x-16x prospective Non-GAAP 2018 EBITDA & PE.  However, consensus estimates for 2019 are projecting a ~30% increase in both EBITDA and EPS, indicating little fundamental justification for a return to that range. This suggests limited downside for the shares of a fast-growing company that is trading at below peer multiples. On balance, the risk-reward profile of MLNX looks attractive from our standpoint. 

(link to Robert’s insight: MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread)


Briefly …

Sprint Corp (S US) has received approval from the FCC for the merger with T-Mobile to proceed following concessions. The Justice Department approval is outstanding and Sebastian Ashton, CFA believes the outcome remains uncertain. He reiterates investors should look to exit the bonds at current valuations given they are trading at a premium to par, in order to mitigate deal risk exposure. If the merger fails, the company may face liquidity issues over the medium term given their deteriorating fundamental performance and negative free cash flow. (link to Sebastian’s insight: Sprint Corp – One Regulatory Approval, Another to Go, How Likely?)

STUBS & HOLDCOS

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

JCNC’s discount to NAV of 14.4% is around its narrowest in the past 12-months and compares to an average of ~20%.  The key trigger for JCNC’s recent outperformance appears to be the cancellation of the offer for Bank Permata (BNLI IJ).

  • Both Standard Chartered Bank and Astra hold 44.56% in BNLI, leaving minorities with 10.88%. First rumoured back in November/December, state-owned Bank Mandiri Persero (BMRI IJ) was understood to be the frontrunner to acquire the stakes held by Astra and St Chart. 
  • The speculated price sought by BNLI was 1.8x P/B, dropping to 1.6x, then 1.4x, before talks were allegedly abandoned last week. There has been no official announcement/comment (and in my own correspondence with the IR) from Astra on this sale. Astra’s stake in BNLI accounts for 3.6% of its market cap – not a material %.  
  • JCNC is prodding its narrowest discount to NAV in the past year, having all-but reversed its 4Q18 lows. There may be further upside for JCNC, but it appears limited. BNLI is for sale and is currently trading at 1.0x P/B. I would not be surprised to see further dialogue initiated on a proposed sale.

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

Ayala Corp’s discount (at the time of my insight) to NAV had bounced off a 12-month low but still traded 2Stdevs+ from the average, and below the 12.9% level when I previously discussed this Holdco in greater detail in late April. ACs 1Q19 figures released on the 10 May did not endear investors to the stub ops.  

  • Mitsubishi’s 6.58% stake remains an overhang – however, there appears no urgency for another placement with AC trading a YTD lows. On the assumption these share placements bolster full-year results (March year-end), Mitsubishi can afford to wait for a recovery in the share price.  However, this assumes there is a near-term recovery with respect to this placement.
  • This recent set of quarterly results at the parent level is not positive. Expect the discount to NAV to drift sideways, if not lower without the benefit of any positive newsflow at the stub ops – or on the placement – until 1H results announced around mid-August clarify the earnings direction for 2019. 
  • If Mitsubishi is indifferent to selling as its in-cost is a fraction of the current price, the spectre of declining (& a protracted decline in) stub earnings may tilt them to place shares earlier.
    • UPDATE: AC announced it had bought back 3.8m shares from Mitsubishi Corp at PHP 838, a 1.5% discount to the prior day’s close. “This transaction completes their portfolio rebalancing exercise with regard to their Ayala holdings, which now stands and will remain at around six percent (6%).”  Positive news for Ayala and a nice bounce – it closed the week at 11.5% discount to NAV against a 12-month low of 16% on the 21 May.

(link to my insight: StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower)

SPIN-OFFS – HONG KONG

A number of Hong Kong spin-offs, including  Haitong UniTrust International Leasing Co Ltd (1905 HK) (HUIL) and Xinyi Energy Holdings Ltd (3868 HK), have been announced recently. Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have also made announcements to spin-off certain divisions, although these remain subject to Exchange approvals and market conditions. Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

  • Haitong Securities Co Ltd (H) (6837 HK)‘s implied stub ops appear slightly expensive versus peers. Haitong Sec has underperformed both its peers and HSI since the initial spin-off announcement back in March 2017. However, stub income halved in FY18 compared to a 28% decline on average for peers. At ~15% of market cap, this is a weak Holdco/subsidiary relationship. HUIL is expected to commence trading on the 3 June. 
  • Xinyi Solar Holdings (968 HK)‘s performance and valuation (with reference to its stubs ops) relative to peers, appears overextended, notably for operations with declining growth and net margins. The implied stub is near a 52-week high. At between 35-45% of market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH’s volume. XEH is expected to commence trading on the 28 May.
  • Legend Holdings Corp H (3396 HK)‘s proposed spin-off of Zhengqi Financial has all the hallmarks of being a weak Holdco/subsidiary relationship; as does Kerry Logistics Network (636 HK)‘s proposed spin-off and separate listing of Kerry Express (Thailand) on the stock exchange of Thailand. Tianneng Power Intl (819 HK)‘s spin-off of its battery manufacturer may result in a stub to watch, however financial details of the spin-off are minimal, it still requires PRC approval, and the spin-off was previously attempted back in 2015.

links to insights:
SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing
SPINOFF: Xinyi Solar Spinoff of Xinyi Energy

SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

OTHER M&A 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, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

19.81%
GS
Core Pac
17.14%
Anue
Kim Eng
Zhongchang (859 HK)
74.98%
Cinda
Bocom
TUS International
19.41%
China Sec
Outside CCASS
26.75%
China Ind
Outside CCASS
Source: HKEx

2. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?

The World Health Organization (WHO) finally made its long-awaited decision on officially classifying game addiction disorder as a disease on May 25th. In June 2018, the WHO already included gaming disorder on the “11th revision of its international classification of diseases.” The WHO has been reviewing this issue for nearly 11 months and it finally made its decision on classifying it as an official disease. 

Will this issue become a “deal breaker” for the Nexon sale? No, we do not believe that WHO finally deciding that gaming disorder is a disease will serve as a deal breaker. Nonetheless, we believe that it will have a negative impact on the game industry as a whole and will be an important factor that could bring down the potential purchase price. 

Three Key Issues of WHO’s decision to Classify Gaming Addiction as Disease to the Nexon Sale:

  • How much has the market already taken this into account? 
  • Gaming taxes? 
  • Greater negative perception of gaming

3. MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread

Mlnx

Until very recently, the merger spread in the low to mid-single-digit range appeared to signal few problems with respect to Nvidia’s (NVDA US) proposed acquisition  of Mellanox (MLNX US) moving to consummation by year-end as targeted. However,  with one of the closing conditions of the deal being the receipt of antitrust clearance in China, the past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratchetting up of trade tensions between the US and China. Financial media and pundits have been quick to reference Qualcom’s (QCOM US) failed bid for NXP Semiconductors (NXPI US) last year as why this bodes ill for the NVDA/MLNX transaction. 

Below, we set out a case as to why the QCOM/NXPI may not be the right reference for the NVDA/MLNX transaction and why we believe the recently widened spread offers an attractive risk-reward opportunity for arbs with a potential IRR of at least 25%.   

Unusal Spreads As of May 23, 2019

M&A Situation
Spread
Expected Close
Comment
CO/GNW
65%
Jun-19
Still waiting  Canada, China SAFE approvals/Delay concern
FMF/STC
17%
Jun-19
Regulatory/Pricing Adjustment/Delay Risk
ILMN/PACB
16%
Jul-19
Potential Antitrust Complications in UK/Extended Review Period
NVDA/MLNX
14%
Dec-19
China Regulatory Concern
TMUS/S
12%
Jul-19
Potential antitrust complications/Extended review period
CNC/WCG
12%
Jun-20
Rumored Humana interest in CNC 

4Q 2016-2Q 2019 Live US M&A Announced Deals (>$400 MN) & Spreads 

Acquirer
Target
Sector
Date Announced
Transaction Type
Expected Close 
Offer Price
 Target Firm Price
Spread
4Q-2016
 
 
 
 
 
 
5/23/2019
 
China Oceanwide (China)
GNW
Financial -Life Insurance/Mortgage Insurance
23-Oct-16
Cash
Dec-18
$5.43
$3.29
65.0%
1Q-2018
 
 
 
 
 
 
 
 
SJW
CTWS
Water Utility
15-Mar-18
Stock
Dec-18
$72.09
$62.85
14.7%
SJW
CTWS
Water Utility
6-Aug-18
Cash (OfferRevised)
Jun-19
$70.00
$69.48
0.7%
FNF
STC
Insurance
19-Mar-18
Cash/Stock 
Jun-19
$49.90
$42.71
16.8%
2Q-2018
 
 
 
 
 
 
 
 
TMUS
S
Wireless Communications Services
29-Apr-18
Stock
Jul-19
$7.80
$6.95
12.2%
3Q-2018
 
 
 
 
 
 
 
 
Amcor (Australia)
BMS
Packaging
6-Aug-18
Stock
Jun-19
$57.23
$57.25
0.0%
HIG
NAVG
P&C Insurance
22-Aug-18
Cash
Jun-19
$70.00
$69.96
0.1%
4Q-2018
 
 
 
 
 
 
 
 
HRS
LLL
Aerospace & Defense
14-Oct-18
Stock
Jun-19
$245.10
$243.78
0.5%
IBM
RHT
Technology- Software
28-Oct-18
Cash
Dec-19
$190.00
$186.01
2.1%
ILMN
PACB
Healthcare-Diagnostics
1-Nov-18
Cash
Jul-19
$8.00
$6.91
15.8%
IIVI
FNSR
Communication Equipment
9-Nov-18
Cash/Stock
Jun-19
$22.65
$21.19
6.9%
NXTR
TRCO
TV Broadcaster
3-Dec-18
Cash
Sep-19
$46.50
$46.13
0.8%
Siris Capital/Evergreen Coast Capital (Elliott)
TVPT
Leisure
10-Dec-18
Cash
Jun-19
$15.75
$15.15
4.0%
ABCB
LION
Regional Banks
17-Dec-18
Stock
Jun-19
$28.26
$28.30
-0.2%
1Q-2019
 
 
 
 
 
 
 
 
BMY
CELG
Biopharmaceuticals
3-Jan-19
Cash/Stock
Sep-19
$95.40
$95.63
-0.2%
DXC
LXFT
Technology-Software
7-Jan-19
Cash
Jun-19
$59.00
$57.84
2.0%
FISV
FDC
Business Services
16-Jan-19
Stock
Dec-19
$26.42
$25.87
2.1%
CHFC
TCF
Regional Banks
28-Jan-19
Stock
Oct-19
$20.15
$20.04
0.5%
SXC
SXCP
Coal MLP
5-Feb-19
Stock
Jul-19
$10.84
$11.02
-1.7%
BBT
STI
Regional Banks
7-Feb-19
Stock
Dec-19
$62.30
$62.03
0.4%
Roche
ONCE
Biotech
25-Feb-19
Cash
Jun-19
$114.50
$108.84
5.2%
Platinum Equity
LABL
Business Services
25-Feb-19
Cash
Sep-19
$50.00
$49.80
0.4%
BIIB
NITE
Biotech
4-Mar-19
Cash
Jun-19
$25.50
$25.50
0.0%
NVDA
MLNX
Technology – Semiconductors
11-Mar-19
Cash
Dec-19
$125.00
$109.80
13.8%
FIS
WP
Business Services
18-Mar-19
Cash/Stock
Dec-19
$122.82
$121.98
0.7%
JLL
HFF
Commercial Real Estate Services
19-Mar-19
Cash/Stock
Sep-19
$44.18
$43.96
0.5%
CUZ
TIER
Office REIT
25-Mar-19
Stock
Sep-19
$27.33
$27.24
0.3%
CNC
WCG
Healthcare Plans
27-Mar-19
Cash/Stock
Jun-20
$307.32
$274.49
12.0%
ON
QTNA
Technology – Semiconductors
27-Mar-19
Cash
Dec-19
$24.50
$24.10
1.7%
ZF Friedrichshafen
WBC
Auto Parts
28-Mar-19
Cash
Mar-20
$136.50
$130.34
4.7%
2Q-2019
 
 
 
 
 
 
 
 
UGI
APU
Utility – Regulated Gas
2-Apr-19
Cash/Stock
Sep-19
$33.86
$34.15
-0.9%
ENTG
VSM
Specialty Chemicals
28-Jan-19
Stock (Abandoned)
5-Apr-19
$42.43
$51.20
-17.1%
Merck KGaA (Germany)
VSM
Specialty Chemicals
12-Apr-19
Cash
Dec-19
$53.00
$51.25
3.4%
Wieland-Werke AG (Germany)
BRSS
Industrials – Metal Fabrication
10-Apr-19
Cash
Dec-19
$44.00
$43.12
2.0%
CVX
APC
Oil & Gas E&P
12-Apr-19
Cash/Stock (Abandoned)
6-May-19
$62.06
$75.49
-17.8%
OXY
APC
Oil & Gas E&P
6-May-19
 
Dec-19
$74.52
$72.29
3.1%
WM
ADSW
Waste Management
15-Apr-19
Cash
Mar-20
$33.15
$32.18
3.0%
Siris Capital Group
EFII
Technology – Computer Systems
15-Apr-19
Cash
Sep-19
$37.00
$36.96
0.1%
EXPE
LEXEA
Internet Content & Information
16-Apr-19
Stock
Jul-19
$41.92
$41.77
0.4%
Apollo Global Management
SFS
Grocery
16-Apr-19
Cash
Sep-19
$6.50
$6.54
-0.6%
JEC
KEYW
Software Application
22-Apr-19
Cash
Aug-19
$11.25
$11.24
0.1%
PK
CHSP
Lodging REIT
6-May-19
Cash/Stock
Sep-19
$29.41
$29.72
-1.0%
MRVL
AQ
Technology – Semiconductors
6-May-19
Cash
Dec-19
$13.25
$13.05
1.5%
MPLX
ANDX
Oil & Gas Midstream
8-May-19
Stock
Dec-19
$35.40
$35.36
0.1%
Digital Colony Partners/EQT (Private Equity)
ZAYO
Communication Equipment
9-May-19
Cash
Jun-20
$35.00
$32.62
7.3%
Employers Mutual Casualty Co
EMCI
Property & Casualty Insurance
9-May-19
Cash
Dec-19
$36.00
$36.03
-0.1%
SnapAV
CTRL
Electronic Components
9-May-19
Cash
Dec-19
$23.91
$23.64
1.1%
IFM Global Infrastructure Fund
BPL
Oil & Gas Midstream
10-May-19
Cash
Dec-19
$41.50
$40.87
1.5%
HPE
CRAY
Technology – Computer Systems
17-May-19
Cash
Jan-20
$35.00
$35.16
-0.5%
NASCAR
ISCA
Leisure
22-May-19
Cash
Dec-19
$45.00
$45.55
-1.2%

4. Mallinckrodt – The Volatility Continues?

8

Although Mallinckrodt’s bonds are trading at a significant discount to par, we recommend investors remain side-lined given our assessment of the probability of further price volatility.

 Although we acknowledge the equity cushion given a conservative EV/EBITDA valuation of ~6x vs. total debt/EBITDA of ~ 5x, we expect continued price volatility.

Accordingly, we believe a more attractive entry point will present itself over the coming months at a lower price level. Despite this, we think that the business, or its individual segments, will remain a going concern with an eventual spin-off into separate entities as per management’s plan.

However, the issue is timing and we expect further volatility due to legal/regulatory risk which is difficult to quantify

5. Trump Trade Means Lynas Capex Easier

Screenshot%202019 05 24%20at%2012.25.24%20am

The last two days have been pretty spectacular for the shares of Lynas Corp Ltd (LYC AU). While it is not clear what has changed OTHER than a heightening of tensions in the trade war, several factors may be to ‘blame.’

With the blocking of all US hardware and software sales to Huawei after a White House Executive Order on Information Security late last week (temporarily mitigated two days ago by a 90-day temporary general license aimed at easing the transition), the question on everyone’s lips was how China would respond. The first response was that China would cease doing business with anyone who ceased doing business with Huawei. That seemed a countermeasure designed to be reciprocal. 

While Huawei founder Ren Zhengei has made several public statements in Chinese social and state media (many of which appear to be abbreviated for maximum effect – read the details folks!) in recent days, the perception is that Chinese leaders have been quiet. One exception to that was a visit by China President Xi Jinping to rare earth company JL Mag Rare-Earth Co Ltd (300748 CH), in Jiangxi province on Monday. That led to rampant speculation on the share prices of Chinese rare earth companies, and the idea that it was symbolic of what China might do to the US (block rare earth exports). 

Monday the 20th May saw a pre-market release of a notification of an MOU of a JV between Lynas and US company Blue Line to create a rare earths separation facility in the US. The JV would be majority-owned by Lynas, and would initially concentrate on heavy rare earth (Dysprosium and Terbium) separation but could also include light rare earth (Neodymium, Praseodymium, Lanthanum) separation facilities at a facility on a site currently owned by Blue Line. This strikes me as an obvious thing for which a miner would issue a press release. The two companies already work together, and it promises nothing. It is, however, a project to work on working on a project, and is more designed to elicit interest from other parties to fund it.

The 21st May saw Investor Day in Sydney and the stock popped 14.4%, following that by a 7+% move on the 22nd (yesterday) temporarily clearing the highest 3mo moving average seen in the last five years.

data source: tradingview.com

The question is what has changed and was that change worth a 20+% move in two days?

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko
  2. Renault/Nissan:  Mangalore Alert!

1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko

Spin2

Last Week in Event SPACE …

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

EVENTS

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Despite his initial conciliatory stance prior to his appointment to the board and as the new chairman of Renault, Jean-Dominique Senard said the Alliance needed to be re-balanced “in spirit” to counter fears among its Japanese partners that Renault wants to dominate the partnership. Subsequent to his ascension to the board, Renault has made a new proposal for integration. Indications are that proposal was rebuffed by Nissan. This was followed by Nissan’s CEO Hiroto Saikawa saying “What’s most important is Nissan’s future. The question is how we should use the alliance for our future, not how we should be used by the alliance.

A Yomiuri article said that Renault told Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. This is a serious escalation in tensions.

  • Renault is pushing at a time when they should not, and lobbing threats like flaming barrels of oil over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings of scale. Renault is acting now while Nissan is weak from the governance scandal and after Nissan has lowered its forecast for a second time this year. Yet Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises.
  • Nissan could sell new shares in itself to dilute Renault below 40%. Or buy more shares in Renault to own more than 25%. Or commence constructive disengagement. Renault could go hostile on Nissan, which would break the Alliance Agreement and start a war. All told, the possibilities for the Alliance look bleaker.
  • If Nissan engages in defense, the “attack to defend” trade is to own more Renault. If Nissan defends itself with good governance, the trade is to own more Nissan. It’s not an easy trade, but Travis Lundy tilts to Renault, for now. That could change quickly.

(link to Travis’ insight: Renault/Nissan: Mangalore Alert!)

STUBS & HOLDCOS

NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

Travis recommended a NTT/Docmo set up last October NTT Stub Vs MktCap Near 10yr Lows, Stub Earnings Vs Total Near 10yr High around the time of the “Docomo Shock” of lower pricing come April 2019. The stub – if you measure it that way – doubled from less than ¥600/share to ¥1200/share as of the close earlier this week. Since the initial recommendation, NTT Docomo has executed a large buyback and NTT has executed a smaller buyback and the market expectation is for another NTT buyback from the government sometime after earnings.

  • NTT Docomo has now released its new lower-priced and simpler pricing plans which start in June this year. The Nikkei released an article over the past weekend saying that OP would fall 20% this year. This was a full 11.5% below the consensus forecast. Shares ended up on both sets of news, but once again the stock ended up. That left NTT at a higher price vs Docomo than before but the ratio is almost 5% below recent highs despite worse than-expected forecasts for NTT Docomo’s OP and a promised four-year soft spot.
  • NTT Docomo trades at 12x its highest EPS for the next several years. NTT trades at sub 10x on a consolidated basis and well less than that on a parent-implied basis (leverage helps).
  • Travis was a buyer of the NTT/Docomo “dip”. He expected a 20% drop in OP at NTT Docomo would be absorbed in stride, but not really. However, ongoing cost-cutting, lower depreciation and writedowns of fixed line assets, and better profitability on a mature cash-cow business means NTT parent-only (i.e. NTT less Docomo and Data) earnings should continue to progress higher, and NTT should continue to distribute that capital to shareholders. 
  • A priori, there has been shorting of Docomo vs NTT for the past several months and that has now reached a point of “sell the news” where those short are buying back their Docomo. And near-term may favour Docomo vs NTT in regards to buyback flows as Travis expected a Docomo market buyback of ¥300-400bn.
  • After the close on Friday, Docomo released earnings forecasts – OP down 18% and NP down a little less. Docomo also announced a buyback of ¥300bn to be conducted in the market over the next year.

(link to Travis’ insight: NTT Vs Docomo: Where To From Here?)


Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

AC’s 8% decline (at the time of my note) since the beginning of the month, compared to ALI’s 5% gain, has resulted in the discount to NAV widening to ~13% against a one-year average of 4%. Although ALI’s exchangeable bond was cited as a possible cause for the recent bifurcation – the last day for conversion was the 22 April and was fully converted – the chief suspect is the unlocking of a recent placement by Mitsubishi Corp (8058 JP) and the possibility of a new placement.

  • On 20 March 2018, Mitsubishi placed 8.5mn shares of AC at ₱934/shares (~7.5% discount to last close). The placement reduced Mitsubishi’s stake to 8.75% from a little over 10% and was the first time it has sold since securing its stake in early 2007 when AC traded around ₱55.
  • On 15 January 2019, Mitsubishi placed 13mn Ayala shares at ₱900 per share (~7.3% discount). Allegedly Mitsubishi initially offered 9mn shares.  As with the shares sold in March, this shares placement had a 90-day lock-up on further sales, which expired last week.
  • Mitsubishi is a seller of AC – that is evident – and still holds 41.57mn or 6.58% of shares out. However, the urgency to sell more is not apparent – the most recent placements occurred ahead of their year-end. Stub earnings are tonking along, propped up by the energy division. All things considered, AC looks interesting here.

(link to my insight: StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”)


First Pacific Co (142 HK)

Curtis Lehnert revisits this holdco, having first propositioned a set-up trade back in early December. The trade is moving in the right direction and recent developments indicate there is room for a further narrowing in the discount.

  • In March, First Pac  announced it is exiting its 50% stake in the Goodman Fielder JV (GF) for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. But this is a significant step towards narrowing the discount to NAV as GF was the second largest component of the stub (~18% of NAV). 
  • Proceeds from the sale would be used to pay down debt and for share repurchases. The company also mentioned they have identified further assets for sale outside of emerging Asia. Curtis’ take on this statement is that the Pacific Light project that operates a LNG-fired power plant in Singapore may be the next to be sold as it is the only other significant asset that is not in “emerging” Asia.
  • There is also Indofood Sukses Makmur Tbk P (INDF IJ)‘s voluntary offer for Indofood Agri Resources (IFAR SP), which I discussed in PT Indofoods’ Voluntary Offer for 74% Held Sub IFAR.
    The impact on First Pac is minor, but it is a wider sign that the group is in the midst of restructuring and streamlining its shareholdings.

(link to Curtis’ insight: TRADE IDEA – First Pacific (142 HK) Stub: Assets Sales Pave the Way to a Narrower Discount to NAV)

M&A – ASIA-PAC

Kosaido Co Ltd (7868 JP) (Mkt Cap: $172mn; Liquidity: $2mn)

Kosaido came out with lower “forecasts” for the year to this past 31 March, which consisted of (possibly kitchen-sinking) writedowns in relations to the funeral parlor business and writedowns and weakness in the info business. The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share. 

So… Kosaido directors WERE able to recommend minorities sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) a few months ago, but now cannot recommend to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

  • The Murakami bid is ¥750. It is not supported by Kosaido, is still well below BVPS (which is now lower than at the start of the Tender) and the Murakami bid is not designed to squeeze out minorities. If you do not tender, even if it DOES succeed, there is zero guarantee that the backend will trade higher than the current price or the Tender Offer Price. 
  • The Bull Case here is that Minami Aoyama Real Estate gets 51%, then replaces all the directors at both Kosaido and Tokyo Hakuzen, and then embarks on an asset-lightening exercise to fund rehabilitation, then sells off the parts to deliver book value to investors. 
  • The Bear Case is that there is no successful tender, and the shares fall back to some level lower than here as punters bail and then the Murakami group scoops up more stock lower. The Worse Bear Case is that the company simply cannot rescue itself. It has had years to fix an obviously weak “info” business and it has not done so. 
  • The Base Case could be seen that the tender goes through, Murakami gets 51%, then it takes a while for anything to happen, things come out less than optimal, and because Murakami-san gets to consolidate, he doesn’t care about his mark-to-market. But you will.

(link to Travis’ insight: Kosaido: The Bull Case, The Bear Case, and the Base Case)


Automotive Holdings (AHG AU) (Mkt Cap: $560mn; Liquidity: $2mn)

Ap Eagers Ltd (APE AU) has now dispatched the Bidder’s Statement for its all-scrip (1 APE share for every 3.8 AHG shares) offer for AHG. The Offer is conditional on ACCC approval and no MACs. There is no minimum acceptance (shares tendered are irrevocable, which hasn’t stopped what appears to be Perpetual tendering in its 9.2% stake to the IAF) threshold nor finance condition or due diligence. AHG recommends shareholders take no action as it considers the proposal to be highly conditional and that AHG trades through terms.

  • The merged AHG/APE is expected to exact pre-tax cost synergies (according to APE) of $13.5mn annually.  Although he agrees the merger rationale to have merit, AHG’s CEO John McConnell argues synergies “may be a bit light by the way we’re looking at it”. APE’s CEO Martin Ward countered estimates may potentially increase with the benefit of a full operational review.
  • With AHG’s share price languishing, there is a hint of opportunism to APE’s Offer. But not a lot – the scrip ratio is not unreasonable when viewed from a 1M, 3M and 6M viewpoint. Only when the timeframe extends further out to one-year (3.52x) and beyond does the ratio appear to take advantage.
  • With car dealerships under the hammer amidst declining new vehicle sales, the benefits from a merger are apparent. This Offer may just require a small kiss to terms to get all parties on board. The premium to terms has come in since Perpetual tendered.

(link to my insight: AHG & AP Eagers – Smart Carma)


Yungtay Engineering (1507 TT) (Mkt Cap: $800mn; Liquidity: $1mn)

The tender results gets Hitachi ~39.7% of shares out. Hitachi got about 28% of the non-Hitachi and non-Hsu Cho-Li shares in the tender. 70+% of what was possible did not tender. This cannot be seen as a big victory for Hitachi and they know it. They do not have the “control” to consolidate as evidenced by the EGM spat. Travis expects this has now turned into a waiting game for them. 

  • At the EGM on the 18th April, the Hitachi/Yungtay side got three directors, the “Market Faction” led by the The Baojia Group and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of Schindler Holding Ag (SCHN SW) and United Technologies (UTX US)‘s Otis Elevators business – which combined have 11+% between them – obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The “opposition” had in some way “won” management rights.
  • Baojia Group and Hsu Tso-Ming plus Otis and Schindler will find it difficult to win enough to oust Hitachi. They can’t force capital decisions because Hitachi has negative control. They can only hope to greenmail Hitachi, or grow the company out from under them. A second tender offer by Hitachi was rumoured apparently, but Hitachi stomped on that rumour immediately.
  • Minority shareholders are left with a much less liquid instrument than before, which is expensive and has a kind of takeover premium built in when Travis expects there are few chances of a near-term takeover.

(link to Travis’ insight: Hitachi Deal for Yungtay Completes But Control Is Elusive)


SK Hynix Inc (000660 KS) (Mkt Cap: $47bn; Liquidity: $221mn)

On April 22nd, it was reported that SK Hynix is interested in acquiring MagnaChip Semiconductor Corp (MX US)‘s foundry business. Magnachip (market cap of US$316mn) employs about 2,500 people in the Cheongju and Gumi fab facilities and R&D centers in Korea. The foundry business currently represents about 45% of Magnachip’s sales.

  • In 2017, SK Hynix launched the SK Hynix System IC which focuses on the foundry business.  There have been numerous speculations about a potential M&A of various foundry businesses by either Samsung Electronics and SK Hynix in the past year. Recently, Global Foundries, the world’s third largest foundry player, has been looking for a buyer of its 300 mm fab (Fab 7) in Woodland, Singapore. Neither Samsung or SK Hynix have expressed interest.
  • It has been noted that the final bidders for the Magnachip foundry business may also include China’s Jian Guang Asset Management, and SMIC (China). Although this is a small scale deal, Douglas Kim believes SK Hynix would be the best fit as it would accelerate the company’s ambitions in the foundry business, which would be negative for the industry leaders Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) and Samsung. 

(link to Douglas’ insight: Korea M&A Spotlight: SK Hynix to Acquire Magnachip’s Foundry Business?)


Ki Holdings (6747 JP) (Mkt Cap: $169mn; Liquidity: $0.3mn)

Koito Manufacturing (7276 JP)  announced a Tender Offer to take out the minority shareholders in Ki Holdings. This has been long-awaited and long-needed. However, the modalities of how this is getting done are symptomatic of a shocking lack of good governance process. This deal effectively requires zero independent-thinking, economically-motivated investors to tender to make it a success and force minority squeezeout and delisting. This deal can almost certainly be accomplished with every single one of them refusing to participate.

  • The company needs 66.7% to get this over the hump and the combination of the parent and existing financial and corporate cross-holders would put this over 67% quite easily. This tender offer effectively requires zero non-crossholder shareholders to tender to make it a success.
  • Is the Tender Offer Price at least in the middle of the DCF range? No. Did either the Target or the Buyer obtain Fairness Opinions? No. Does the forward forecast for this year look like it is low-balled? Yes.

  • This is a done deal, and there is not much you can do about it unless you take the appraisal rights route.

(link to Travis’ insight: Koito Mfg (7276) Finally Announces TOB for KI Holdings (6747) Subsidiary)


Hanergy Thin Film Power (566 HK) (Mkt Cap: N/A; Liquidity: N/A)

The Scheme Document has been dispatched with a court meeting tabled for the 18 May 2018. The terms remain unchanged from the initial announcement on the 26 February – the proposal is one SPV share for each Scheme share. The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

  • We now know the SPV is incorporated in the BVI. Interestingly, “independent” shareholders now comprise 40.51% of shares out, up from 32.49% in the February announcement, after the Offeror’s stake (in concert with subsidiaries) has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage.  As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.
  • Questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles (a delisting procedure will commence if Hanergy does not resume trading before the end of July) or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.
  • For shareholders angling for the A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings – there is no guarantee – as it silos independent shareholders into a separate entity which, according to PRC law, facilitates the A-share application. On account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

(link to my insight: The Hanergy Dilemma: Vote For The Scheme)

M&A – US

Anadarko Petroleum (APC US) (Mkt Cap: $32bn; Liquidity: $400mn)

Occidental Petroleum (OXY US) announced a proposal to acquire Anadarko, potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko. OXY proposed a 50/50 cash/stock deal comprised of $38 cash plus 0.6094 OXY shares per APC share, or a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd.

  • OXY would need to issue about 309mn shares to fund the stock portion of its proposal, which is about 41% of its current share count, and would leave the combined company owned 71% by current OXY shareholders and 29% by current APC shareholders. Such a large share issuance will require the approval of OXY shareholders, which might present a challenge.
  • OXY’s CEO Vicki Hollub justified the pursuit of APC by claiming OXY is best equipped to exploit APC’s Permian Basin and DJ basin assets, stating that Oxy is “the right acquirer for Anadarko Petroleum because we can get the most out of shale.”
  • If the Board of APC determines that the OXY proposal is a Superior Proposal, CVX will have four business days to revise (improve) terms. If OXY then improves its proposal so it is a Superior Proposal, CVX will have a further three business days to further improve its terms.
  • CVX must now decide how badly it wants this deal. John DeMasi thinks there’s a decent chance they step up. With some upside to the OXY proposal and the possibility of CVX topping OXY’s terms by enough of a margin to put it firmly ahead, he thought APC was an attractive speculative merger arbitrage situation here.

(link to John’s insight: Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath)


Briefly …

On May 31, 2018,  Spirit Realty Capital (SRC US) spun-off its lower quality and debt encumbered assets into a vehicle Spirit MTA REIT (SMTA US), leaving SRC as a triple net lease REIT that is primarily focused on single tenant retail real estate in the US. Investors have yet to buy into the transformed SRC as the value gap between it and its closest peers has actually widened. Robert Sassoon delves into why this should reverse. (link to Robert’s insight: SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit)

OTHER M&A UPDATES

  • First Steamship (286.05mn) and Kuo Jen Hao (83.9mn) – collectively holding 24.66% in Summit Ascent Holdings (102 HK) – have sold their stakes to Suncity Group (1383 HK) @$1.94/share. After the transaction, Suncity holds 27.94% in Summit. This is still below the 30% MGO threshold. But outgoing ED John Wang also has 5% of shares out.

  • “‘Big bully’ Lynas Corp Ltd (LYC AU) must send waste home” is the headline in the AFR article (paywalled). This is quoting Malaysian government deputy minister and Kuantan MP Fuziah Salleh, who has been Lynas’ most outspoken critic.  She acknowledged Malaysia’s Cabinet is divided on the issue.

  • Indofood Agri Resources (IFAR SP)‘s Offer doc has been dispatched. The offer is now open and the first closing date is the 24 May. The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.

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

Name

% chg

Into

Out of

19.90%
Yue Xiu
Outside CCASS
22.00%
Prime
Outside CCASS
23.09%
Hang Seng
Outside CCASS
Dragon Mining (1712 HK)
15.15%
SHK
Outside CCASS
12.01%
HSBC
Outside CCASS
14.04%
Founder Sec
ABCI
DLC Asia (8210 HK)
11.00%
BEA
Outside CCASS
Source: HKEx

2. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko
  2. Renault/Nissan:  Mangalore Alert!
  3. Kosaido: The Bull Case, The Bear Case, and the Base Case

1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko

Spin2

Last Week in Event SPACE …

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

EVENTS

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Despite his initial conciliatory stance prior to his appointment to the board and as the new chairman of Renault, Jean-Dominique Senard said the Alliance needed to be re-balanced “in spirit” to counter fears among its Japanese partners that Renault wants to dominate the partnership. Subsequent to his ascension to the board, Renault has made a new proposal for integration. Indications are that proposal was rebuffed by Nissan. This was followed by Nissan’s CEO Hiroto Saikawa saying “What’s most important is Nissan’s future. The question is how we should use the alliance for our future, not how we should be used by the alliance.

A Yomiuri article said that Renault told Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. This is a serious escalation in tensions.

  • Renault is pushing at a time when they should not, and lobbing threats like flaming barrels of oil over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings of scale. Renault is acting now while Nissan is weak from the governance scandal and after Nissan has lowered its forecast for a second time this year. Yet Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises.
  • Nissan could sell new shares in itself to dilute Renault below 40%. Or buy more shares in Renault to own more than 25%. Or commence constructive disengagement. Renault could go hostile on Nissan, which would break the Alliance Agreement and start a war. All told, the possibilities for the Alliance look bleaker.
  • If Nissan engages in defense, the “attack to defend” trade is to own more Renault. If Nissan defends itself with good governance, the trade is to own more Nissan. It’s not an easy trade, but Travis Lundy tilts to Renault, for now. That could change quickly.

(link to Travis’ insight: Renault/Nissan: Mangalore Alert!)

STUBS & HOLDCOS

NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

Travis recommended a NTT/Docmo set up last October NTT Stub Vs MktCap Near 10yr Lows, Stub Earnings Vs Total Near 10yr High around the time of the “Docomo Shock” of lower pricing come April 2019. The stub – if you measure it that way – doubled from less than ¥600/share to ¥1200/share as of the close earlier this week. Since the initial recommendation, NTT Docomo has executed a large buyback and NTT has executed a smaller buyback and the market expectation is for another NTT buyback from the government sometime after earnings.

  • NTT Docomo has now released its new lower-priced and simpler pricing plans which start in June this year. The Nikkei released an article over the past weekend saying that OP would fall 20% this year. This was a full 11.5% below the consensus forecast. Shares ended up on both sets of news, but once again the stock ended up. That left NTT at a higher price vs Docomo than before but the ratio is almost 5% below recent highs despite worse than-expected forecasts for NTT Docomo’s OP and a promised four-year soft spot.
  • NTT Docomo trades at 12x its highest EPS for the next several years. NTT trades at sub 10x on a consolidated basis and well less than that on a parent-implied basis (leverage helps).
  • Travis was a buyer of the NTT/Docomo “dip”. He expected a 20% drop in OP at NTT Docomo would be absorbed in stride, but not really. However, ongoing cost-cutting, lower depreciation and writedowns of fixed line assets, and better profitability on a mature cash-cow business means NTT parent-only (i.e. NTT less Docomo and Data) earnings should continue to progress higher, and NTT should continue to distribute that capital to shareholders. 
  • A priori, there has been shorting of Docomo vs NTT for the past several months and that has now reached a point of “sell the news” where those short are buying back their Docomo. And near-term may favour Docomo vs NTT in regards to buyback flows as Travis expected a Docomo market buyback of ¥300-400bn.
  • After the close on Friday, Docomo released earnings forecasts – OP down 18% and NP down a little less. Docomo also announced a buyback of ¥300bn to be conducted in the market over the next year.

(link to Travis’ insight: NTT Vs Docomo: Where To From Here?)


Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

AC’s 8% decline (at the time of my note) since the beginning of the month, compared to ALI’s 5% gain, has resulted in the discount to NAV widening to ~13% against a one-year average of 4%. Although ALI’s exchangeable bond was cited as a possible cause for the recent bifurcation – the last day for conversion was the 22 April and was fully converted – the chief suspect is the unlocking of a recent placement by Mitsubishi Corp (8058 JP) and the possibility of a new placement.

  • On 20 March 2018, Mitsubishi placed 8.5mn shares of AC at ₱934/shares (~7.5% discount to last close). The placement reduced Mitsubishi’s stake to 8.75% from a little over 10% and was the first time it has sold since securing its stake in early 2007 when AC traded around ₱55.
  • On 15 January 2019, Mitsubishi placed 13mn Ayala shares at ₱900 per share (~7.3% discount). Allegedly Mitsubishi initially offered 9mn shares.  As with the shares sold in March, this shares placement had a 90-day lock-up on further sales, which expired last week.
  • Mitsubishi is a seller of AC – that is evident – and still holds 41.57mn or 6.58% of shares out. However, the urgency to sell more is not apparent – the most recent placements occurred ahead of their year-end. Stub earnings are tonking along, propped up by the energy division. All things considered, AC looks interesting here.

(link to my insight: StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”)


First Pacific Co (142 HK)

Curtis Lehnert revisits this holdco, having first propositioned a set-up trade back in early December. The trade is moving in the right direction and recent developments indicate there is room for a further narrowing in the discount.

  • In March, First Pac  announced it is exiting its 50% stake in the Goodman Fielder JV (GF) for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. But this is a significant step towards narrowing the discount to NAV as GF was the second largest component of the stub (~18% of NAV). 
  • Proceeds from the sale would be used to pay down debt and for share repurchases. The company also mentioned they have identified further assets for sale outside of emerging Asia. Curtis’ take on this statement is that the Pacific Light project that operates a LNG-fired power plant in Singapore may be the next to be sold as it is the only other significant asset that is not in “emerging” Asia.
  • There is also Indofood Sukses Makmur Tbk P (INDF IJ)‘s voluntary offer for Indofood Agri Resources (IFAR SP), which I discussed in PT Indofoods’ Voluntary Offer for 74% Held Sub IFAR.
    The impact on First Pac is minor, but it is a wider sign that the group is in the midst of restructuring and streamlining its shareholdings.

(link to Curtis’ insight: TRADE IDEA – First Pacific (142 HK) Stub: Assets Sales Pave the Way to a Narrower Discount to NAV)

M&A – ASIA-PAC

Kosaido Co Ltd (7868 JP) (Mkt Cap: $172mn; Liquidity: $2mn)

Kosaido came out with lower “forecasts” for the year to this past 31 March, which consisted of (possibly kitchen-sinking) writedowns in relations to the funeral parlor business and writedowns and weakness in the info business. The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share. 

So… Kosaido directors WERE able to recommend minorities sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) a few months ago, but now cannot recommend to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

  • The Murakami bid is ¥750. It is not supported by Kosaido, is still well below BVPS (which is now lower than at the start of the Tender) and the Murakami bid is not designed to squeeze out minorities. If you do not tender, even if it DOES succeed, there is zero guarantee that the backend will trade higher than the current price or the Tender Offer Price. 
  • The Bull Case here is that Minami Aoyama Real Estate gets 51%, then replaces all the directors at both Kosaido and Tokyo Hakuzen, and then embarks on an asset-lightening exercise to fund rehabilitation, then sells off the parts to deliver book value to investors. 
  • The Bear Case is that there is no successful tender, and the shares fall back to some level lower than here as punters bail and then the Murakami group scoops up more stock lower. The Worse Bear Case is that the company simply cannot rescue itself. It has had years to fix an obviously weak “info” business and it has not done so. 
  • The Base Case could be seen that the tender goes through, Murakami gets 51%, then it takes a while for anything to happen, things come out less than optimal, and because Murakami-san gets to consolidate, he doesn’t care about his mark-to-market. But you will.

(link to Travis’ insight: Kosaido: The Bull Case, The Bear Case, and the Base Case)


Automotive Holdings (AHG AU) (Mkt Cap: $560mn; Liquidity: $2mn)

Ap Eagers Ltd (APE AU) has now dispatched the Bidder’s Statement for its all-scrip (1 APE share for every 3.8 AHG shares) offer for AHG. The Offer is conditional on ACCC approval and no MACs. There is no minimum acceptance (shares tendered are irrevocable, which hasn’t stopped what appears to be Perpetual tendering in its 9.2% stake to the IAF) threshold nor finance condition or due diligence. AHG recommends shareholders take no action as it considers the proposal to be highly conditional and that AHG trades through terms.

  • The merged AHG/APE is expected to exact pre-tax cost synergies (according to APE) of $13.5mn annually.  Although he agrees the merger rationale to have merit, AHG’s CEO John McConnell argues synergies “may be a bit light by the way we’re looking at it”. APE’s CEO Martin Ward countered estimates may potentially increase with the benefit of a full operational review.
  • With AHG’s share price languishing, there is a hint of opportunism to APE’s Offer. But not a lot – the scrip ratio is not unreasonable when viewed from a 1M, 3M and 6M viewpoint. Only when the timeframe extends further out to one-year (3.52x) and beyond does the ratio appear to take advantage.
  • With car dealerships under the hammer amidst declining new vehicle sales, the benefits from a merger are apparent. This Offer may just require a small kiss to terms to get all parties on board. The premium to terms has come in since Perpetual tendered.

(link to my insight: AHG & AP Eagers – Smart Carma)


Yungtay Engineering (1507 TT) (Mkt Cap: $800mn; Liquidity: $1mn)

The tender results gets Hitachi ~39.7% of shares out. Hitachi got about 28% of the non-Hitachi and non-Hsu Cho-Li shares in the tender. 70+% of what was possible did not tender. This cannot be seen as a big victory for Hitachi and they know it. They do not have the “control” to consolidate as evidenced by the EGM spat. Travis expects this has now turned into a waiting game for them. 

  • At the EGM on the 18th April, the Hitachi/Yungtay side got three directors, the “Market Faction” led by the The Baojia Group and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of Schindler Holding Ag (SCHN SW) and United Technologies (UTX US)‘s Otis Elevators business – which combined have 11+% between them – obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The “opposition” had in some way “won” management rights.
  • Baojia Group and Hsu Tso-Ming plus Otis and Schindler will find it difficult to win enough to oust Hitachi. They can’t force capital decisions because Hitachi has negative control. They can only hope to greenmail Hitachi, or grow the company out from under them. A second tender offer by Hitachi was rumoured apparently, but Hitachi stomped on that rumour immediately.
  • Minority shareholders are left with a much less liquid instrument than before, which is expensive and has a kind of takeover premium built in when Travis expects there are few chances of a near-term takeover.

(link to Travis’ insight: Hitachi Deal for Yungtay Completes But Control Is Elusive)


SK Hynix Inc (000660 KS) (Mkt Cap: $47bn; Liquidity: $221mn)

On April 22nd, it was reported that SK Hynix is interested in acquiring MagnaChip Semiconductor Corp (MX US)‘s foundry business. Magnachip (market cap of US$316mn) employs about 2,500 people in the Cheongju and Gumi fab facilities and R&D centers in Korea. The foundry business currently represents about 45% of Magnachip’s sales.

  • In 2017, SK Hynix launched the SK Hynix System IC which focuses on the foundry business.  There have been numerous speculations about a potential M&A of various foundry businesses by either Samsung Electronics and SK Hynix in the past year. Recently, Global Foundries, the world’s third largest foundry player, has been looking for a buyer of its 300 mm fab (Fab 7) in Woodland, Singapore. Neither Samsung or SK Hynix have expressed interest.
  • It has been noted that the final bidders for the Magnachip foundry business may also include China’s Jian Guang Asset Management, and SMIC (China). Although this is a small scale deal, Douglas Kim believes SK Hynix would be the best fit as it would accelerate the company’s ambitions in the foundry business, which would be negative for the industry leaders Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) and Samsung. 

(link to Douglas’ insight: Korea M&A Spotlight: SK Hynix to Acquire Magnachip’s Foundry Business?)


Ki Holdings (6747 JP) (Mkt Cap: $169mn; Liquidity: $0.3mn)

Koito Manufacturing (7276 JP)  announced a Tender Offer to take out the minority shareholders in Ki Holdings. This has been long-awaited and long-needed. However, the modalities of how this is getting done are symptomatic of a shocking lack of good governance process. This deal effectively requires zero independent-thinking, economically-motivated investors to tender to make it a success and force minority squeezeout and delisting. This deal can almost certainly be accomplished with every single one of them refusing to participate.

  • The company needs 66.7% to get this over the hump and the combination of the parent and existing financial and corporate cross-holders would put this over 67% quite easily. This tender offer effectively requires zero non-crossholder shareholders to tender to make it a success.
  • Is the Tender Offer Price at least in the middle of the DCF range? No. Did either the Target or the Buyer obtain Fairness Opinions? No. Does the forward forecast for this year look like it is low-balled? Yes.

  • This is a done deal, and there is not much you can do about it unless you take the appraisal rights route.

(link to Travis’ insight: Koito Mfg (7276) Finally Announces TOB for KI Holdings (6747) Subsidiary)


Hanergy Thin Film Power (566 HK) (Mkt Cap: N/A; Liquidity: N/A)

The Scheme Document has been dispatched with a court meeting tabled for the 18 May 2018. The terms remain unchanged from the initial announcement on the 26 February – the proposal is one SPV share for each Scheme share. The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

  • We now know the SPV is incorporated in the BVI. Interestingly, “independent” shareholders now comprise 40.51% of shares out, up from 32.49% in the February announcement, after the Offeror’s stake (in concert with subsidiaries) has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage.  As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.
  • Questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles (a delisting procedure will commence if Hanergy does not resume trading before the end of July) or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.
  • For shareholders angling for the A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings – there is no guarantee – as it silos independent shareholders into a separate entity which, according to PRC law, facilitates the A-share application. On account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

(link to my insight: The Hanergy Dilemma: Vote For The Scheme)

M&A – US

Anadarko Petroleum (APC US) (Mkt Cap: $32bn; Liquidity: $400mn)

Occidental Petroleum (OXY US) announced a proposal to acquire Anadarko, potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko. OXY proposed a 50/50 cash/stock deal comprised of $38 cash plus 0.6094 OXY shares per APC share, or a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd.

  • OXY would need to issue about 309mn shares to fund the stock portion of its proposal, which is about 41% of its current share count, and would leave the combined company owned 71% by current OXY shareholders and 29% by current APC shareholders. Such a large share issuance will require the approval of OXY shareholders, which might present a challenge.
  • OXY’s CEO Vicki Hollub justified the pursuit of APC by claiming OXY is best equipped to exploit APC’s Permian Basin and DJ basin assets, stating that Oxy is “the right acquirer for Anadarko Petroleum because we can get the most out of shale.”
  • If the Board of APC determines that the OXY proposal is a Superior Proposal, CVX will have four business days to revise (improve) terms. If OXY then improves its proposal so it is a Superior Proposal, CVX will have a further three business days to further improve its terms.
  • CVX must now decide how badly it wants this deal. John DeMasi thinks there’s a decent chance they step up. With some upside to the OXY proposal and the possibility of CVX topping OXY’s terms by enough of a margin to put it firmly ahead, he thought APC was an attractive speculative merger arbitrage situation here.

(link to John’s insight: Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath)


Briefly …

On May 31, 2018,  Spirit Realty Capital (SRC US) spun-off its lower quality and debt encumbered assets into a vehicle Spirit MTA REIT (SMTA US), leaving SRC as a triple net lease REIT that is primarily focused on single tenant retail real estate in the US. Investors have yet to buy into the transformed SRC as the value gap between it and its closest peers has actually widened. Robert Sassoon delves into why this should reverse. (link to Robert’s insight: SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit)

OTHER M&A UPDATES

  • First Steamship (286.05mn) and Kuo Jen Hao (83.9mn) – collectively holding 24.66% in Summit Ascent Holdings (102 HK) – have sold their stakes to Suncity Group (1383 HK) @$1.94/share. After the transaction, Suncity holds 27.94% in Summit. This is still below the 30% MGO threshold. But outgoing ED John Wang also has 5% of shares out.

  • “‘Big bully’ Lynas Corp Ltd (LYC AU) must send waste home” is the headline in the AFR article (paywalled). This is quoting Malaysian government deputy minister and Kuantan MP Fuziah Salleh, who has been Lynas’ most outspoken critic.  She acknowledged Malaysia’s Cabinet is divided on the issue.

  • Indofood Agri Resources (IFAR SP)‘s Offer doc has been dispatched. The offer is now open and the first closing date is the 24 May. The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.

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

Name

% chg

Into

Out of

19.90%
Yue Xiu
Outside CCASS
22.00%
Prime
Outside CCASS
23.09%
Hang Seng
Outside CCASS
Dragon Mining (1712 HK)
15.15%
SHK
Outside CCASS
12.01%
HSBC
Outside CCASS
14.04%
Founder Sec
ABCI
DLC Asia (8210 HK)
11.00%
BEA
Outside CCASS
Source: HKEx

2. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

3. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale? and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?
  2. MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread
  3. Mallinckrodt – The Volatility Continues?
  4. Trump Trade Means Lynas Capex Easier
  5. Nexon: Continuing Question Marks

1. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?

The World Health Organization (WHO) finally made its long-awaited decision on officially classifying game addiction disorder as a disease on May 25th. In June 2018, the WHO already included gaming disorder on the “11th revision of its international classification of diseases.” The WHO has been reviewing this issue for nearly 11 months and it finally made its decision on classifying it as an official disease. 

Will this issue become a “deal breaker” for the Nexon sale? No, we do not believe that WHO finally deciding that gaming disorder is a disease will serve as a deal breaker. Nonetheless, we believe that it will have a negative impact on the game industry as a whole and will be an important factor that could bring down the potential purchase price. 

Three Key Issues of WHO’s decision to Classify Gaming Addiction as Disease to the Nexon Sale:

  • How much has the market already taken this into account? 
  • Gaming taxes? 
  • Greater negative perception of gaming

2. MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread

Nvda

Until very recently, the merger spread in the low to mid-single-digit range appeared to signal few problems with respect to Nvidia’s (NVDA US) proposed acquisition  of Mellanox (MLNX US) moving to consummation by year-end as targeted. However,  with one of the closing conditions of the deal being the receipt of antitrust clearance in China, the past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratchetting up of trade tensions between the US and China. Financial media and pundits have been quick to reference Qualcom’s (QCOM US) failed bid for NXP Semiconductors (NXPI US) last year as why this bodes ill for the NVDA/MLNX transaction. 

Below, we set out a case as to why the QCOM/NXPI may not be the right reference for the NVDA/MLNX transaction and why we believe the recently widened spread offers an attractive risk-reward opportunity for arbs with a potential IRR of at least 25%.   

Unusal Spreads As of May 23, 2019

M&A Situation
Spread
Expected Close
Comment
CO/GNW
65%
Jun-19
Still waiting  Canada, China SAFE approvals/Delay concern
FMF/STC
17%
Jun-19
Regulatory/Pricing Adjustment/Delay Risk
ILMN/PACB
16%
Jul-19
Potential Antitrust Complications in UK/Extended Review Period
NVDA/MLNX
14%
Dec-19
China Regulatory Concern
TMUS/S
12%
Jul-19
Potential antitrust complications/Extended review period
CNC/WCG
12%
Jun-20
Rumored Humana interest in CNC 

4Q 2016-2Q 2019 Live US M&A Announced Deals (>$400 MN) & Spreads 

Acquirer
Target
Sector
Date Announced
Transaction Type
Expected Close 
Offer Price
 Target Firm Price
Spread
4Q-2016
 
 
 
 
 
 
5/23/2019
 
China Oceanwide (China)
GNW
Financial -Life Insurance/Mortgage Insurance
23-Oct-16
Cash
Dec-18
$5.43
$3.29
65.0%
1Q-2018
 
 
 
 
 
 
 
 
SJW
CTWS
Water Utility
15-Mar-18
Stock
Dec-18
$72.09
$62.85
14.7%
SJW
CTWS
Water Utility
6-Aug-18
Cash (OfferRevised)
Jun-19
$70.00
$69.48
0.7%
FNF
STC
Insurance
19-Mar-18
Cash/Stock 
Jun-19
$49.90
$42.71
16.8%
2Q-2018
 
 
 
 
 
 
 
 
TMUS
S
Wireless Communications Services
29-Apr-18
Stock
Jul-19
$7.80
$6.95
12.2%
3Q-2018
 
 
 
 
 
 
 
 
Amcor (Australia)
BMS
Packaging
6-Aug-18
Stock
Jun-19
$57.23
$57.25
0.0%
HIG
NAVG
P&C Insurance
22-Aug-18
Cash
Jun-19
$70.00
$69.96
0.1%
4Q-2018
 
 
 
 
 
 
 
 
HRS
LLL
Aerospace & Defense
14-Oct-18
Stock
Jun-19
$245.10
$243.78
0.5%
IBM
RHT
Technology- Software
28-Oct-18
Cash
Dec-19
$190.00
$186.01
2.1%
ILMN
PACB
Healthcare-Diagnostics
1-Nov-18
Cash
Jul-19
$8.00
$6.91
15.8%
IIVI
FNSR
Communication Equipment
9-Nov-18
Cash/Stock
Jun-19
$22.65
$21.19
6.9%
NXTR
TRCO
TV Broadcaster
3-Dec-18
Cash
Sep-19
$46.50
$46.13
0.8%
Siris Capital/Evergreen Coast Capital (Elliott)
TVPT
Leisure
10-Dec-18
Cash
Jun-19
$15.75
$15.15
4.0%
ABCB
LION
Regional Banks
17-Dec-18
Stock
Jun-19
$28.26
$28.30
-0.2%
1Q-2019
 
 
 
 
 
 
 
 
BMY
CELG
Biopharmaceuticals
3-Jan-19
Cash/Stock
Sep-19
$95.40
$95.63
-0.2%
DXC
LXFT
Technology-Software
7-Jan-19
Cash
Jun-19
$59.00
$57.84
2.0%
FISV
FDC
Business Services
16-Jan-19
Stock
Dec-19
$26.42
$25.87
2.1%
CHFC
TCF
Regional Banks
28-Jan-19
Stock
Oct-19
$20.15
$20.04
0.5%
SXC
SXCP
Coal MLP
5-Feb-19
Stock
Jul-19
$10.84
$11.02
-1.7%
BBT
STI
Regional Banks
7-Feb-19
Stock
Dec-19
$62.30
$62.03
0.4%
Roche
ONCE
Biotech
25-Feb-19
Cash
Jun-19
$114.50
$108.84
5.2%
Platinum Equity
LABL
Business Services
25-Feb-19
Cash
Sep-19
$50.00
$49.80
0.4%
BIIB
NITE
Biotech
4-Mar-19
Cash
Jun-19
$25.50
$25.50
0.0%
NVDA
MLNX
Technology – Semiconductors
11-Mar-19
Cash
Dec-19
$125.00
$109.80
13.8%
FIS
WP
Business Services
18-Mar-19
Cash/Stock
Dec-19
$122.82
$121.98
0.7%
JLL
HFF
Commercial Real Estate Services
19-Mar-19
Cash/Stock
Sep-19
$44.18
$43.96
0.5%
CUZ
TIER
Office REIT
25-Mar-19
Stock
Sep-19
$27.33
$27.24
0.3%
CNC
WCG
Healthcare Plans
27-Mar-19
Cash/Stock
Jun-20
$307.32
$274.49
12.0%
ON
QTNA
Technology – Semiconductors
27-Mar-19
Cash
Dec-19
$24.50
$24.10
1.7%
ZF Friedrichshafen
WBC
Auto Parts
28-Mar-19
Cash
Mar-20
$136.50
$130.34
4.7%
2Q-2019
 
 
 
 
 
 
 
 
UGI
APU
Utility – Regulated Gas
2-Apr-19
Cash/Stock
Sep-19
$33.86
$34.15
-0.9%
ENTG
VSM
Specialty Chemicals
28-Jan-19
Stock (Abandoned)
5-Apr-19
$42.43
$51.20
-17.1%
Merck KGaA (Germany)
VSM
Specialty Chemicals
12-Apr-19
Cash
Dec-19
$53.00
$51.25
3.4%
Wieland-Werke AG (Germany)
BRSS
Industrials – Metal Fabrication
10-Apr-19
Cash
Dec-19
$44.00
$43.12
2.0%
CVX
APC
Oil & Gas E&P
12-Apr-19
Cash/Stock (Abandoned)
6-May-19
$62.06
$75.49
-17.8%
OXY
APC
Oil & Gas E&P
6-May-19
 
Dec-19
$74.52
$72.29
3.1%
WM
ADSW
Waste Management
15-Apr-19
Cash
Mar-20
$33.15
$32.18
3.0%
Siris Capital Group
EFII
Technology – Computer Systems
15-Apr-19
Cash
Sep-19
$37.00
$36.96
0.1%
EXPE
LEXEA
Internet Content & Information
16-Apr-19
Stock
Jul-19
$41.92
$41.77
0.4%
Apollo Global Management
SFS
Grocery
16-Apr-19
Cash
Sep-19
$6.50
$6.54
-0.6%
JEC
KEYW
Software Application
22-Apr-19
Cash
Aug-19
$11.25
$11.24
0.1%
PK
CHSP
Lodging REIT
6-May-19
Cash/Stock
Sep-19
$29.41
$29.72
-1.0%
MRVL
AQ
Technology – Semiconductors
6-May-19
Cash
Dec-19
$13.25
$13.05
1.5%
MPLX
ANDX
Oil & Gas Midstream
8-May-19
Stock
Dec-19
$35.40
$35.36
0.1%
Digital Colony Partners/EQT (Private Equity)
ZAYO
Communication Equipment
9-May-19
Cash
Jun-20
$35.00
$32.62
7.3%
Employers Mutual Casualty Co
EMCI
Property & Casualty Insurance
9-May-19
Cash
Dec-19
$36.00
$36.03
-0.1%
SnapAV
CTRL
Electronic Components
9-May-19
Cash
Dec-19
$23.91
$23.64
1.1%
IFM Global Infrastructure Fund
BPL
Oil & Gas Midstream
10-May-19
Cash
Dec-19
$41.50
$40.87
1.5%
HPE
CRAY
Technology – Computer Systems
17-May-19
Cash
Jan-20
$35.00
$35.16
-0.5%
NASCAR
ISCA
Leisure
22-May-19
Cash
Dec-19
$45.00
$45.55
-1.2%

3. Mallinckrodt – The Volatility Continues?

1

Although Mallinckrodt’s bonds are trading at a significant discount to par, we recommend investors remain side-lined given our assessment of the probability of further price volatility.

 Although we acknowledge the equity cushion given a conservative EV/EBITDA valuation of ~6x vs. total debt/EBITDA of ~ 5x, we expect continued price volatility.

Accordingly, we believe a more attractive entry point will present itself over the coming months at a lower price level. Despite this, we think that the business, or its individual segments, will remain a going concern with an eventual spin-off into separate entities as per management’s plan.

However, the issue is timing and we expect further volatility due to legal/regulatory risk which is difficult to quantify

4. Trump Trade Means Lynas Capex Easier

Screenshot%202019 05 24%20at%2012.25.24%20am

The last two days have been pretty spectacular for the shares of Lynas Corp Ltd (LYC AU). While it is not clear what has changed OTHER than a heightening of tensions in the trade war, several factors may be to ‘blame.’

With the blocking of all US hardware and software sales to Huawei after a White House Executive Order on Information Security late last week (temporarily mitigated two days ago by a 90-day temporary general license aimed at easing the transition), the question on everyone’s lips was how China would respond. The first response was that China would cease doing business with anyone who ceased doing business with Huawei. That seemed a countermeasure designed to be reciprocal. 

While Huawei founder Ren Zhengei has made several public statements in Chinese social and state media (many of which appear to be abbreviated for maximum effect – read the details folks!) in recent days, the perception is that Chinese leaders have been quiet. One exception to that was a visit by China President Xi Jinping to rare earth company JL Mag Rare-Earth Co Ltd (300748 CH), in Jiangxi province on Monday. That led to rampant speculation on the share prices of Chinese rare earth companies, and the idea that it was symbolic of what China might do to the US (block rare earth exports). 

Monday the 20th May saw a pre-market release of a notification of an MOU of a JV between Lynas and US company Blue Line to create a rare earths separation facility in the US. The JV would be majority-owned by Lynas, and would initially concentrate on heavy rare earth (Dysprosium and Terbium) separation but could also include light rare earth (Neodymium, Praseodymium, Lanthanum) separation facilities at a facility on a site currently owned by Blue Line. This strikes me as an obvious thing for which a miner would issue a press release. The two companies already work together, and it promises nothing. It is, however, a project to work on working on a project, and is more designed to elicit interest from other parties to fund it.

The 21st May saw Investor Day in Sydney and the stock popped 14.4%, following that by a 7+% move on the 22nd (yesterday) temporarily clearing the highest 3mo moving average seen in the last five years.

data source: tradingview.com

The question is what has changed and was that change worth a 20+% move in two days?

5. Nexon: Continuing Question Marks

Screenshot%202019 05 24%20at%203.54.18%20am

The Nexon Co Ltd (3659 JP) control-change saga plods on. 

I continue to read all the news that’s fit to print in English, Japanese, and Korean if I can find some web service to translate the hangul. 

My continuing worry about the significant number of articles which get published is that the ‘updates’ provided are much more soap opera-esque than really significant news developments or even insightful commentary which could inform market observers and participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

For this, I have a lower expectation of “certainty” on this situation than I expected I would have by now, and because of the passage of time, the NPV of the trade is slightly lower with a higher volatility of jump risk on eventual outcome than I expected it would have (I expected the components of the NPV to change – certainty would raise NPV while time-decay before announcement would drag on deal NPV, but the lack of certainty has added drag).

More comments about news evolution, content, and trading strategy are below.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: Renault/Nissan:  Mangalore Alert! and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Renault/Nissan:  Mangalore Alert!
  2. Kosaido: The Bull Case, The Bear Case, and the Base Case

1. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

2. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: Renault/Nissan:  Mangalore Alert! and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Renault/Nissan:  Mangalore Alert!
  2. Kosaido: The Bull Case, The Bear Case, and the Base Case
  3. Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath

1. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

2. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

3. Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath

Oxy apc%20proved%20reserve%20summary

Occidental Petroleum (OXY US) on Wednesday morning announced a proposal to acquire Anadarko Petroleum (APC US) , potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko.

The proposal has a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd. Oxy proposes a 50/50 cash/stock deal comprised of $38 cash plus .6094 OXY shares per APC share, or $38 billion in aggregate equity value.

 The details are laid out below.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Event-Driven: Renault/Nissan:  Mangalore Alert! and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Renault/Nissan:  Mangalore Alert!
  2. Kosaido: The Bull Case, The Bear Case, and the Base Case
  3. Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath
  4. The Hanergy Dilemma: Vote For The Scheme

1. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

2. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

3. Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath

Oxy apc%20proved%20reserve%20summary

Occidental Petroleum (OXY US) on Wednesday morning announced a proposal to acquire Anadarko Petroleum (APC US) , potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko.

The proposal has a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd. Oxy proposes a 50/50 cash/stock deal comprised of $38 cash plus .6094 OXY shares per APC share, or $38 billion in aggregate equity value.

 The details are laid out below.

4. The Hanergy Dilemma: Vote For The Scheme

The Scheme Document for Hanergy Thin Film Power (566 HK) has been dispatched with a court meeting tabled for the 18 May 2018.

The terms remain unchanged from the initial announcement on the 26 February – the proposal is one SPV share for each Scheme share.

The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

The IFA, in a heavily disclaimed summary, recommends shareholders vote for the Scheme.

What’s New?

We now know the SPV is incorporated in the BVI. Hanergy is incorporated in Bermuda. Upon the Scheme becoming effective, the SPV will be 100% owned by independent shareholders who face “no restrictions … to sell or transfer their SPV shares in private through the over-the-counter trading“. Whatever price that may be.

An Increase in Independents

Independent shareholders of Hanergy now comprise 40.51% of shares out, up from 32.49% in the February announcement. The shares held by the Offeror – Hanergy Mobile Energy Holdings Limited – in concert with subsidiaries, has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage.  As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.

What to Do?

The questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles – a delisting procedure will commence if Hanergy does not resume trading before the end of July – or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.

At a guess, from perusing various rules and regulations, there’s little to distinguish between the two.

For shareholders angling for A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings, as it silos independent shareholders into a separate entity. 

The Offeror has sought advice from its PRC legal advisers and according to the advice of the PRC legal advisers, it is not feasible to achieve the A-Share Listing if the Company has a large number of non PRC Independent Shareholders as it is the case currently. Further, the Offeror’s PRC legal advisers confirmed that it is feasible under the PRC laws and regulations for the A-Share Listco to make application for A-Share Listing if the Independent Shareholders hold the entire share capital of the SPV and the SPV is one of the shareholders of the A-Share Listco.

For the Offeror, the SPV facilitates the A-share application – although it does not guarantee its approval. And even if shareholders do not choose to exit the SPV AND the A-share listing is approved, the SPV’s holding into the A-share can theoretically be diluted via the introduction of new shareholders in a pre-IPO allotment.

Nevertheless, on account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.