Event-Driven

In this briefing:

1. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp
2. Descente’s Doleful Defense (Dicaeologia)
3. Nissan Governance Outlook – Foggy Now, Sunny Later
4. Itochu and Descente: Gloves Off

1. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp

Last Week in Event SPACE …

• Something is up as Kosaido Co Ltd (7868 JP)‘s shares trade almost 40% through terms and back down – still 18% through terms.
• Descente Ltd (8114 JP)‘s management’s explanation why Itochu owning 40% would be bad is almost a paean to good governance, but the gloves are off.
• Panalpina Welttransport Holding (PWTN SW) is burdened with “social costs” in the near-term.
• Opportunistic yes, but Medco Energi Internasional T (MEDC IJ)‘s proposal for Ophir Energy (OPHR LN) is okay in a less-than-ideal situation.
• A possible last minute counter to Apollo’s disappointing offer for RPC Group PLC (RPC LN).
• The market is valuing Baidu Inc (ADR) (BIDU US) core ops as an “Old Economy” company with little to no growth prospect.
• Plus CCASS movements and expected upcoming events for key M&A transactions.

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

Kosaido Co Ltd (7868 JP) (Mkt Cap: $176mn; Liquidity: $1.2mn)

When Bain announced its MBO for Kosaido at ¥610/share, Travis Lundy concluded (in his insight Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?) that it was a lowball bid and a virtual asset strip in progress. The kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like the renewal of a business. The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher.

• Travis’ inclination at Thursday’s price (¥775/share) is that at a 30% discount to book, there could be enough here to entice someone to split the company up at a slightly better level, but he doubts that it is worth 1x book. Given the headaches involved in making this company worth more than book, it would be worth less than book now. If the Info business can be rescued, then it is cheap. If it cannot, it is not.
• Because “management-friendly” shareholders currently hold at least 40% and probably more like 50+%, Travis thinks Murakami-san will find it really tough to mount, or get someone else to mount, a truly hostile action. 
• Perhaps Murakami-san’s goal here is to block the deal then get management to use debt to buy out other people and expand the funeral parlour business, then get a strategic to buy the whole thing out. It could be, but Travis doesn’t think chasing the market at 25-30% above where Murakami-san got in is a good risk.

Since Travis wrote, Murakami-san’s vehicles have added another 1.24% to reach 9.55% of shares out. The last set of shares was purchased at an average of ¥652/share.

(link to Travis’ insight: Kosaido: Activism Drives Price 30+% Through Terms)

Descente Ltd (8114 JP) (Mkt Cap: $1.8bn; Liquidity: $4.3mn)

This past Thursday 7 February, Descente announced a weak Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP) Tender Offer with a 28-page supporting powerpoint deck (also in Japanese). Descente appears to have no ability to defend itself, and its claim that a large shareholder like Itochu could damage corporate value by weakening governance is effectively a statement that others (like perhaps Wacoal) would too, so only a full takeover makes sense under that defense.

• Descente management’s explanation for why Itochu owning 40% would be bad is almost a paean to good governance. If the influence of suppliers and customers in the shareholder register is bad, it is bad – whether friendly to management or not. Conflict of interest can happen via entrenchment.
• The lack of a white knight proposed and effective “I got nothing, but please don’t tender” response is bearish for the shares. if management is right and Itochu’s presence at 40% will lower corporate value, the back end might be worth less than ¥1,871/share where it was trading pre-tender. That would mean the fair value of shares now would still be below here.
• If Itochu gets its 40% and ANTA votes with Itochu, it is highly possible that the two could effect dramatic change at the management and board level. That would be very hostile and corporate Japan would have something to say about that. Travis says “I am not sure Itochu would go that hostile immediately.”
• Michael Causton just wrote about Descente’s rejection of the Itochu tender saying “The Gloves Are Off”. He notes there is a perception of a cultural difference between Descente’s brand cultivation and Itochu Textile’s hands-off approach to brand management, but notes that the differences between Descente and Itochu need to be resolved quickly in order to optimally ramp up brand awareness and sales points ahead of the Rugby World Cup in Japan this year, the Olympics, next year, and the World Masters Games the year after. 

links to:
Travis’ insight: Descente’s Doleful Defense (Dicaeologia)
Michael’s insight: Itochu and Descente: Gloves Off

ND Software (3794 JP) (Mkt Cap: $212mn; Liquidity: $0.04mn)

ND Software (NDS) announced a MBO sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be ~7.2x trailing 12-month EV/EBITDA. The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this. Looks straightforward, but …

• Sometime activist Symphony Financial Partners (SFP) holds around 20% in NDS. If on board, this this deal is almost done because 31.26% is already pledged to tender, Symphony’s stake would make it 51.5%. Other presumably management-friendly shareholders own another 10%, and employees own about 7%. If Symphony is on board, that easily clears the 67% hurdle. If SFP are not on board, they own about 60% of what is necessary to block this deal.  And they could buy on market to raise their stake further. 
• Travis would not want to sell out his shares tomorrow at ¥1699/share. Or even ¥1701. He thinks there is a chance that the loose float is scooped up by shareholders or players who might want to increase their stake and see if this deal can be bumped. 

(link to Travis’ insight: ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $4.1bn; Liquidity: $20mn)

Palpina confirmed that the Ernst Göhner Foundation, Panalpina’s largest shareholder (46% of shares out) does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A. Panalpina’a stock tanked, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

• If management had said that they have a plan which is to grow themselves out of their current doldrums, and their largest shareholder supports that plan to stick with management and go slow, nothing will get done until the new chairman is installed in May at the AGM, and even then, given the Foundation’s position that they support management’s “independent growth strategy”, there is not much minority shareholders can do.
• This is an ongoing issue of governance. If the directors are effectively chosen by the Ernst Göhner Foundation, which supports the company’s independence, so they do too, minority shareholders serve no purpose other than to provide capital for the foundation to keep Panalpina listed.
• This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive offer. Travis expects this is eventually worth another go but he would want to reload lower and/or later, or when Panalpina is in a better position after the full IT package is deployed.

Since Travis wrote, DSV has released earnings and said it is still significantly engaged in the bid, and comments from the chairman of the Ernst Göhner Foundation has made comments suggesting it is not wedded to the idea, so it comes down to price – someone has to pay now to get the benefits expected from the full IT package.

Travis pointed out in the discussions that interestingly, when DSV released earnings it did not announce a buyback, which would have been normal, leading some to speculate the company is saving its cash for another go at it.

(link to Travis’ insight: Largest Panalpina Shareholder to Other Shareholders: Get Stuffed) 

Ophir Energy (OPHR LN) (Mkt Cap: $204mn; Liquidity: $3mn)

On its fourth attempt Medco Energi Internasional T (MEDC IJ) receives board approval for its £0.55/share (66% premium to the closing price) offer for Ophir. The deal is conditional on receiving 75% shareholder approval, approval from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

• There is an opportunistic element to Medco’s tilt after Ophir recently announced the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. This resulted in a $300mn non-cash impairment. Ophir had previously written down $310mn on the same project back in September.
• Shareholders such as Petrus (~2.8% stake) won’t support the offer having announced in mid-Jan that Medco’s earlier £0.485/share proposal “massively under-values” Ophir.
• Reg approvals are not expected to be an issue  – the stake in Tanzania is for a 20% non-controlling interest, a similar % approved in a prior sale to Pavilion in 2015. There is no approval/consent required from the Thai authorities – it is in there really to cover the unlikely situation that for some reason the Thai authorities raise an objection.

• Ophir’s shares are trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder (Sand Grove) may warrant such an outcome. A firm offer is on the table backed by the Ophir’s board. I’d look to get involved a spread or two below terms. 

(link to my insight: Medco’s “Okay” Offer For Ophir After Fortuna Setback)

RPC Group PLC (RPC LN) (Mkt Cap: $4.2bn; Liquidity: $43mn)

On January 23, after months of media speculation, RPC announced a final cash offer by a unit of Apollo Global Management for £7.82/share by way of a scheme. Two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, immediately expressed disappointment with the offer valuation.

• On January 31, Berry Global Group, a former Apollo  portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.
• The price being paid by Apollo is not very generous, though RPC’s sale process has been widely reported since September, 2018. Apollo’s ‘no increase’ declaration has made it easy for BERY to win this, provided no one else comes to the party. (I reached out to RPC who confirmed Apollo is restricted from countering a higher bid as it is bound by the language in the Offer announcement that the offer of £7.82 per share is final and will not be increased.) So there is limited upside from here unless you think someone else could join BERY as a late gatecrasher.
• Apollo’s offer provides an effective floor so there is limited downside from here, especially under strict UK rules which make it difficult for an acquirer to walk. John DeMasi recommend buying RPC on the possibility BERY comes out with a generous offer or another buyer shows up due to the undemanding valuation of Apollo’s offer.

(link to John’s insight: RPC Group PLC – It Ain’t Over ’til It’s Over)

Baidu Inc (ADR) (BIDU US) (Mkt Cap: $60.6bn; Liquidity: $490mn)

Johannes Salim, CFA tackled Baidu which he estimates is trading at a discount to NAV of 29% or ~2 SD below its 3-yr average NAV discount.

• It’s a weak-ish stub with 57%-owned video streaming subsidiary iQIYI Inc (IQ US) (which went public in 1Q18) and 19%-owned online travel agency, Ctrip.Com International (Adr) (CTRP US), together accounting  for 14% of NAV.
• BIDU’s core business (primarily online/mobile search services plus new initiatives such as Baidu Cloud and autonomous driving), accounts for 78% of NAV, with net cash a further 8% of NAV.
• Fundamentally, BIDU’s core business has grown healthily, with strong cash flows generation. Johannes estimates the market is unjustifiably valuing this business at US$49.3bn, or 8.7x 2019E EV/EBITDA or 11.2x 2019P, suggesting little to no growth prospect.

(link to Johannes’ insight: Baidu: Time to Swoop In, with NAV Discount Widening Substantially)

CJ Corp (001040 KS) (Mkt Cap: $3bn; Liquidity: $7.5mn)

Sanghyun Park recommends long Holdco and short the synthetic sub ((Cj Cheiljedang (097950 KS), CJ ENM (035760 KS), CJ CGV Co Ltd (079160 KS) and Cj Freshway (051500 KS) on a ratio of 50:40:7:3 ) at this point.

• By my calcs, CJ Corp is trading at a 52% discount to NAV compared to a 52-week average of 41%. CJ C and CJ ENM comprise 63% of NAV.
• Of note, the stub ops still account for 29% of NAV and primarily comprises the 55.13% stake in CJ Olive Networks and brand royalty, each accounting for ~13% of NAV.

(link to Sanghyun’s insight: CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach)

Toyota Industries (6201 JP)(Mkt Cap: $15.8bn; Liquidity: $24mn)

Curtis Lehnert recommends closing the Toyota set-up trade, which hasn’t exactly been a storming one (4% or 1.96% on the gross notional).

• Toyota announced earning recently which (slightly) beat expectations slightly and the stock rallied in response. This move brought the discount to NAV in line with its 6-month average and has eroded the statistical edge of staying in the trade.
• The fundamentals for Toyota are still attractive, therefore it could be argued to hold the stub beyond these levels. However, Curtis has opted for the tactical route in the current environment and take profits when a statistical edge disappears.

(link to Curtis’ insight: TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade)

Briefly …

• Sanghyun recommended a long 2PB and short 1P, after Hyundai Motor Co (005380 KS)‘s 1P/2PB price ratio touched 152% of σ on a 20D MA. This is the highest since late Nov last year. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
• Sanghyun also recommended go long Samsung Electronics (005930 KS)‘s1P and short Common, for a short term reversion as we enter the March shareholder meeting phase. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• Greencross Ltd (GXL AU) shareholders have approved the scheme of arrangement.

• MYOB Group Ltd (MYO AU) trades through terms after announcing Vinva is a new substantial holder.

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.   

2. Descente’s Doleful Defense (Dicaeologia)

The new Takeover Rules enacted in December 2006 (with one amendment to the SEL made in 2005 in direct reaction to the loophole used by Livedoor to acquire large stakes of Nippon Broadcasting System off-market to reach a level above one-third) are enshrined in the Financial Instruments and Exchange Act/Law (normally called “FIE”, “FIEA”, or “FIEL”), with the most relevant portions commencing with Article 27-2. These “TOB Rules” outlawed stealth acquisition off-market to “suddenly acquire” a large stake without passing through the market mechanism or conducting a Tender Offer. The principle of this was a sense of “fairness” such that minority investors had an equal opportunity to sell to someone who sought to have control or influence, and that it could not simply be arranged through collusive behavior. 

The first rule which mattered to Descente Ltd (8114 JP) was that the Board of the “Subject Company”, according to Article 27-10…

shall, pursuant to the provisions of a Cabinet Office Ordinance, submit a document which states its opinion on the Tender Offer and other matters specified by a Cabinet Office Ordinance (hereinafter referred to as the “Subject Company’s Position Statement”) to the Prime Minister within a period specified by a Cabinet Order from the date when the Public Notice for Commencing Tender Offer is made.

That period specified is 10 business days.

So by Thursday 14 February, Descente’s board was obliged to release a “Subject Company Position Statement” (意見表明報告書) saying whether it was for or against (or neutral or withholding an opinion about) the bid. It also had to state the reasons for its opinion, the process it took to come to those opinions, and whether it would take defensive measures against the bid (and other measures specified in the relevant Cabinet Order. This reporting obligation would allow Descente’s board to ask questions of the acquiror (to which the acquiror would be required to respond within five business days) and to ask for an extension of the Offer (which has a legal enforcement under certain conditions, which are not that difficult to meet).

Several days before that deadline, on Thursday 7 February, Descente Ltd (8114 JP announced its Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP)‘s Tender Offer with a 28-page supporting powerpoint deck (also in Japanese).

The shares were down Thursday and Friday for a reason. 

If Descente Management and the Board hope that nobody will tender, because Itochu’s presence will cause harm to the medium-long-term corporate value of the company, Management and the Board are putting investors on the spot.

Shares were trading in the ¥1870s and Itochu is offering 50% more than that. Descente saying that corporate value in the medium-long term will be damaged means that should show up in the share price, and investors at the close Friday – after a day to digest the Descente response – believed ¥2520 was the right price if one included the economic effects of the Itochu tender offer. Obviously, that means they think it was worth less if they were not going to tender. 

Investors who want to sell all of their shares now could possibly do so at a 33% premium to where their shares were trading. 

Management and the Board proposing investors not avail themselves of an opportunity to sell shares to someone willing to pay 50% more than pre-tender price for a portion of their shares (or perhaps 33% more than pre-tender as of Friday’s close for more or all of it) needed to explain their own value proposition. Descente had an opportunity to present a “fair value” number from a valuation expert and hints at why they think the shares are worth as much or more over the medium-long term, giving economically-minded investors a reason not to tender. 

The “Subject Company Position Statement” did not do that. 

3. Nissan Governance Outlook – Foggy Now, Sunny Later

This past week saw developments which put the Nissan Motor (7201 JP) – Renault SA (RNO FP) relationship on a better path.

There are interesting noises around the likely arrival of Jean-Dominique Senard on the board of Nissan which the French state won’t like (because they won’t be getting the pony they want) but which would ultimately serve Renault’s interests better. 

Renault and Nissan are conducting a joint investigation into the Renault-Nissan Alliance BV entity which Carlos Ghosn also chaired, and Renault has passed a dossier of Ghosn’s personal expenses borne by Renault and the Alliance to French investigators.

A trial balloon was floated in the Nikkei suggesting the French government had said to the Japanese government it was open to Renault selling some Nissan shares and perhaps the state could lower its stake in Renault. This was “categorically denied” by the French with some haste but the idea of forming a holding company was categorically denied as acceptable by the French just under a year ago. Things have changed.

Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.

Below, a discussion of what the board looks like, will look like, and could look like in/after June and a discussion of the structure of possible capital changes.

4. Itochu and Descente: Gloves Off

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

In this briefing:

1. Itochu and Descente: Gloves Off
2. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
3. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

1. Itochu and Descente: Gloves Off

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

2. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

3. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

In this briefing:

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

In this briefing:

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. Kosaido: Activism Drives Price 30+% Through Terms

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

4. Kosaido: Activism Drives Price 30+% Through Terms

In my piece Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? discussing the Kosaido Co Ltd (7868 JP) MBO by Bain, even the title suggested it was a lowball bid with the wrong price.

The deal was announced at ¥610/share which was a 40+% premium to last, but it was still being done at a 44% discount to Tangible Book Value Per Share. I mentioned in the conclusions the following four points…

• This is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.

• This company is an 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.”

• 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.

The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher. As of today’s close, the stock is 28% through terms.

Yesterday the shares briefly traded almost 40% through terms.

Something is up.

In this briefing:

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. Kosaido: Activism Drives Price 30+% Through Terms
5. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

1. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

Terms & Schedule

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

4. Kosaido: Activism Drives Price 30+% Through Terms

In my piece Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do? discussing the Kosaido Co Ltd (7868 JP) MBO by Bain, even the title suggested it was a lowball bid with the wrong price.

The deal was announced at ¥610/share which was a 40+% premium to last, but it was still being done at a 44% discount to Tangible Book Value Per Share. I mentioned in the conclusions the following four points…

• This is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.

• This company is an 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.”

• 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.

The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher. As of today’s close, the stock is 28% through terms.

Yesterday the shares briefly traded almost 40% through terms.

Something is up.

5. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

In this briefing:

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance
2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
3. Baidu: Time to Swoop In, with NAV Discount Widening Substantially
4. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation

• Hyundai Motor 1P/2PB price ratio is currently at 152% of σ on a 20D MA. This is the highest since late Nov last year. Price ratio wise, they are now slightly above 120D average.
• 1P/2PB div yield difference on FY19e is -0.34%p. This is lower than last year’s yearend level. Hyundai Motor Common has been drifting sideways for a while lately. 2PB has generally been more quickly responding to Common’s price movement. This led to a higher-than-usual price divergence on 1P/2PB. 1P should be following Common/2PB at this point.
• It is locally being speculated that HMG will announce a revised restructuring plan as early as next month. When this happened last time, 2PB responded first and 1P followed suit. This market speculation will also serve to boost 2PB in the short-term. I’d go long 2PB and short 1P.

3. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.   

4. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

With the shares hitting all-time highs, Pinduoduo (PDD US) announced a follow-on public offering to raise net proceeds (potentially of $1.1 billion) from the sale of 37 million ADS along with the placing of 14.8 million ADS from existing shareholders (post-lockup expiry).

In this briefing:

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially
2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors
3. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade
5. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.   

2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

With the shares hitting all-time highs, Pinduoduo (PDD US) announced a follow-on public offering to raise net proceeds (potentially of $1.1 billion) from the sale of 37 million ADS along with the placing of 14.8 million ADS from existing shareholders (post-lockup expiry).

3. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
• On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
• We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.

4. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade

In my original insight on December 11, 2018 TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of Toyota Industries (6201 JP) that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, Toyota Industries (6201 JP) has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn’t exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-mortem trade analysis on the Toyota Industries stub
• alternative data support for my actions

5. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed

A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. 

This was more than a little confusing.

Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.

Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.

But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.

The New News

This morning, Panalpina offered a press release saying…

Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.

According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.

The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive. 

At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher.  If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.

The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.

In this briefing:

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, finally received a firm but marginally lower offer from Brookfield Asset Management (BAM US) through a recommended implementation deed.

In this briefing:

1. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
2. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade
3. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed
4. Medco’s “Okay” Offer For Ophir After Fortuna Setback
5. RPC Group PLC – It Ain’t Over ’til It’s Over

1. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
• On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
• We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.

2. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade

In my original insight on December 11, 2018 TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of Toyota Industries (6201 JP) that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, Toyota Industries (6201 JP) has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn’t exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-mortem trade analysis on the Toyota Industries stub
• alternative data support for my actions

3. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed

A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. 

This was more than a little confusing.

Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.

Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.

But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.

The New News

This morning, Panalpina offered a press release saying…

Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.

According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.

The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive. 

At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher.  If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.

The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.

4. Medco’s “Okay” Offer For Ophir After Fortuna Setback

On 30th January 2019, Indonesian oil and gas company Medco Energi Internasional T (MEDC IJ) announced an agreement to acquire Ophir Energy (OPHR LN) in a £390mn cash deal (at an offer price of £0.55/share).  

Medco initially made an unsolicited approach for Ophir at £0.58/share on 22nd October 2018, and indicated a “willingness to consider offering Ophir’s shareholders additional potential consideration via contingent value rights in relation to the Fortuna LNG asset in Equatorial Guinea (which at the time was awaiting an extension approval) subject to further analysis and due diligence“. Given uncertainty that persevered on Fortuna’s license extension, Medco revised its bid to £0.538/share on 20th December 2018.

On 7th January 2019, Ophir announced that it was recording a $300mn non-cash impairment following the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. Ophir had previously written down $310mn back in September. Subsequently, Medco revised its bid further down to £0.485 on 11th January 2019 but this offer was rejected by Ophir’s board.

Medco’s latest offer of £0.55/share is a 66% premium to the closing price of £0.33 on 28 December 2018.  Ophir’s board has unanimously recommended the latest offer stating that the deal offered “upfront cash value” to its shareholders and that the offer price “reflects the future prospects of Ophir’s high-quality assets“.

The deal is conditional on receiving 75% shareholder approval, receiving of clearances from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

Medco’s offer does provide long-suffering Ophir shareholders with an okay exit in a less-than-ideal situation. Ophir’s shares have been trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder may warrant such an outcome. But I’d be disinclined to chase through terms.

5. RPC Group PLC – It Ain’t Over ’til It’s Over

RPC Group PLC (RPC LN) (“RPC” or the “Company”) is a leading global plastic products design and engineering company based in Rushden, Northamptonshire, less than two hours north of London, and has over 188 operations in 33 countries with FYE March ’18 sales of £3.75 billion. RPC’s products are used in food and non-food packaging, including in beverage, health care and personal care.

After media speculation, RPC confirmed on September 10, 2018 that preliminary discussions were taking place with each of Apollo Global Management (APO US) and Bain Capital which may result in an offer for the Company. After five “put up or shut up” (“PUSU”) extensions, the Company issued a Rule 2.7 announcement of a recommended final cash offer for RPC Group PLC by a unit of Apollo on January 23, 2019 for 782p cash per share intended to be implemented by way of a scheme of arrangement.

The price of 782p was a disappointment to some, with two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, expressing disappointment with the offer valuation.

On January 31, 2019 Berry Global Group, Inc. a former Apollo Global Management portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence information from RPC for this purpose. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.

The shares closed Friday, February 1^st at 793p, 1.4% above the agreed deal price. In this piece we’ll get up to speed with the relevant facts and explore how things might play out from here.

In this briefing:

1. M&A: A Round-Up of Deals in January 2019

1. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.