Category

Mergers and Acquisitions

Brief M&A: Tencent’s Turn To Run A Ruler Over Leyou and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Tencent’s Turn To Run A Ruler Over Leyou
  2. Cathay Pacific Rights – The Flow Dynamics
  3. Colowide Partial Tender for Ootoya Is a Sell
  4. Metlifecare/EQT: The Retirement Solution
  5. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net

1. Tencent’s Turn To Run A Ruler Over Leyou

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A Brief Background

There appears to be no shortage of interest in online game operator Leyou Technologies (1089 HK).

Back on the 20 September 2019, Leyou announced it was in preliminary discussions with various independent potential investors in connection with either a possible share disposal from its major shareholder (Yuk Kwok Cheung Charles) holding 52.37% (at the time), or a possible acquisition of a substantial part of the business. The potential buyer, rumoured to be Tencent Holdings (700 HK)-backed iDreamsky Technology Limited (1119 HK), was confirmed on the 9 December. No price was mentioned.

Fast forward to the 5 May this year, and Leyou announced Yuk and Zhejiang Century Huatong (002602 CH) (“ZCH”) had entered into an MOU for Yuk’s 69.2% stake in Leyou. It was the intention of Yuk and Centaury Huatong to enter into a formal agreement within 90 days from the announcement of the MOU. On the 19 May, Leyou announced Yuk had received the “Earnest Money” of US$80mn from ZCH.  No price was mentioned in the announcements. ZCH also counts Tencent as a shareholder.

On the 2 July, Bloomberg reported that Sony Corp (6758 JP) was “weighing a bid” for Leyou. Leyou shares closed up 9.8% to $2.80 on that rumour, its highest close since September 2018, but below the indicative/rumoured (but still not formally announced) Offer price of $3.11/share under iDreamsky’s proposal. ZCH’s tentative Offer price was believed to be higher than iDreamsky’s. 

The New News

After going into a trading halt before the start of last Friday’s trading session, Leyou announced Yuk had entered into a privatisation exclusivity agreement with Tencent Holdings (700 HK).

Again, no price is mentioned.

As always, more below the fold.

2. Cathay Pacific Rights – The Flow Dynamics

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On 9 June 2020, Cathay Pacific Airways (293 HK) called for a trading halt, and four hours later – just before 1pm local time – announced a…

HK$39.0 BILLION RECAPITALISATION PROPOSAL INVOLVING (1) PROPOSED ISSUE OF PREFERENCE SHARES AND WARRANTS; AND (2) PROPOSED RIGHTS ISSUE OF RIGHTS SHARES ON THE BASIS OF SEVEN RIGHTS SHARES FOR EVERY ELEVEN EXISTING SHARES (link here).

This was announcement was discussed admirably on the same day by David Blennerhassett in Cathay Pacific’s Government Stop Gap, with more in-depth coverage of the pro-forma balance sheet combined with run-rate cash-burn estimates in Cathay Pacific: A Bonfire For Money. As you can tell from the titles, he was bearish. That was when the shares were 25% higher than here. 

The Circular was announced on 19 June 2020, and the EGM is scheduled for 13 July 2020 at 2pm. If approved on Monday 13 July, the last day of shares trading WITH RIGHTS will be the 14th of July.

Starting the 15th of July, the shares will trade ex-rights, and the nil-paid rights themselves will trade between the 24th and 31st of July, inclusive.

Shareholders will receive 7 rights for every 11 shares held, at a rights subscription price of HK$4.68 (46.9% discount to the close of 8 June, and 35% discount to the then-TERP of $7.20) to raise aggregate proceeds of ~HK$11.7bn (there are, of course, pref shares and warrants for another HK$21.5bn). 

There are two days left before the shares go ex-.

3. Colowide Partial Tender for Ootoya Is a Sell

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Japanese Restaurant Chain Amalgamator Colowide Co Ltd (7616 JP) purchased stakes in OOTOYA Holdings (2705 JP) last autumn from two founding family members who wanted to sell. They they purchased a small number of shares in the market. That got them to just over 19%. 

Colowide approached Ootoya to see if they could join together as Colowide has by purchasing 50+% stakes in Atom Corp (7412 JP) and Kappa Create (7421 JP) and REINS International (formerly known as Rex Holdings, purchased from Advantage Partners in 2012 and 2015). 

Ootoya has a particular shtick, which is well different than other chains in Japan. This is the founding ethos and it is clear as clear can be on their homepage.

Real Food. Ootoya

Our motto is “Japanese meals”

The way our mothers and their mothers before them

who thinking of their children’s health

worked hard in the kitchen,

we take customer orders, one dish at a time,

and prepare the food right there. 

That has always been important to us.

In order for us to get closer to that feeling a mother has, preparing for her family…

We wash and prepare vegetables, at the shop

We shave the dried bonito, making soup stock, at the shop

We carefully make pickles and marinade in the shop

We grill, simmer, and cook, at the shop.

We make good food by making the effort.

Ootoya has one brand. It makes “home-cooked food”, on the spot, and that is its claim to fame. It has approximately 340 restaurants as of the end of May, across all locations, run by the company or by franchisees.

Colowide runs, or owns 50% of companies which run, a total of nearly 50 different brands across 2700 restaurants ranging from Karubi, “hamburg steak”, sushi, cooked seafood, tonkatsu, Italian, French, Spanish, pizza, yakitori, several “regional food” specialty chains, shabu shabu, Freshness Burger, Wolfgang Puck, and others. They even have a new steak grill and deli food restaurant in Tokyo called “The Dad Bod.” Colowide’s revenue is, not unexpectedly with 8x the storecount, about 10x higher than Ootoya’s. Colowide tries to run things efficiently, and so tends to run things wherever possible with centralized kitchen hubs feeding pre-prepared dishes and content to the for finishing at restaurant kitchens. 

For more on the differing natures of Ootoya and Colowide, please refer to Mio Kato, CFA‘s writeup in Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth. There is nothing I disagree with there. 

The Colowide model did not appeal to Ootoya management when Colowide approached the firm, so negotiations went nowhere. Colowide made overtures to Ootoya shareholders, proposing that Ootoya become a subsidiary, before the shareholder meeting starting in April, and their proposals got soundly defeated at the AGM at the end of June 2020. Crushed, in fact. 

In response, Colowide launched a hostile tender offer to go from 19.2% to 51% of shares out. 

Ootoya’s initial response said the Tender Offer was launched without warning, and proposes to make Ootoya a subsidiary despite the fact that it’s proposals suffered a resounding defeat just two weeks ago. Ootoya will separately release an official Target Opinion. This is due 10 days from the Colowide announcement. I expect it to declare opposition to this hostile Tender Offer but I do not see what Ootoya can do. 

Ootoya is being priced expensively here. And that is in the middle of a pandemic which is causing the firm to burn cash. It is not clear who might rescue Ootoya from a buyer who wants to change the entire ethos of the Ootoya brand.  

More below the fold, with charts, and of course, Ye Olde Arb Grids.

4. Metlifecare/EQT: The Retirement Solution

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On the 6 July, ahead of the 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/AVPG pitched a non-binding indicative offer to acquire all Metlifecare Ltd (MET NZ) shares for NZ$6.00/share (vs. the initial Offer of NZ$7/share) under a Scheme of Arrangement. The July meeting was subsequently deferred. 

At the time, this revised Offer appeared a decent compromise for all parties. MET can avoid protracted litigation, which was expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.

So it was no surprise four days later that MET entered into a new Scheme Implementation Agreement.

The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.

The new SIA required a majority of MET directors – not all – recommend that shareholders vote in favour of the scheme. The directors unanimously agreed the scheme should be put to shareholders. But Chairman Kim Ellis stopped short of recommending shareholders vote in favour of the revised Scheme. Nevertheless, the majority was secured.

This is a done deal. Shareholders are expected to vote on the Scheme late September with a tentative implementation date late October.

5. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net

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Last Week in Event SPACE …

  • Interestingly, the impact of FamilyMart Co Ltd (8028 JP)‘s shareholder dynamic on price may not be what “smart” active investors think it is. And the results may not be what people think it normally would be. Once again, it is possible that greedy bears get stuck.
  • Sina Corp (Class A) (SINA US)‘s totally unremarkable non-binding MBO.
  • Overall, buying LINE Corp (3938 JP) at the current price (JPY 5570/share) seems like an iffy bet. Any injury to global equity markets due to worsening COVID-19 situation, or regulation against global internet names, or a drop from record multiples of the entire space in the US might lead to less bullishness of a bump. 
  • EQT blinks first and returns to the negotiation table with Metlifecare Ltd (MET NZ).
  • Hibiki Path Advisors, the largest true minority investor for Accordia Golf Trust (AGT SP) has announced that it is not satisfied with the price offered. They have a number of complaints, and some of them have merit. Not all of them do. 
  • PRC clean energy plays remain very much in vogue as Beijing Jingneng Clean Energy (579 HK)  flags a potential offer from its parent.
  • Fibre optic component play O-Net Technologies (Group) (877 HK) announces a privatisation Offer.
  • Plus, other events, CCASS movements and Mood Spins.

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

M&A – ASIA

FamilyMart Co Ltd (8028 JP) (Mkt Cap: $10.1bn; Liquidity: $35mn)

The Nikkei reported that 50.1% owner Itochu Corp (8001 JP) had “decided” today to launch a takeover bid for Familymart to take it private. The Tender Offer has been announced at ¥2300/share. It is less than the ¥2750/share implied by the purchase price in the Tender Offer in 2018 which got Itochu from 41.5% to 50.1%. Travis Lundy expects ‘the market’ will clamour for more, but the shareholder structure on this is no less “interesting” than it was in April 2018 when he wrote about the previous tender, saying Itochu Tender For FamilyMart – Winnie Sees a Hunny Pot But Greedy Bears Get Stuck. Here is the Tender Offer doc.

  • This deal is highly opportunistic.  Because this resembles a situation which would be addressed by the METI Fair M&A Guidelines from a year ago, there could be some noise for a majority of minority or other measures meant to support minority shareholder rights. That support will be limited for structural reasons, which is probably the reason why the minimum threshold for success is not two-thirds, but instead is an additional 50mm shares, which is 10%. 
  • The pricing is low. Very low. The Enterprise Value at TOB Price against Next Year EBITDA is 5+x. It was 11x in the Tender Offer just two years ago.  That means the Financial Advisors did not do their job. They said “fair” was a lower price at half the valuation. Plus this time 20% of the equity value of FamilyMart is in other shareholdings. The FamilyMart Special Committee and/or Board DID do their job, but I think less well than they could have. They could have pointed out the halving of the valuation. 
  • Travis expects this deal has a marginally higher probability of failure than of being bumped and becoming successful. But both failure and bump are a higher probability than they would normally be. If it is successful, I would expect the shares to trade just through terms early, then quickly higher, then pause, wait for the bump, maybe trade a bit higher, then deal at the bumped price or not. 
  • Travis does not see tremendous downside post-tender. CVS may be out of fashion, but I do not believe that Itochu will not try to make things work better and smoother than before even if they only own 50.1%. That will mean Itochu will own more of the economics from PB and logistics, but so be it. Also, this event could be the trigger that allows investors to re-assess the value of FamilyMart, or indeed of a well-run CVS business. If the shares trade through terms, and there is no bump, it is unlikely this goes through… unless there is a spoiler, like the Nikkei Inc says that FamilyMart will be deleted from the Nikkei 225 if Itochu only buys 9.9%.

links to:
Travis’ insight: FamilyMart Tender Offer – Winnie and HunnyPot Redux
Oshadhi Kumarasiri‘s insight: ITOCHU Attempts to Take FamilyMart Private at a Bargain


Sina Corp (Class A) (SINA US) (Mkt Cap: $2.6bn; Liquidity: $26mn)

SINA looks sets to join the growing list of Chinese companies seeking to delist in the US and relist, ostensibly in Hong Kong. Yesterday, Sina announced the receipt of a preliminary non-binding “going private” proposal from New Wave – a company controlled by its chairman/CEO Charles Chao – at US$41/share,  a ~20% premium to the average closing price during the 30 trading days prior to the announcement. 

  • SINA’s jewel is microblogger Weibo Corp (Adr) (WB US) – China’s Twitter Inc (TWTR US)equivalent – in which it holds a ~45% equity stake but controls ~71% of the vote. However, Weibo is not immune to the impact form COVID-19. In 1Q20, Weibo’s total net revenues was $323.4mn, a 19% decline yoy. Advertising and marketing revenues for 1Q20 was $275.4mn, a decrease of 19% compared to $341.1 million for the same period last year. Weibo’s consensus target price has declined to US$42.09/share, down 14% YTD.
  • Due diligence still needs to be carried out but such a condition is rudimentary – Chao has been with the company since 1999, and has been the chairman/CEO since 2011. The Board has also formed a special committee consisting of independent directors to evaluate and consider the Proposed Transaction. It is doubtful the Offer won’t be supported.
  • This appears a highly opportunistic Offer, however, Chao has 58% of the vote in the bag. I would not anticipate a bump – it’s just not how things are usually done for the privatisation of Chinese companies in the US. Shares trade at a tight gross spread of 1.4%.  I would not chase it here. 

(links to my insight: Sina Corp: Management Buyout Offer)


LINE Corp (3938 JP) (Mkt Cap: $12.4bn; Liquidity: $15mn)

On the 30 June after the close, LINE, Z Holdings, Softbank Corp, and Z Holdings (“the Relevant Parties”) announced that the deal would likely not complete by the originally scheduled October 1st deadline. So while the official word is there is no anticipated change to terms (a reference to the way shares were trading through terms at the time), shares trade higher.  The market, at 3.5% through terms, is now betting on a bump to the LINE TOB Price. To make that a decent winning bet, investors have to think there is a greater-than 50% chance of a bump of 10% or more… with no chance of a regulatory block in there.

  • There is a chance of a regulatory impediment. It could be Korean-Japanese geopolitical issues. It could be Japanese government worries on cashless payment systems. It could be anti-trust regulators inviting comment from competitors and competitors putting a stick in the spokes. I am not overly concerned about Taiwan, Thailand, or Japan, but one wonders if the Korea angle is problematic. 
  • We do not know what LINE H1 earnings will look like. There is a special gain on the sale of a security holding. We do not know what it is or what impact it will have. If LINE H1 earnings and commentary are strikingly positive, that could help a bump argument. I do not know enough about the way things have evolved in Q2 to know whether the improvement in Q1 accelerated to a level which is not already forecast by management and the Street. 
  • THE TRADE:  At ¥5380 or just below terms, making the bet on a bump was “easy.” It did not cost much as shareholder approval at Z was already achieved. At ¥5570 Friday, it is substantially less easy.  If Travis owned shares in LINE, he would be lightening up here rather than buying more.He would have no qualms about being out completely at this price.He would have no qualms at buying at terms for the minor optionality, but thinks the reward/risk ratio of a bump after buying at terms is not great if the stock is trading at terms when the conditions are met, allowing the Tender Offer to go ahead. 

(links to Travis’ insight: Market Is Pricing a LINE Bump – Should It?)


Metlifecare Ltd (MET NZ) (Mkt Cap: $0.8bn; Liquidity: $3mn)

Ahead of MET’s 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/QVPG have pitched a non-binding indicative offer to acquire all MET shares for NZ$6.00/share under a Scheme of Arrangement. This compares to the original Scheme consideration of NZ$7.00 per share in cash. Consequently, the July meeting has been deferred.  This would appear a decent compromise for all parties. MET can avoid protracted litigation, which is expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.

  • Before entering into a new SIA, APVG requires Metlifecare to fully settle the litigation in respect of the SIA dated 29 December 2019. By “fully settle”, this means Metlifecare drops its litigation to enforce the December 2019 SIA. Both sides would agree to walk away wearing their own costs. Though not mentioned in the announcement, APVG’s proposal will require OIO approval. APVG withdrew their original OIO application before securing final approval so they will have to lodge another application. The expectation is that it would be a quick process this time around as the previous application was very close to approval according to my contact at MET.
  • According to today’s announcement, the Guardians of the New Zealand Superannuation Fund (who I believe still have ~19.8% of shares out, as per the 2019 annual report) is “broadly supportive of Metlifecare urgently progressing APVG’s non-binding indicative offer“.
  • How is the final dividend treated? The announcement is silent on this, and in my back & forth with MET, it is not yet clear how it will be addressed. MET paid a final dividend (June Y/E) of NZ$0.075/share in FY19. Assuming a firm offer unfolds, one that could complete in 4Q20, I would think to get full shareholder support, the dividend would have to be included. To note, the Offer price under the December SIA was to be reduced by any dividend paid. This is the reason no interim divined was declared for the Dec 19-end interim period.
  • This remained (at the time of the insight) a pre-event, although one with a very high likelihood of formal offer emerging. For those investors who bundled into MET when it consistently closed below NZ$4/share after EQT announced its intention to terminate the Scheme – I recommended (in Metlifecare: Down But Not Out – Get Long) going long at $4.34/share – I suggest taking profit.
  • UPDATE: As expected, MET has entered into a new Scheme Implementation Agreement with Asia Pacific Village Group Limited/EQT to acquire all Metlifecare’s shares for NZ$6.00/share. 

    The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.

(link to my insight: Metlifecare: EQT Blinks And Tables A Revised Offer


Accordia Golf Trust (AGT SP) (Mkt Cap: $0.5bn; Liquidity: $1mn)

Hibiki Path Advisors – the second-largest shareholder in AGTand one who has been noisy on behalf of all shareholders – issued a Press Release which stated they were disappointed with the price and that it will be voting against the proposed divestment in the case the price is not revised higher. The easiest points to address for AGT independent board members in requesting Accordia Golf parent to pay a slightly higher price are the idea of there already being a slightly favourable transfer to the parent in the form of high royalty fees as a percent of gross operating profit. The elimination of fees to the Trustee Manager could be deemed to be another “benefit”.

  • The real question to the buyer and to the IFA is whether the value of the golf courses might be higher if they stopped running it as a golf course business and instead carpeted 100+ golf courses across Japan with solar farms. IF the parent made more money from converting them to solar farms, that would be worthwhile getting a bump. Of course, I expect the parent wouldn’t tell you if that was their plan.  If one pushed for a small bump, it might be possible. Otherwise, the relatively low threshold for approving this deal suggests that Hibiki Path may not win unless they put substantially greater pressure on the Trustee Manager. They should probably try to get ISS and SIAS involved.
  • The shares opened on 30 June at S$0.685 which was too low. They traded lower, only trading higher after a competitor to Smartkarma realized they had left out a S$0.014 payment to be made. The shares traded much of 3 July at S$0.690-0.695. Even at S$0.695 the shares are probably cheap as an arb to defined terms unless you think the contingent claims portion will be stripped out. I would not expect they will be, but one could argue the point.
  • The letter may mean a jump in price. I think the threat to this deal and the noise made by Hibiki Path so far are unlikely to trigger either an opinion by the IFA that the price is not high enough, nor a serious threat to the deal being completed at proposed terms. However, an honest response by the independent committee could be a way of getting a slightly higher price out of the buyers, ESPECIALLY now that the effects of COVID-19 have been seen to be limited. Travis expects that buying at or below S$0.69 is still a good reward/risk profile to an arb expecting deal completion. 

(link to Travis’ insight: Major Accordia Golf Trust Shareholder Has Issues With Price & Process


Beijing Jingneng Clean Energy (579 HK) (Mkt Cap: $2.2bn; Liquidity: $1mn)

After being suspended the previous Friday morning pursuant to the Code on Takeovers and Mergers. Jingjeng has announced its parent (Beijing energy Holdings “BEH”) has indicated an intention to make a voluntary cash general Offer. No price was mentioned.  BEH holds 471.6mn H shares, or around 16.7% of H shares out, therefore the blocking take at a Scheme-like vote would be 8.33% of H-shares out.  This would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

  • Jingneng is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a Scheme-like vote (≥ 75% for, ≤10% against). Such an Offer may or may not require an additional tendering acceptance condition.
  • Tendering condition? It’s not clear. This announcement used the words “conditional voluntary cash general offer“. Similar wording is used in the Harbin Electric Co Ltd H (1133 HK)Huaneng Renewables Corp H (958 HK) & AVIC International Holdings (161 HK)transactions, wherein a tendering condition was present. At a guess, it’s probably a condition to a firm Offer.
  • What Price? The average premium for past Merger by Absorption deals is 47%. That backs out a possible fair value of ~$2.30, around a three-year high, with a deal size of $5.4bn. $2.30/share is ~0.75x P/B, which compares with ~0.64x P/B for recent energy privatisations.  Shares closed at $2.04 on Friday. There is a clear directive to privatise clean energy plays. Now is the time to run a ruler over other peers (China Datang Corp Renewable Power (1798 HK) ), in addition to other SOE-controlled entities (possibly Asia Satellite Telecom Holdings Ltd (1135 HK), Cosco International Holdings (517 HK) & Tianjin Development Holdings (882 HK)) potentially subject to a delisting proposal.

(link to my insight: Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?


O-Net Technologies (Group) (877 HK) (Mkt Cap: $0.6bn; Liquidity: $3mn)

On the 6 July, O-Net, a leader in the provision of high-technology products and optical networking components, was suspended pursuant to the Code on Takeovers and Mergers. An Offer, by way of a Scheme, has now been announced. The cancellation price is HK$6.50/share, a 23.57% premium to last close. The price will not be increased. Disinterested Shareholders comprise 375.196mn shares, or 44.99% of shares out. Therefore 10% blocking stake is attached to ALL of the Scheme Shares held by the Disinterested Shareholders at the Scheme Meeting is 37.52mn shares or 4.499% of shares out. O-Net is Cayman incorporated therefore the headcount test applies. Assuming the deal gets up, this may be wrapped up by late October.

  • A condition to the Scheme is that Kaifa’s shareholders approve the acquisition. This should be a simple majority vote. CapIQ has SOE China Electronics Corporation holding a little over 39%. I don’t see the vote as being a risk to the deal. It is currently expected that a shareholders’ meeting will be convened by Kaifa within one month from this Offer announcement.
  • O-Net should be a key beneficiary from global 5G investment. Applying various metrics and with respect to a global basket of peers, I argued there was potentially 33% upside from the undisturbed price to an Offer price. We got 23.57%. That’s probably going to be enough. Shares were trading around a two-year high and have all but batted away COVID-19. 
  • I see the gross/annualised spread at 3.7%/13.5%, assuming cheques are issued late October. That level looks about right. This is not a slam dunk premium – the average premium for Asia-Pac transactions this year is ~33%. Still, O-Net was up 27% YTD, ahead of the Offer announcement, so optically, the offer is not viewed as opportunistic. All in, this deal should get up. 

links to my insights:
O-Net (877 HK): Swish Switches Offer
O-Net Tech (877 HK): Tripping The Light Fantastic


J.B. Chemicals & Pharmaceuticals (JBCP IN) (Mkt Cap: $0.7bn; Liquidity: <$1mn)

The Promoters of JBCP announced on 3rd July they had signed an SPA with KKR & Co Inc (KKR US) to sell up to 54% of the company’s total shares from their holdings. Pursuant to SEBI Regulations, this triggered the obligation for the Acquirer to launch a Mandatory Open Offer to buy shares from Public Shareholders at similar Terms.  To fulfil this requirement, the Acquirer has launched a Partial Tender Offer to buy up to 26% of the company’s total shares from non-promoter shareholders at a cash price of INR745.00/share. Tender Offers in India have a statutory timeline that requires the settlement to be within 72 business days from the date of the announcement which means the Offer could be completed in the next 4 months. 

  • The Open Offer Quantity will be fixed at 20,093,346 shares (26% of voting capital) and how much the Promoters will get to sell will depend on what portion of the Open Offer Quantity gets filled. If Open Offer gets fully filled (26%), Promoters will be able to sell up to 38.9% in total (so that the Acquirer’s stake does not exceed 64.9%). If no shares are acquired in the Open Offer, the Promoters will be able to sell the entire SPA quantity of 54% (given that Total Foreign Shareholding in the Company remains at or below 74%). 
  • The Open Offer is not conditional upon any minimum level of acceptance.  If all non-promoter shareholders (44.09%) tender their shares, 58.97% of the total tendered quantity will be purchased. (Minimum Fill Ratio = 58.97%). If non-promoter shareholders representing less than 26% tender their shares, all shares tendered will be purchased. (Maximum Fill Ratio = 100%).
  • The upside is ~3.4% to the tender offer price, which is a relatively low annualized return over 4 months. However, on a longer-term basis, expecting growth and a desire by KKR to exit after several years through a sale to someone else, one can expect a Delisting Offer at a higher price could be in the offing. For that, this situation is bullish as the odds are better of a higher price than a lower price. If you trade this situation, the trade is to know you have a put option for 60-75% of your position at a price 3.4% higher than here. Janaghan Jeyakumar thinks a 70-80% pro-ration rate is likely if the shares stay at the current level minus a little bit. If the shares drop to below INR 700 prior to the Tender Offer, that would be a great place to buy.

(link to Janaghan’s insight: J.B.Chemicals (JBCP IN): Partial Tender Offer by KKR


In Leyou – Is Sony Targeting Splash Damage as Microsoft Targets Warner Brothers Interactive, Mio Kato reckons Sony Corp (6758 JP)‘s reported interest in Leyou Technologies (1089 HK) is highly credible. Against the backdrop of Microsoft’s reported interest in acquiring Warner Brothers Interactive Entertainment, he feels the move would make sense as both players move to strengthen 1st party development capabilities. In Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou, he also discusses Sony’s 1.4% stake purchase in Unreal Engine creator Epic Games for $250mn and how they might impact Leyou. Also, Leyou’s chairman Yuk has now entered into an exclusivity agreement with Tencent Holdings (700 HK). No price is mentioned.

M&A – UK

Rockrose Energy PLC (RRE LN) (Mkt Cap: $0.3bn; Liquidity: $3mn)

On 6th July, UK-based independent Oil & Gas company Rockrose made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn. The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash. This all-friendly Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020. The Acquirer has also reserved the right to implement the Acquisition by way of a Takeover Offer.The Offer Price translates to premia of 63.7%, 90.7%, and 68.5% to the stock’s pre-announcement closing price, 3-month VWAP, and 6-month VWAP respectively.

  • The Scheme will require approval from Target Shareholders representing 75% of votes cast. Irrevocables from Target Shareholders holding 35.3% (4,651,113 shares) have agreed to vote in favour of the Deal.  If the second largest shareholder Cavendish Asset Management (1,442,648 shares or ~11% stake). If they also vote in favour, the maximum required approval rate could fall to 45% for the remaining shareholders. 
  • This Deal seems like a rescue. As a publicly-listed company, RockRose was mainly interested in acquisitions in the upstream Oil and Gas sector which they intended to fund through further equity offerings. However, at present, they feel raising further equity capital would be “unduly dilutive” after the drastic decline in stock price in recent months caused by Oil Price Shocks and COVID-19 fears. Given this context, the Offer Terms seem acceptable.  
  • Given the board’s unanimous recommendation and the willingness of insiders to accept the Deal, others might be convinced to sell too.  At the time of writing, RockRose shares are trading at GBP18.34 translating to a gross spread of 0.87% with roughly 2 months to completion.  Janaghan expects RockRose shares to trade close to terms until completion. This could be a simple and short-dated “rate-of-return” trade. I expect the Deal to complete as-is.
(link to Janaghan’s insight: RockRose-Viaro Deal: Trading Close to Terms

INDEX REBALS

The next quarterly rebalance for the FTSE Taiwan 50 Index  will be effective 21 September and the changes will be announced on 4 September. Passive funds will need to trade at the close on 18 September. The data used to determine changes to the index will use the closing prices on 24 August. In FTSE Taiwan50 Index Rebalance Preview – First Look Sees Two Changes, Brian Freitas sees two potential inclusions/exclusions from the index. Silergy Corp (6415 TT) and Realtek Semiconductor (2379 TT) are potential additions and would replace China Life Insurance (2823 TT) and Lite On Technology (2301 TT)


M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $24mn)

Activist Polygon (1.025% stake in MásMóvil, worth c. EUR 31 mn) has sent a letter to the CNMV (Securities Market National Commission, the Spanish market watchdog) regarding the terms of the Lorca Telecom (KKR, Cinven and Providence funds) voluntary takeover bid for MásMóvil. The letter provides reasons why the current offer (especially the irrevocable undertakings) seems unfair for the minority shareholders

  • Jesus Rodriguez Aguilar reckons there are three possible scenarios from here: i) a counterbid by other private equity firms, such as Carlyle or CVC (who have mulled a bid for MásMóvil in the past); ii) one of the incumbents —Telefónica, Vodafone or Orange— counteroffers at a higher price. This seems difficult (see further in the note); and iii)  :orca Capital does not get the 90% acceptance required to squeeze out and delist MásMóvil, so the current shareholders share in the possible upside of a hypothetical Vodafone Spain acquisition.
  • Jesus’ recommendation is LONG MásMóvil: the downside risk at the last close (EUR 22.68 vs a bid of EUR 22.50) is low and there are reasons to hold for an improved bid. The Domínguez de Gor family (8% stake) has already said that it will not consider the bid unless there is an improved price of EUR 24 per share. The acceptance period of the Lorca Capital bid should start in September.

(link to Jesus’ insight: MásMóvil – Lorca Capital: Summer Lull

EVENTS

In  New Rules on Prefs Trading, Listing, & Delisting in Korea, Sanghyun discussed the new rules for the trading, listing, and delisting of the local preferred shares announced by the Korea FSC. The minimum shares out and market cap for new listings are now 1mn shares and ₩5bn, effective October this year. As for delisting, those prefs below 0.2mn shares or ₩2bn market cap will lose their spot, starting October next year with a grace period of one year,

OTHER M&A & EVENT UPDATES

  • Iberdrola SA (IBE SM)released its Secondary Bidder’s Statement on Infigen Energy (IFN AU) announcing the FIRB condition had been fulfilled. Infigen for its part announced updated Supplementary Target Statements on both the Iberdrola deal … and the UAC Energy deal
  • The Halcyon Agri Corp (HACL SP) rights issue mandate was granted by the AGM. 
  • Yixin Group Ltd (2858 HK)‘s Composite Doc has been delayed until the 7 April 2021, to allow time for the satisfaction of all conditions.
  • Cardinal Resources (CDV AU) has completed the issuance of shares (26mn or A$11.96mn) to Shandong as per the BIA. Difficult to see Norgold coming back into the mix from here. Bidder/Target Statements due out on or before the 22 July. 
  • Golden Meditech Holdings (801 HK) announced that an “application has been made by the Company and the Offeror to the Executive for consent to the extension of the latest date for despatching the Scheme Document from 8 July 2020 to 26 August 2020 and the Executive has granted the consent.” That about 10 days past my initial estimate. 
  • SAIC Motor HK Investment Limited – presumably an entity under SAIC Motor (600104 CH) – will acquire 20.87% of shares out from UCAR, and 14.76% from Amber Gen – both at $3.10/share – taking its take to 28.92%. Car Inc (699 HK) closed at $2.53 yesterday. This will give shares a boost.
  • Sanyo Shokai (8011 JP) ‘dissident’ investor RMB Capital has upped their stake in the company to 7.6%.
  • Hohsui Corp (1352 JP) was put on notice that it has until 31 March 2021 to lift its market cap in order to stay in the TSE1, or else it will get demoted to the TSE2. 
  • Both Anicom Holdings (8715 JP) and Benefit Japan (3934 JP) announced that the TSE had put each on notice for possible demotion to the TSE2 (from the TSE1) if they do not maintain a shareholder count of 2,000 or more by the end of the grace period (31 March 2021). 

CCASS

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

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

Name

%chg

Into

Out of

42.00%
BNP
Outside CCASS
15.15%
Citic
Partners Cap
17.07%
Haitong
Every Joy
Charmacy (2289 HK)
18.32%
MS
ML
Source: HKEx

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

Name

% chg

Into

Out of

Fin Street (1502 HK)
17.53%
Guotai
Outside CCASS
13.83%
GS
Outside CCASS
14.53%
SBI
Outside CCASS
China Saftower (8623 HK)
12.29%
Chaoshang
Outside CCASS
Source: HKEx

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Brief M&A: Bitauto (BITA US): Done Deal. Keep An Eye on Yixin’s MGO and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Bitauto (BITA US): Done Deal. Keep An Eye on Yixin’s MGO
  2. Last Week in Event SPACE: Sembcorp, Cathay, Nichii Gakkan, Unilever, Just Eat/Grubhub
  3. Meiji Holdings: Considering a Stock Split
  4. Bitauto’s Privatisation Enters into a Definitive Agreement

1. Bitauto (BITA US): Done Deal. Keep An Eye on Yixin’s MGO

Image 70247221131592045045257

On the 13 September 2019, Tencent Holdings (700 HK) and Hammer Capital tabled a preliminary non-binding proposal for Bitauto Holdings Ltd Adr (BITA US) at US$16/ADS, a ~20.6% premium to last close and a 36.1% premium to the 30-day VWAP. This was discussed in Tencent’s Potential Downstream Offer For Yixin

On Friday (12 June), Bitauto announced it has entered into a definitive Merger Agreement with Tencent and Hammer at the previously-announced Offer price of US$16/ADS. 

Shareholders holding 55.3% of shares out have agreed to vote in favour of the Merger. The proposal needs two-thirds. This is a done deal.

The quirky takeaway from this Merger will be how the downstream unconditional MGO unfolds for Yixin Group Ltd (2858 HK), currently 43.74%-held by Bitauto.

2. Last Week in Event SPACE: Sembcorp, Cathay, Nichii Gakkan, Unilever, Just Eat/Grubhub

Image?1591921345

 Last Week in Event SPACE …

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

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

EVENTS

Sembcorp Industries (SCI SP) / Sembcorp Marine (SMM SP) 

SMM is conducting a 5:1 Rights Offering at a 29-35% discount to TERP at S$0.20/share vs last at S$0.85 and recent VWAP average of S$0.74/share in order to pay down debt and have more working capital in the COVID-19 downturn to both demand and ability to work. After this, SMM will pay back debt owed to its parent SCI (offsetting SCI’s rights outlay). After that, SCI will spin out all its shares held in SMM. SCI is injecting capital – in effect a debt for equity swap – to get it back, then spin off the shares for good. It is a transfer of substantial control to Temasek, leaving Temasek owning a just-under-50% stake in SCI, and a stake in SMM which could vary significantly from about 30% to about 59%.

  • You could also think of SMM as a short, because a lot of the SCI holders – 30-35% of SCM post-capital raise – will be happy to realise the value of the SMM shares they receive, and get out as soon as they possibly can. They’d get out sooner, but there is almost no stock borrow on SCM for them to hedge.
  • You could think of SCI as a spin-off trade, extracting value. The nature of the relative valuations (high multiples at SMM and low multiples at SCI) and the accounting for higher EBITDA lower net income companies like SCM means that the accounting optics to SCI shareholders are fantastic. SCI holders who get SCM then sell it are effectively buying (owning) SCI cheap, and selling SCM expensively. SMM is being cast adrift. 
  • If this is great for SCI shareholders (the liquidation of Holdcos almost always extract value at the parent level), that means it is either bad for Temasek or for minority holders of SMM. One might say both, but there has long  been speculation that Temasek would try to merge the beleaguered SMM with Keppel, upon which it is now in the process of trying to conduct a Partial Offer. 

Links to:
Travis Lundy‘s insight: SembCorp Marine and SCI – A Gloriously Messy Recap and De-Merger – Big Win for SCI.
Travis’ insight: Sembcorp Marine Rights Offer – Cast Away
my insight: StubWorld: The Liquidation Of Sembcorp’s Holdco
Ke Yan‘s insight: SMM Rights Issue & Demerger Is One Step Closer to Keppel O&M+SMM Merger


Cathay Pacific Airways (293 HK)  (Mkt Cap: $4.3bn; Liquidity: $5mn)

Cathay’s rescue package was inevitable. Having the Hong Kong government stump up ~67% of the $40.95bn package did come as a slight surprise. The government backstop suggests this was a matter of expediency on Cathay’s part as opposed to desire. This also appears a “kicking the can down the road” scenario. 

  • The Hong Kong government is not in the business to run an airline. Just like in China, the government does not directly run airlines. As Cathay will want to (or should) refinance the pref shares in the next two to three years owing to the onerous coupon step-up, the Hong Kong government will also be happy to exit. One possible option could be to transfer the pref shares to Air China at some later date.
  • For Swire, when shares were suspended ahead of the announcement, this appeared an ideal time to unshackle itself from the inevitability of exiting its position. Injecting HK$5.3bn to maintain a largely similar stake in a heavily debt-laden operation, when the likelihood of necessary refinancing/rights issues possibly 2-3 years out, does not, to me, warrant a narrowing in the discount NAV. 
  • For SIA, which already had direct government interest, its reorganisation package, though heavily dilutive, provided long-term funding and clarity on its shareholder structure. This package for Cathay falls short on clarity and gives the impression of an interim fix or a compromise. 
  • My back of the napkin calcs estimates Cathay could burn through the entire pref share proceeds by year-end. Cathay may well need to go around cap in hand again, and sooner than the market thinks.  The TERP price of $7.20 provides an indicative price level, as the name implies, and I see no reason why shares should trade at a significant premium to this price. SIA, using Friday’s close is trading 5% below its announcement-date TERP.

links to my insights:
Cathay Pacific’s Government Stop Gap
Cathay Pacific: A Bonfire For Money


Unilever NV (UNA NA)Unilever PLC (ULVR LN) 

UNA announced plans to unify its Group legal structure under a single parent company, ULVR. They’ve attempted a unification back in 2005 and 2018. Conditions required are approvals of shareholders in Unilever NV and Unilever PLC in EGM; consultations with employee representative bodies, and applicable regulatory consents.

  • UNA shares were (at the time Jesus Rodriguez Aguilar‘s insight) trading at a discount of 2.2% to ULVR. That discount should close as a result of the merger. That’s not a lot of skin in the game for a transaction expected to close in 4Q20.

(link to Jesus’ insight: Unilever’s DLC Unwinding)

M&A – ASIA

Nichii Gakkan Co (9792 JP) (Mkt Cap: $1bn; Liquidity: $5mn)

When this deal was announced on 8 May, it took about 3 minutes to conclude that the deal was done at the wrong price. It took an hour with the document to find a half dozen holes in the method and reasoning by which insiders, and Bain, and the Board had decided that a ¥1500/share price for an MBO was fair.  The NEW News is a press release from LIM Advisors, one of Asia’s long-time specialists. The letter points out several ways that inherent conflicts of interest were present, and such conflicts of interest were not adequately mitigated through good governance.

  • Investors have been short-changed. LIM Advisors has written a letter which is public. It could be more public.  LIM suggests a fair price should be ¥2400/share or higher. Travis thinks a minimum should be ¥2100 but thought a price up to ¥2600 is explainable easily enough.  Given the existing funding assets of the family, and the desire of Bain to get a high IRR on whatever they put in, Travis would suggest ¥2000-2300  are probably as high as this could go. 
  • The fact that we have not seen a Large Shareholder Report of a 5% holder though volume traded so far since the announcement (on market) is equivalent to 22.8% of shares outstanding.
  • The fact that this deal managed to go through the process and get independent legal signoff, audit signoff, accounting sign-off and ticked the boxes that the Supreme Court deems need to be ticked to make this a “fair price” shows two things: the Supreme Court’s decision in the case of JCOM was, in fact, significantly flawed, OR, this particular case sees ALL of its advisors and Board to be lacking in requisite governance skills or ethics sufficient to conduct a fair process.  Travis happens to believe BOTH are the case. 

(link to Travis’ insight: An Activist Appears in Nichii Gakkan (9792): Good!)


Hexaware Technologies (HEXW IN) (Mkt Cap: $1.7bn; Liquidity: $9mn)

On the 5 June 2020, Hexaware announced it had received a Delisting Proposal from the Promoter and 62.4% owner HT Global IT Solutions Holdings Limited (an entity owned by a Barings Private Equity Asia fund) the day before. The Delisting Proposal Letter proposed an Indicative Offer Price of Rs.285/share, where the stock bounced to in April, and below where it spent the two years to March.  Delisting Offers (also known as Exit Offers) offer interesting dynamics as they are different than takeover price discovery in most other places. There is a long, detailed discussion of the process in Indian Delisting/Exit Offers – Know Your Process and The Games Played.

  • Hexaware Intimation of Board Meeting regarding the Delisting Proposal was differently phrased than either Vedanta Ltd (VEDL IN) or Adani Power Ltd (ADANI IN)‘s. The document says in #5 that it shall appoint a Merchant Banker. It does not specify it will do so at the meeting.#6 talks about the contents of the Board Meeting and says that it will consider the proposal for voluntary delisting but does not mention the Merchant Banker.
  • Travis’ concludes the Merchant Banker appointment has not been made, and the Board Meeting this Friday the 12th will not be able to see a Board Resolution to support the Delisting Proposal, and to proceed.

  • Travis recommends being long Hexaware now and buying on any dips.  IF Hexaware shares dipped sharply on Friday after the “Outcome of Board Meeting” announcement release is posted, and some early buyers take profits, he recommend using that opportunity to buy more. 

  • UPDATE: Hexaware ‘s Board Meeting Outcome out as expected. The company took on the Delisting Proposal, appointed ICICI as Merchant Banker, and authorized personnel to do the back check on insider activity. And the shares did not dip.

link to Travis’ insights:
Hexaware:  Dips and Doodles in the Delisting Proposal Process
Hexaware Delisting Proposal – This Could Go Higher


LIXIL VIVA (3564 JP) (Mkt Cap: $1bn; Liquidity: $11mn)

Arcland Sakamoto (9842 JP), LIXIL VIVA, and Lixil Group (5938 JP) announced a multi-leg agreement where Arcland Sakamoto would launch a Tender Offer to take over enough shares in LIXIL Viva so that after the Tender Offer, Arcland and LIXIL Group would own enough to squeeze out minorities. Then Arcland will inject some capital into LIXIL Viva, enabling it to buy back shares from LIXIL Group so that Arcland will be the sole owner. There are a couple of specific reasons for doing it this way which only support an improved price for minorities, so the structure is not terribly objectionable, but the minimum threshold for tender success being only 12% out of the ~45% minority ownership is a part of Japanese tender offers on companies with large incumbent stake holdings which should be fixed at some point.

  • This deal was not un-flagged. There were media suggestions last year, and more media reports earlier this year. The run-up in price is partly due to that expectation. As a result, the agreed price between the beauty contest buyer and the main owner has almost no premium to last trade. This will upset some people, but the company is at the expensive end of its peers. It is not by any means an egregiously unfair price.
  • The transaction structure is a bit more complex than normal, but it accomplishes the same thing – a dirt-simple Tender Offer as far as minorities are concerned.  Only 12.12% of the 45.5% float is required to get this deal over the line. That should be doable, but one could imagine some fearless souls trying to push the shares up slightly above terms to try to trigger a bump. 
  • Travis expects there are enough local funds, financial institutions, and retail investors to be able to get this across the line at ¥2,600/share. He would get long just below terms. 

(link to Travis’ insight: Lixil Viva (3564 JP) Takeout Tender Offer)


After gaining ~40% in the three trading days to close last week, Jinmao Hotel & Jinmao (China) Hotel Investments and Management Limited (6139 HK) (Jinmao Hotel) was suspended 8 June “pursuant to the Code on Takeovers and Mergers“. Jinmao Hotel is 66.77%-held by China Jinmao Holdings (817 HK), which in turn is ultimately controlled by SOE Sinochem Group. Back on the 23 January, Jinmao Hotel announced it had been informed by Sinochem that it was planning a strategic restructuring. Details of the restructuring plan and its implementation were subject to relevant approval and regulatory procedures. With an Offer potentially forthcoming, in Jinmao Hotels (6139 HK) In The Cross Hairs, I provided a cursory overview of Jinmao Hotel, how an Offer may unfold, and how this may affect China Jinmao.
UPDATE: An Offer by way of a Scheme was announced Friday (12 June), at an offer price of $4.80/share, a 30.4% premium to last close. The Offer price is final. Irrevocables total 21.04%. The Offeror and concert parties hold 67.81%, therefore the blocking stake at the Unitholders Meeting will be 3.219% of shares out. That’s probably enough to get this deal up.


Niit Technologies (NITEC IN) announced a 3.13% Buyback Offer at a premium (INR 1725/share) had been approved in December 2019. Shares popped and traded in larger volume. This was a good signal from the management and promoter. Foreigners ended up increasing their stake in the first quarter as retail and some local mutual funds sold the pop. Finally in mid-May, SEBI arranged for some temporary relaxation of regulations, which meant NIIT Technologies could proceed more quickly. It launched the buyback three weeks ago with an Offer Period starting 29 May and closing on 11 June. Paperwork was due 13 June. But as pointed out by Travis in NIIT Technologies Tender Buyback – Offer If You Can, this only worked if you owned the shares as of Record Date 12 March 2020. 


In Facebook Enters into a Licensing Deal with Saregama to Further Expand Its Foothold in India, Shifara Samsudeen discussed Facebook Inc A (FB US) entering into a global licensing deal with India’s Saregama India (SARE IN). The two companies have not disclosed any details regarding the deal such as the pricing or terms of the deal. In mid-March, Spotify Technology SA (SPOT US)  entered into a licensing deal with Saregama where about 100k songs from Saregama’s catalog will be added to Spotify’s streaming platform.


With Hanwha Group’s initial investment in Nikola Corp (NKLA US) up 16x since November 2018, Douglas Kim discusses in A Surge in Value of Nikola Corp – ‘Tesla’ of Hydrogen Trucks: A Merger of Hanwha Corp & H-Solutions?  the possibility of a merger of H-Solution and Hanwha Corporation (000880 KS), which could reduce the long-awaited risks about the transfer of the ownership of the Hanwha Group from the Chairman to his sons and also improve the overall transparency of the Hanwha Group.


Sanghyun Park discusses Mirae Asset Daewoo (006800 KS)‘s latest buyback in Mirae Asset Daewoo Buyback & 2PB Dividend Play. It plans to buy back a total of 16mn common shares from June 8 to September 7. It is 1.97% of the total shares out and 2.43% of the ordinary shares. This buyback brings up the total treasury shares from 17.16% to 19.59%. 

M&A – US

China Distance Education Holdings Ltd (ADR) (DL US) (Mkt Cap: $0.3bn; Liquidity: $1mn)

The top shareholders of China Distance, Mr.Zhengdong Zhu and his spouse Ms. Baohong Yin, made a “Preliminary Non-Binding Proposal” to acquire all the outstanding shares of the company.  The Offer Price will be US$9.08 in cash per ADS (US$2.27 per ordinary share) and this translates to an implied market cap of US$307mn for the company. This Offer is non-binding. This deal could possibly be executed in the form of a statutory merger which will require Target Shareholder approval – typically two-thirds of votes cast in the shareholder meeting.

  • The Acquirers are co-founders of the company and they currently hold around 39.17% of total shares which also equate to 39.17% of voting power.  The other directors and executive officers held another 3.56% (as of Jan 2020) which means the total insider holding (together with the Acquirers) could be around 42.73% The second largest shareholder, YM Investments controls another 19.1%. This is the controlling shareholder of Orchid Asia Group. It is possible YM Investments is in negotiations with the Acquirers. 
  • Janaghan Jeyakumar considers this Offer to be light. The Offer comes 66.1% below the all-time high of US$26.78.  The Offer Price translates to a premium of 25.8% to the undisturbed price and is 24.4%, 26.3%, and 23.9% higher than the 1-month, 3-month, and 1-year VWAPs respectively. Considering how far the stock has dropped from its all-time high, these numbers seem slightly weak.  The Offer translates to EV/Revenue(LTM) and EV/EBITDA(LTM) multiples of 1.25x and 5.70x, respectively, which are both far below the peer medians of 3.52x and 18.83x respectively. 
  • Janaghan recommends waiting for a binding proposal to be announced. If this does not result in a Binding Offer and if the stock reverts back to its pre-announcement level of US$7.22, this would be a 12.1% drop from the current trading price. However, the drop could be much larger than this – the stock almost plunged close to US$6.00 in the first week of April 2020 and momentarily traded below US$6.15 as recent as 14th May 2020. A fall to US$6.00 would translate to a loss to 26.9%.  Until a Binding Offer is announced, expect the stock to trade with a lot of noise.

M&A – EUROPE

In Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?, Patryk Basiewicz reckons the way Prosus let Just Eat go during the bidding war seemed like a strategic retreat. This move led to speculation that Prosus (PRX NA) was pulling back so it could make a bolder move for the combined Just Eat Takeaway (JET LN) at a later stage. Now with a bid on Grubhub Inc (GRUB US) on the tape, if Prosus wants JET it has to make its move very soon. New JET can be bought by a determined bidder. The founder of Takeaway.com NV (TKWY NA) is diluted and legal blocks to a takeover have been removed. Patryk shows that Prosus’ current funding capacity, at conservative levels,  just matches its needs to buy and fix JET. 

STUBS

In Heineken / Heineken Holdings NAV Discount, Jesus recommends going long Heineken Holding NV (HEIO NA), short Heineken NV (HEIA NA). He sees the current discount to NAV at 9.2%, but the five-year average is 7.2% 

PAIRS

Japan’s convenience stores outperformed the Topix index by over 10 percentage points during the COVID-19 led equity sell off in March 2020. Over the next two and a half months, the Topix index outperformed convenience stores as the overall market recovered from March 2020 low level. Oshadhi Kumarasiri analysed the share price movements of Seven & I, Lawson and FamilyMart Co Ltd (8028 JP) and found out that Seven & I and Lawson had the highest correlation for daily share price performance.
  • 84% of Lawson’s convenience stores are in Japan while 91% of its overseas convenience stores are in China. Oshadhi expects better economic conditions in Japan and China will favour Lawson, driving a 13% decline in the Seven & I/Lawson EPS ratio. Oshadhi targets a Seven & I/Lawson price ratio is 0.58, and a Long Short pair trade between Lawson and Seven & I could yield about 11% in market-neutral returns.

(link to Oshadhi’s insight: Japan Convenience Store Pair Trade: Long Lawson/Short Seven & I)


Kasikornbank PCL (KBANK TB) / Bangkok Bank Public (BBL TB)

On 27 May, the Thai NVDR Company announced that the Bank of Thailand had extended the approval for the Thai NVDR Co. to hold BBL shares up to 35% of the paid-up capital. The new limit extension runs to 23 December 2020. This was surprising since the NVDR limit for KBANK had been reduced from 35% to 25% of paid up capital with effect from 23 January, and the holding on BBL’s NVDRs on 27 May was 23.89%.

  • MSCI decided not to add BBL to the Standard indices in the May SAIR since the 35% NVDR issuance limit extension was due to expire in June and MSCI wanted to avoid potential reverse turnover in case the limit extension was not granted. There is a possibility that BBL is added to the MSCI indices in the August QIR, though there is still the overhang of the limit extension expiring in December.
  • KBANK has outperformed BBL by 14% on a total return basis since Brian’s last insight, and he recommends taking profit at these levels.

(link to Brian Freitas‘s insight: BBL / KBANK : BBL NVDR Issuance Limit Extended to December, Possible MSCI Inclusion & Trade Unwind)

INDEX REBALS

FTSE Russell has announced the results of the June index review for the FTSE TWSE Taiwan 50 Index. The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As Brian expected (in FTSE TWSE Taiwan 50 Index Review – Expensive Inclusion, Cheap Exclusion), there is one addition Wiwynn Corp (6669 TT) and one deletion Pou Chen (9904 TT) in the review. Brian estimates 0.24 days of ADV to buy on Wiwynn and 0.88 days of ADV to sell on Pou Chen. Short interest has been rising on both stocks, though short interest is 4% of free float on Wiwynn. 


FTSE Russell also announced the preliminary list of inclusions and exclusions to the Russell 3000 Index (RAY INDEX). The changes are effective 29 June and passive funds will look to trade at or by the close on 26 June. There are 200 additions and 145 deletions in this review. The rebalance leads to one of the highest volume days in the US markets with over US$9 trillion benchmarked to the FTSE Russell US indices. While stocks such as Zoom Video Communications Inc (ZM US)Slack Technologies Inc (WORK US)Datadog Inc (DDOG US)Pinterest Inc (PINS US) and CloudFlare (NET US) have been added to the index in this reconstitution, the real trade, as discussed by Brian in Russell 3000 Index Review – The BIG One, lies elsewhere.


Provided Wheelock (20 HK)‘s privatisation is successful, as discussed by Brian in Wheelock Privatisation – Impact On Wharf Holdings (4 HK) & Wharf REIC (1997 HK), there will be small passive buying from the FTSE and MSCI trackers on Wharf Real Estate Investment (1997 HK) due to an increase in the free float while there will be net selling on Wharf Holdings (4 HK) across the MSCI Hong Kong/ MSCI China trackers. WREIC could see around 19m shares of buying at the Hong Kong Hang Seng Index (HSI INDEX) September rebalance due to an increase in the free float.


Euronext announced the results of the quarterly review for the Cotation Assistée en Continu (CAC) family of indices. The constituent changes will be effective from 22 June and the rebalancing trades will need to be done at the close on 19 June. For the benchmark CAC 40 (CAC INDEX)Teleperformance (RCF FP) has been included and Sodexo SA (SW FP) has been excluded. InCAC40 Index Review – Teleperformance In, Sodexo Out, Brian estimates over 5 days of ADV to buy on Teleperformance and over 2 days of ADV to sell on Sodexo. Fundamentally, Teleperformance trades in line with its peers while Sodexo trades cheaper than its peer group. 


In Brian’s insight ASX200 Index Review – A Handful of Changes, S&P Dow Jones Indices announced changes to the S&P/ASX 200 (AS51 INDEX). The changes are effective at the open of trading on 22 June and passive funds will need to complete their rebalancing activity at or by the close on 19 June. There are 5 additions in the review: Centuria Industrial Reit (CIP AU)Megaport Ltd (MP1 AU), Mesoblast Ltd (MSB AU)Oil Basins Ltd (OBL AU) and Perseus Mining (PRU AU). There are 6 deletions in the review: Estia Health (EHE AU)Hub24 Ltd (HUB AU)Jumbo Interactive (JIN AU)Mayne Pharma (MYX AU)Pilbara Minerals (PLS AU) and Pinnacle Investment Management Group.

TAKEOVER RULES

Quiddity M&A: Australia Foreign Investment Reforms

On the 5 June 2020, the Treasury of the Australian Government released a 34-page document titled Foreign investment reforms, outlining the “most comprehensive” reform to Australian foreign investment review framework since the Foreign Acquisition and Takeovers Act (FATA) was introduced in 1975. The new powers afforded the government – a draft legislation for consultation will be released next month –  will primarily address new national security test, streamlining the approval processes for certain privately controlled institutional investment funds that hold purely passive foreign government funds; and Stronger penalties and enforcement powers.

  •  What can and cannot pass muster under the government’s purview is long overdue. But I doubt the new foreign investment framework will provide granularity for transactions such as CK Infrastructure Holdings (1038 HK) / APA Group (APA AU) – and whether it has government backing. Still, ensuring greater compliance with conditions placed on foreign investors is not a bad thing.
  • Most investors undertake investments in non-sensitive areas, therefore the introduction of the new national security test should not affect how they interact with the foreign investment review framework. If an investment was previously exempt from screening, it will remain exempt – unless the investment raises national security concerns and falls below existing monetary thresholds.  
  • Full details will be known next month – and there is still work to be done as to what exactly constitutes a sensitive national security business – but it largely appears business as usual under the guise of a better organised foreign investment framework. I don’t subscribe to the notion this reform will materially raise transaction costs, eliminating marginal transactions.  The pushback is that the existing foreign investment system has a tendency to be arbitrary and opaque; and that the new reforms may only serve to add more opacity. 

(link to my insight: Quiddity M&A: Australia Foreign Investment Reforms)

OTHER M&A & EVENT UPDATES

CCASS

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

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

Name

%chg

Into

Out of

66.42%
CTW
Lamtex
17.46%
Guotai
HSBC
F8 Enterprises (8347 HK)
11.39%
Pinestone
Bluemont
Source: HKEx

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

Name

% chg

Into

Out of

36.45%
HSBC
Outside CCASS
TBK (1960 HK)
15.00%
Lego
Outside CCASS
Source: HKEx

3. Meiji Holdings: Considering a Stock Split

Image 27974764841592064818779

  • Japanese consumer goods company Meiji Holdings (2269 JP) issued a press release on Friday (12th June 2020) stating that the company is considering a stock split to boost liquidity and capital injection by investors.
  • The company previously conducted a two for one stock split on 1st October 2015. The share price rallied as much as 17.9% in the two days following Meiji’s announcement of its 2015 stock split.
  • We believe Meiji had genuine reasons for its previous stock split, whereas the explanation for the current considering stock split is not convincing. We explain our reasons below.

4. Bitauto’s Privatisation Enters into a Definitive Agreement

Rev%20decline

On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

We had previously highlighted the attractive Bitauto privatisation spread risk/reward. Overall, we think that with the definitive agreement signed, the privatisation has a high chance of success. 

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Brief M&A: Colowide Partial Tender for Ootoya Is a Sell and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Colowide Partial Tender for Ootoya Is a Sell
  2. Metlifecare/EQT: The Retirement Solution
  3. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net
  4. Leyou in Tencent’s Crosshairs
  5. ITOCHU Attempts to Take FamilyMart Private at a Bargain

1. Colowide Partial Tender for Ootoya Is a Sell

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Japanese Restaurant Chain Amalgamator Colowide Co Ltd (7616 JP) purchased stakes in OOTOYA Holdings (2705 JP) last autumn from two founding family members who wanted to sell. They they purchased a small number of shares in the market. That got them to just over 19%. 

Colowide approached Ootoya to see if they could join together as Colowide has by purchasing 50+% stakes in Atom Corp (7412 JP) and Kappa Create (7421 JP) and REINS International (formerly known as Rex Holdings, purchased from Advantage Partners in 2012 and 2015). 

Ootoya has a particular shtick, which is well different than other chains in Japan. This is the founding ethos and it is clear as clear can be on their homepage.

Real Food. Ootoya

Our motto is “Japanese meals”

The way our mothers and their mothers before them

who thinking of their children’s health

worked hard in the kitchen,

we take customer orders, one dish at a time,

and prepare the food right there. 

That has always been important to us.

In order for us to get closer to that feeling a mother has, preparing for her family…

We wash and prepare vegetables, at the shop

We shave the dried bonito, making soup stock, at the shop

We carefully make pickles and marinade in the shop

We grill, simmer, and cook, at the shop.

We make good food by making the effort.

Ootoya has one brand. It makes “home-cooked food”, on the spot, and that is its claim to fame. It has approximately 340 restaurants as of the end of May, across all locations, run by the company or by franchisees.

Colowide runs, or owns 50% of companies which run, a total of nearly 50 different brands across 2700 restaurants ranging from Karubi, “hamburg steak”, sushi, cooked seafood, tonkatsu, Italian, French, Spanish, pizza, yakitori, several “regional food” specialty chains, shabu shabu, Freshness Burger, Wolfgang Puck, and others. They even have a new steak grill and deli food restaurant in Tokyo called “The Dad Bod.” Colowide’s revenue is, not unexpectedly with 8x the storecount, about 10x higher than Ootoya’s. Colowide tries to run things efficiently, and so tends to run things wherever possible with centralized kitchen hubs feeding pre-prepared dishes and content to the for finishing at restaurant kitchens. 

For more on the differing natures of Ootoya and Colowide, please refer to Mio Kato, CFA‘s writeup in Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth. There is nothing I disagree with there. 

The Colowide model did not appeal to Ootoya management when Colowide approached the firm, so negotiations went nowhere. Colowide made overtures to Ootoya shareholders, proposing that Ootoya become a subsidiary, before the shareholder meeting starting in April, and their proposals got soundly defeated at the AGM at the end of June 2020. Crushed, in fact. 

In response, Colowide launched a hostile tender offer to go from 19.2% to 51% of shares out. 

Ootoya’s initial response said the Tender Offer was launched without warning, and proposes to make Ootoya a subsidiary despite the fact that it’s proposals suffered a resounding defeat just two weeks ago. Ootoya will separately release an official Target Opinion. This is due 10 days from the Colowide announcement. I expect it to declare opposition to this hostile Tender Offer but I do not see what Ootoya can do. 

Ootoya is being priced expensively here. And that is in the middle of a pandemic which is causing the firm to burn cash. It is not clear who might rescue Ootoya from a buyer who wants to change the entire ethos of the Ootoya brand.  

More below the fold, with charts, and of course, Ye Olde Arb Grids.

2. Metlifecare/EQT: The Retirement Solution

Image 96837553131594429245261

On the 6 July, ahead of the 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/AVPG pitched a non-binding indicative offer to acquire all Metlifecare Ltd (MET NZ) shares for NZ$6.00/share (vs. the initial Offer of NZ$7/share) under a Scheme of Arrangement. The July meeting was subsequently deferred. 

At the time, this revised Offer appeared a decent compromise for all parties. MET can avoid protracted litigation, which was expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.

So it was no surprise four days later that MET entered into a new Scheme Implementation Agreement.

The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.

The new SIA required a majority of MET directors – not all – recommend that shareholders vote in favour of the scheme. The directors unanimously agreed the scheme should be put to shareholders. But Chairman Kim Ellis stopped short of recommending shareholders vote in favour of the revised Scheme. Nevertheless, the majority was secured.

This is a done deal. Shareholders are expected to vote on the Scheme late September with a tentative implementation date late October.

3. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net

Image?1594026380

Last Week in Event SPACE …

  • Interestingly, the impact of FamilyMart Co Ltd (8028 JP)‘s shareholder dynamic on price may not be what “smart” active investors think it is. And the results may not be what people think it normally would be. Once again, it is possible that greedy bears get stuck.
  • Sina Corp (Class A) (SINA US)‘s totally unremarkable non-binding MBO.
  • Overall, buying LINE Corp (3938 JP) at the current price (JPY 5570/share) seems like an iffy bet. Any injury to global equity markets due to worsening COVID-19 situation, or regulation against global internet names, or a drop from record multiples of the entire space in the US might lead to less bullishness of a bump. 
  • EQT blinks first and returns to the negotiation table with Metlifecare Ltd (MET NZ).
  • Hibiki Path Advisors, the largest true minority investor for Accordia Golf Trust (AGT SP) has announced that it is not satisfied with the price offered. They have a number of complaints, and some of them have merit. Not all of them do. 
  • PRC clean energy plays remain very much in vogue as Beijing Jingneng Clean Energy (579 HK)  flags a potential offer from its parent.
  • Fibre optic component play O-Net Technologies (Group) (877 HK) announces a privatisation Offer.
  • Plus, other events, CCASS movements and Mood Spins.

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

M&A – ASIA

FamilyMart Co Ltd (8028 JP) (Mkt Cap: $10.1bn; Liquidity: $35mn)

The Nikkei reported that 50.1% owner Itochu Corp (8001 JP) had “decided” today to launch a takeover bid for Familymart to take it private. The Tender Offer has been announced at ¥2300/share. It is less than the ¥2750/share implied by the purchase price in the Tender Offer in 2018 which got Itochu from 41.5% to 50.1%. Travis Lundy expects ‘the market’ will clamour for more, but the shareholder structure on this is no less “interesting” than it was in April 2018 when he wrote about the previous tender, saying Itochu Tender For FamilyMart – Winnie Sees a Hunny Pot But Greedy Bears Get Stuck. Here is the Tender Offer doc.

  • This deal is highly opportunistic.  Because this resembles a situation which would be addressed by the METI Fair M&A Guidelines from a year ago, there could be some noise for a majority of minority or other measures meant to support minority shareholder rights. That support will be limited for structural reasons, which is probably the reason why the minimum threshold for success is not two-thirds, but instead is an additional 50mm shares, which is 10%. 
  • The pricing is low. Very low. The Enterprise Value at TOB Price against Next Year EBITDA is 5+x. It was 11x in the Tender Offer just two years ago.  That means the Financial Advisors did not do their job. They said “fair” was a lower price at half the valuation. Plus this time 20% of the equity value of FamilyMart is in other shareholdings. The FamilyMart Special Committee and/or Board DID do their job, but I think less well than they could have. They could have pointed out the halving of the valuation. 
  • Travis expects this deal has a marginally higher probability of failure than of being bumped and becoming successful. But both failure and bump are a higher probability than they would normally be. If it is successful, I would expect the shares to trade just through terms early, then quickly higher, then pause, wait for the bump, maybe trade a bit higher, then deal at the bumped price or not. 
  • Travis does not see tremendous downside post-tender. CVS may be out of fashion, but I do not believe that Itochu will not try to make things work better and smoother than before even if they only own 50.1%. That will mean Itochu will own more of the economics from PB and logistics, but so be it. Also, this event could be the trigger that allows investors to re-assess the value of FamilyMart, or indeed of a well-run CVS business. If the shares trade through terms, and there is no bump, it is unlikely this goes through… unless there is a spoiler, like the Nikkei Inc says that FamilyMart will be deleted from the Nikkei 225 if Itochu only buys 9.9%.

links to:
Travis’ insight: FamilyMart Tender Offer – Winnie and HunnyPot Redux
Oshadhi Kumarasiri‘s insight: ITOCHU Attempts to Take FamilyMart Private at a Bargain


Sina Corp (Class A) (SINA US) (Mkt Cap: $2.6bn; Liquidity: $26mn)

SINA looks sets to join the growing list of Chinese companies seeking to delist in the US and relist, ostensibly in Hong Kong. Yesterday, Sina announced the receipt of a preliminary non-binding “going private” proposal from New Wave – a company controlled by its chairman/CEO Charles Chao – at US$41/share,  a ~20% premium to the average closing price during the 30 trading days prior to the announcement. 

  • SINA’s jewel is microblogger Weibo Corp (Adr) (WB US) – China’s Twitter Inc (TWTR US)equivalent – in which it holds a ~45% equity stake but controls ~71% of the vote. However, Weibo is not immune to the impact form COVID-19. In 1Q20, Weibo’s total net revenues was $323.4mn, a 19% decline yoy. Advertising and marketing revenues for 1Q20 was $275.4mn, a decrease of 19% compared to $341.1 million for the same period last year. Weibo’s consensus target price has declined to US$42.09/share, down 14% YTD.
  • Due diligence still needs to be carried out but such a condition is rudimentary – Chao has been with the company since 1999, and has been the chairman/CEO since 2011. The Board has also formed a special committee consisting of independent directors to evaluate and consider the Proposed Transaction. It is doubtful the Offer won’t be supported.
  • This appears a highly opportunistic Offer, however, Chao has 58% of the vote in the bag. I would not anticipate a bump – it’s just not how things are usually done for the privatisation of Chinese companies in the US. Shares trade at a tight gross spread of 1.4%.  I would not chase it here. 

(links to my insight: Sina Corp: Management Buyout Offer)


LINE Corp (3938 JP) (Mkt Cap: $12.4bn; Liquidity: $15mn)

On the 30 June after the close, LINE, Z Holdings, Softbank Corp, and Z Holdings (“the Relevant Parties”) announced that the deal would likely not complete by the originally scheduled October 1st deadline. So while the official word is there is no anticipated change to terms (a reference to the way shares were trading through terms at the time), shares trade higher.  The market, at 3.5% through terms, is now betting on a bump to the LINE TOB Price. To make that a decent winning bet, investors have to think there is a greater-than 50% chance of a bump of 10% or more… with no chance of a regulatory block in there.

  • There is a chance of a regulatory impediment. It could be Korean-Japanese geopolitical issues. It could be Japanese government worries on cashless payment systems. It could be anti-trust regulators inviting comment from competitors and competitors putting a stick in the spokes. I am not overly concerned about Taiwan, Thailand, or Japan, but one wonders if the Korea angle is problematic. 
  • We do not know what LINE H1 earnings will look like. There is a special gain on the sale of a security holding. We do not know what it is or what impact it will have. If LINE H1 earnings and commentary are strikingly positive, that could help a bump argument. I do not know enough about the way things have evolved in Q2 to know whether the improvement in Q1 accelerated to a level which is not already forecast by management and the Street. 
  • THE TRADE:  At ¥5380 or just below terms, making the bet on a bump was “easy.” It did not cost much as shareholder approval at Z was already achieved. At ¥5570 Friday, it is substantially less easy.  If Travis owned shares in LINE, he would be lightening up here rather than buying more.He would have no qualms about being out completely at this price.He would have no qualms at buying at terms for the minor optionality, but thinks the reward/risk ratio of a bump after buying at terms is not great if the stock is trading at terms when the conditions are met, allowing the Tender Offer to go ahead. 

(links to Travis’ insight: Market Is Pricing a LINE Bump – Should It?)


Metlifecare Ltd (MET NZ) (Mkt Cap: $0.8bn; Liquidity: $3mn)

Ahead of MET’s 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/QVPG have pitched a non-binding indicative offer to acquire all MET shares for NZ$6.00/share under a Scheme of Arrangement. This compares to the original Scheme consideration of NZ$7.00 per share in cash. Consequently, the July meeting has been deferred.  This would appear a decent compromise for all parties. MET can avoid protracted litigation, which is expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.

  • Before entering into a new SIA, APVG requires Metlifecare to fully settle the litigation in respect of the SIA dated 29 December 2019. By “fully settle”, this means Metlifecare drops its litigation to enforce the December 2019 SIA. Both sides would agree to walk away wearing their own costs. Though not mentioned in the announcement, APVG’s proposal will require OIO approval. APVG withdrew their original OIO application before securing final approval so they will have to lodge another application. The expectation is that it would be a quick process this time around as the previous application was very close to approval according to my contact at MET.
  • According to today’s announcement, the Guardians of the New Zealand Superannuation Fund (who I believe still have ~19.8% of shares out, as per the 2019 annual report) is “broadly supportive of Metlifecare urgently progressing APVG’s non-binding indicative offer“.
  • How is the final dividend treated? The announcement is silent on this, and in my back & forth with MET, it is not yet clear how it will be addressed. MET paid a final dividend (June Y/E) of NZ$0.075/share in FY19. Assuming a firm offer unfolds, one that could complete in 4Q20, I would think to get full shareholder support, the dividend would have to be included. To note, the Offer price under the December SIA was to be reduced by any dividend paid. This is the reason no interim divined was declared for the Dec 19-end interim period.
  • This remained (at the time of the insight) a pre-event, although one with a very high likelihood of formal offer emerging. For those investors who bundled into MET when it consistently closed below NZ$4/share after EQT announced its intention to terminate the Scheme – I recommended (in Metlifecare: Down But Not Out – Get Long) going long at $4.34/share – I suggest taking profit.
  • UPDATE: As expected, MET has entered into a new Scheme Implementation Agreement with Asia Pacific Village Group Limited/EQT to acquire all Metlifecare’s shares for NZ$6.00/share. 

    The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.

(link to my insight: Metlifecare: EQT Blinks And Tables A Revised Offer


Accordia Golf Trust (AGT SP) (Mkt Cap: $0.5bn; Liquidity: $1mn)

Hibiki Path Advisors – the second-largest shareholder in AGTand one who has been noisy on behalf of all shareholders – issued a Press Release which stated they were disappointed with the price and that it will be voting against the proposed divestment in the case the price is not revised higher. The easiest points to address for AGT independent board members in requesting Accordia Golf parent to pay a slightly higher price are the idea of there already being a slightly favourable transfer to the parent in the form of high royalty fees as a percent of gross operating profit. The elimination of fees to the Trustee Manager could be deemed to be another “benefit”.

  • The real question to the buyer and to the IFA is whether the value of the golf courses might be higher if they stopped running it as a golf course business and instead carpeted 100+ golf courses across Japan with solar farms. IF the parent made more money from converting them to solar farms, that would be worthwhile getting a bump. Of course, I expect the parent wouldn’t tell you if that was their plan.  If one pushed for a small bump, it might be possible. Otherwise, the relatively low threshold for approving this deal suggests that Hibiki Path may not win unless they put substantially greater pressure on the Trustee Manager. They should probably try to get ISS and SIAS involved.
  • The shares opened on 30 June at S$0.685 which was too low. They traded lower, only trading higher after a competitor to Smartkarma realized they had left out a S$0.014 payment to be made. The shares traded much of 3 July at S$0.690-0.695. Even at S$0.695 the shares are probably cheap as an arb to defined terms unless you think the contingent claims portion will be stripped out. I would not expect they will be, but one could argue the point.
  • The letter may mean a jump in price. I think the threat to this deal and the noise made by Hibiki Path so far are unlikely to trigger either an opinion by the IFA that the price is not high enough, nor a serious threat to the deal being completed at proposed terms. However, an honest response by the independent committee could be a way of getting a slightly higher price out of the buyers, ESPECIALLY now that the effects of COVID-19 have been seen to be limited. Travis expects that buying at or below S$0.69 is still a good reward/risk profile to an arb expecting deal completion. 

(link to Travis’ insight: Major Accordia Golf Trust Shareholder Has Issues With Price & Process


Beijing Jingneng Clean Energy (579 HK) (Mkt Cap: $2.2bn; Liquidity: $1mn)

After being suspended the previous Friday morning pursuant to the Code on Takeovers and Mergers. Jingjeng has announced its parent (Beijing energy Holdings “BEH”) has indicated an intention to make a voluntary cash general Offer. No price was mentioned.  BEH holds 471.6mn H shares, or around 16.7% of H shares out, therefore the blocking take at a Scheme-like vote would be 8.33% of H-shares out.  This would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

  • Jingneng is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a Scheme-like vote (≥ 75% for, ≤10% against). Such an Offer may or may not require an additional tendering acceptance condition.
  • Tendering condition? It’s not clear. This announcement used the words “conditional voluntary cash general offer“. Similar wording is used in the Harbin Electric Co Ltd H (1133 HK)Huaneng Renewables Corp H (958 HK) & AVIC International Holdings (161 HK)transactions, wherein a tendering condition was present. At a guess, it’s probably a condition to a firm Offer.
  • What Price? The average premium for past Merger by Absorption deals is 47%. That backs out a possible fair value of ~$2.30, around a three-year high, with a deal size of $5.4bn. $2.30/share is ~0.75x P/B, which compares with ~0.64x P/B for recent energy privatisations.  Shares closed at $2.04 on Friday. There is a clear directive to privatise clean energy plays. Now is the time to run a ruler over other peers (China Datang Corp Renewable Power (1798 HK) ), in addition to other SOE-controlled entities (possibly Asia Satellite Telecom Holdings Ltd (1135 HK), Cosco International Holdings (517 HK) & Tianjin Development Holdings (882 HK)) potentially subject to a delisting proposal.

(link to my insight: Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?


O-Net Technologies (Group) (877 HK) (Mkt Cap: $0.6bn; Liquidity: $3mn)

On the 6 July, O-Net, a leader in the provision of high-technology products and optical networking components, was suspended pursuant to the Code on Takeovers and Mergers. An Offer, by way of a Scheme, has now been announced. The cancellation price is HK$6.50/share, a 23.57% premium to last close. The price will not be increased. Disinterested Shareholders comprise 375.196mn shares, or 44.99% of shares out. Therefore 10% blocking stake is attached to ALL of the Scheme Shares held by the Disinterested Shareholders at the Scheme Meeting is 37.52mn shares or 4.499% of shares out. O-Net is Cayman incorporated therefore the headcount test applies. Assuming the deal gets up, this may be wrapped up by late October.

  • A condition to the Scheme is that Kaifa’s shareholders approve the acquisition. This should be a simple majority vote. CapIQ has SOE China Electronics Corporation holding a little over 39%. I don’t see the vote as being a risk to the deal. It is currently expected that a shareholders’ meeting will be convened by Kaifa within one month from this Offer announcement.
  • O-Net should be a key beneficiary from global 5G investment. Applying various metrics and with respect to a global basket of peers, I argued there was potentially 33% upside from the undisturbed price to an Offer price. We got 23.57%. That’s probably going to be enough. Shares were trading around a two-year high and have all but batted away COVID-19. 
  • I see the gross/annualised spread at 3.7%/13.5%, assuming cheques are issued late October. That level looks about right. This is not a slam dunk premium – the average premium for Asia-Pac transactions this year is ~33%. Still, O-Net was up 27% YTD, ahead of the Offer announcement, so optically, the offer is not viewed as opportunistic. All in, this deal should get up. 

links to my insights:
O-Net (877 HK): Swish Switches Offer
O-Net Tech (877 HK): Tripping The Light Fantastic


J.B. Chemicals & Pharmaceuticals (JBCP IN) (Mkt Cap: $0.7bn; Liquidity: <$1mn)

The Promoters of JBCP announced on 3rd July they had signed an SPA with KKR & Co Inc (KKR US) to sell up to 54% of the company’s total shares from their holdings. Pursuant to SEBI Regulations, this triggered the obligation for the Acquirer to launch a Mandatory Open Offer to buy shares from Public Shareholders at similar Terms.  To fulfil this requirement, the Acquirer has launched a Partial Tender Offer to buy up to 26% of the company’s total shares from non-promoter shareholders at a cash price of INR745.00/share. Tender Offers in India have a statutory timeline that requires the settlement to be within 72 business days from the date of the announcement which means the Offer could be completed in the next 4 months. 

  • The Open Offer Quantity will be fixed at 20,093,346 shares (26% of voting capital) and how much the Promoters will get to sell will depend on what portion of the Open Offer Quantity gets filled. If Open Offer gets fully filled (26%), Promoters will be able to sell up to 38.9% in total (so that the Acquirer’s stake does not exceed 64.9%). If no shares are acquired in the Open Offer, the Promoters will be able to sell the entire SPA quantity of 54% (given that Total Foreign Shareholding in the Company remains at or below 74%). 
  • The Open Offer is not conditional upon any minimum level of acceptance.  If all non-promoter shareholders (44.09%) tender their shares, 58.97% of the total tendered quantity will be purchased. (Minimum Fill Ratio = 58.97%). If non-promoter shareholders representing less than 26% tender their shares, all shares tendered will be purchased. (Maximum Fill Ratio = 100%).
  • The upside is ~3.4% to the tender offer price, which is a relatively low annualized return over 4 months. However, on a longer-term basis, expecting growth and a desire by KKR to exit after several years through a sale to someone else, one can expect a Delisting Offer at a higher price could be in the offing. For that, this situation is bullish as the odds are better of a higher price than a lower price. If you trade this situation, the trade is to know you have a put option for 60-75% of your position at a price 3.4% higher than here. Janaghan Jeyakumar thinks a 70-80% pro-ration rate is likely if the shares stay at the current level minus a little bit. If the shares drop to below INR 700 prior to the Tender Offer, that would be a great place to buy.

(link to Janaghan’s insight: J.B.Chemicals (JBCP IN): Partial Tender Offer by KKR


In Leyou – Is Sony Targeting Splash Damage as Microsoft Targets Warner Brothers Interactive, Mio Kato reckons Sony Corp (6758 JP)‘s reported interest in Leyou Technologies (1089 HK) is highly credible. Against the backdrop of Microsoft’s reported interest in acquiring Warner Brothers Interactive Entertainment, he feels the move would make sense as both players move to strengthen 1st party development capabilities. In Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou, he also discusses Sony’s 1.4% stake purchase in Unreal Engine creator Epic Games for $250mn and how they might impact Leyou. Also, Leyou’s chairman Yuk has now entered into an exclusivity agreement with Tencent Holdings (700 HK). No price is mentioned.

M&A – UK

Rockrose Energy PLC (RRE LN) (Mkt Cap: $0.3bn; Liquidity: $3mn)

On 6th July, UK-based independent Oil & Gas company Rockrose made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn. The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash. This all-friendly Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020. The Acquirer has also reserved the right to implement the Acquisition by way of a Takeover Offer.The Offer Price translates to premia of 63.7%, 90.7%, and 68.5% to the stock’s pre-announcement closing price, 3-month VWAP, and 6-month VWAP respectively.

  • The Scheme will require approval from Target Shareholders representing 75% of votes cast. Irrevocables from Target Shareholders holding 35.3% (4,651,113 shares) have agreed to vote in favour of the Deal.  If the second largest shareholder Cavendish Asset Management (1,442,648 shares or ~11% stake). If they also vote in favour, the maximum required approval rate could fall to 45% for the remaining shareholders. 
  • This Deal seems like a rescue. As a publicly-listed company, RockRose was mainly interested in acquisitions in the upstream Oil and Gas sector which they intended to fund through further equity offerings. However, at present, they feel raising further equity capital would be “unduly dilutive” after the drastic decline in stock price in recent months caused by Oil Price Shocks and COVID-19 fears. Given this context, the Offer Terms seem acceptable.  
  • Given the board’s unanimous recommendation and the willingness of insiders to accept the Deal, others might be convinced to sell too.  At the time of writing, RockRose shares are trading at GBP18.34 translating to a gross spread of 0.87% with roughly 2 months to completion.  Janaghan expects RockRose shares to trade close to terms until completion. This could be a simple and short-dated “rate-of-return” trade. I expect the Deal to complete as-is.
(link to Janaghan’s insight: RockRose-Viaro Deal: Trading Close to Terms

INDEX REBALS

The next quarterly rebalance for the FTSE Taiwan 50 Index  will be effective 21 September and the changes will be announced on 4 September. Passive funds will need to trade at the close on 18 September. The data used to determine changes to the index will use the closing prices on 24 August. In FTSE Taiwan50 Index Rebalance Preview – First Look Sees Two Changes, Brian Freitas sees two potential inclusions/exclusions from the index. Silergy Corp (6415 TT) and Realtek Semiconductor (2379 TT) are potential additions and would replace China Life Insurance (2823 TT) and Lite On Technology (2301 TT)


M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $24mn)

Activist Polygon (1.025% stake in MásMóvil, worth c. EUR 31 mn) has sent a letter to the CNMV (Securities Market National Commission, the Spanish market watchdog) regarding the terms of the Lorca Telecom (KKR, Cinven and Providence funds) voluntary takeover bid for MásMóvil. The letter provides reasons why the current offer (especially the irrevocable undertakings) seems unfair for the minority shareholders

  • Jesus Rodriguez Aguilar reckons there are three possible scenarios from here: i) a counterbid by other private equity firms, such as Carlyle or CVC (who have mulled a bid for MásMóvil in the past); ii) one of the incumbents —Telefónica, Vodafone or Orange— counteroffers at a higher price. This seems difficult (see further in the note); and iii)  :orca Capital does not get the 90% acceptance required to squeeze out and delist MásMóvil, so the current shareholders share in the possible upside of a hypothetical Vodafone Spain acquisition.
  • Jesus’ recommendation is LONG MásMóvil: the downside risk at the last close (EUR 22.68 vs a bid of EUR 22.50) is low and there are reasons to hold for an improved bid. The Domínguez de Gor family (8% stake) has already said that it will not consider the bid unless there is an improved price of EUR 24 per share. The acceptance period of the Lorca Capital bid should start in September.

(link to Jesus’ insight: MásMóvil – Lorca Capital: Summer Lull

EVENTS

In  New Rules on Prefs Trading, Listing, & Delisting in Korea, Sanghyun discussed the new rules for the trading, listing, and delisting of the local preferred shares announced by the Korea FSC. The minimum shares out and market cap for new listings are now 1mn shares and ₩5bn, effective October this year. As for delisting, those prefs below 0.2mn shares or ₩2bn market cap will lose their spot, starting October next year with a grace period of one year,

OTHER M&A & EVENT UPDATES

  • Iberdrola SA (IBE SM)released its Secondary Bidder’s Statement on Infigen Energy (IFN AU) announcing the FIRB condition had been fulfilled. Infigen for its part announced updated Supplementary Target Statements on both the Iberdrola deal … and the UAC Energy deal
  • The Halcyon Agri Corp (HACL SP) rights issue mandate was granted by the AGM. 
  • Yixin Group Ltd (2858 HK)‘s Composite Doc has been delayed until the 7 April 2021, to allow time for the satisfaction of all conditions.
  • Cardinal Resources (CDV AU) has completed the issuance of shares (26mn or A$11.96mn) to Shandong as per the BIA. Difficult to see Norgold coming back into the mix from here. Bidder/Target Statements due out on or before the 22 July. 
  • Golden Meditech Holdings (801 HK) announced that an “application has been made by the Company and the Offeror to the Executive for consent to the extension of the latest date for despatching the Scheme Document from 8 July 2020 to 26 August 2020 and the Executive has granted the consent.” That about 10 days past my initial estimate. 
  • SAIC Motor HK Investment Limited – presumably an entity under SAIC Motor (600104 CH) – will acquire 20.87% of shares out from UCAR, and 14.76% from Amber Gen – both at $3.10/share – taking its take to 28.92%. Car Inc (699 HK) closed at $2.53 yesterday. This will give shares a boost.
  • Sanyo Shokai (8011 JP) ‘dissident’ investor RMB Capital has upped their stake in the company to 7.6%.
  • Hohsui Corp (1352 JP) was put on notice that it has until 31 March 2021 to lift its market cap in order to stay in the TSE1, or else it will get demoted to the TSE2. 
  • Both Anicom Holdings (8715 JP) and Benefit Japan (3934 JP) announced that the TSE had put each on notice for possible demotion to the TSE2 (from the TSE1) if they do not maintain a shareholder count of 2,000 or more by the end of the grace period (31 March 2021). 

CCASS

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

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

Name

%chg

Into

Out of

42.00%
BNP
Outside CCASS
15.15%
Citic
Partners Cap
17.07%
Haitong
Every Joy
Charmacy (2289 HK)
18.32%
MS
ML
Source: HKEx

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

Name

% chg

Into

Out of

Fin Street (1502 HK)
17.53%
Guotai
Outside CCASS
13.83%
GS
Outside CCASS
14.53%
SBI
Outside CCASS
China Saftower (8623 HK)
12.29%
Chaoshang
Outside CCASS
Source: HKEx

4. Leyou in Tencent’s Crosshairs

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Leyou Technologies (1089 HK)’s long-drawn takeover saga has potentially taken its final twist. After market close on Friday, Leyou announced that Mr Yuk, Leyou’s controlling shareholder with a 69.2% stake, entered into a three months exclusivity agreement with Tencent Mobility, a wholly-owned subsidiary of Tencent Holdings (700 HK), to sell his stake. If the stake sale completes, it can result in the possible acquisition and privatization of Leyou by Tencent. 

Leyou has been subject to intense privatisation speculation with various suitors such as iDreamsky Technology Limited (1119 HK)/CVC, Zhejiang Century Huatong A (002602 CH), Sony Corp (6758 JP) and Tencent in pole position at different points in time since September 2019.

Ultimately, the previous negotiations collapsed as although Mr Yuk wants to sell his Leyou stake as evidenced by his long-drawn negotiations with the bidders, he is holding firm with his valuation. Warframe’s improving performance, Tencent’s deep-pockets and Mr Yuk’s stubbornness suggest that the chances of a deal getting done are high. At the last close price of HK$2.89 per share, our privatisation price estimate of HK$3.31 per share implies a gross spread of 14.4%.

5. ITOCHU Attempts to Take FamilyMart Private at a Bargain

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It was reported yesterday (9th July 2020), that Itochu Corp (8001 JP) has launched a tender offer to take FamilyMart Co Ltd (8028 JP) private by acquiring the remaining 49.9% stake held by the minority investors. The offer price is set at ¥2,300 per share, a 31.1% premium to the last close price of ¥1,754. However, the offer price is at a 19.9% discount to the 52-week high and 0.8% discount to the one-year average price.

Travis Lundy’s insight; FamilyMart Tender Offer – Winnie and HunnyPot Redux discussed the background, offer details, shareholding structure, offer price and the chances of success.

This insight is focused on the fair value calculation of the financial advisors.

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Brief M&A: Meiji Holdings: Considering a Stock Split and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Meiji Holdings: Considering a Stock Split
  2. Bitauto’s Privatisation Enters into a Definitive Agreement

1. Meiji Holdings: Considering a Stock Split

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  • Japanese consumer goods company Meiji Holdings (2269 JP) issued a press release on Friday (12th June 2020) stating that the company is considering a stock split to boost liquidity and capital injection by investors.
  • The company previously conducted a two for one stock split on 1st October 2015. The share price rallied as much as 17.9% in the two days following Meiji’s announcement of its 2015 stock split.
  • We believe Meiji had genuine reasons for its previous stock split, whereas the explanation for the current considering stock split is not convincing. We explain our reasons below.

2. Bitauto’s Privatisation Enters into a Definitive Agreement

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On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

We had previously highlighted the attractive Bitauto privatisation spread risk/reward. Overall, we think that with the definitive agreement signed, the privatisation has a high chance of success. 

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Brief M&A: Bitauto’s Privatisation Enters into a Definitive Agreement and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Bitauto’s Privatisation Enters into a Definitive Agreement
  2. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion

1. Bitauto’s Privatisation Enters into a Definitive Agreement

Rev%20decline

On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

We had previously highlighted the attractive Bitauto privatisation spread risk/reward. Overall, we think that with the definitive agreement signed, the privatisation has a high chance of success. 

2. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion

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  • The Japanese drug maker, Takeda Pharmaceutical (4502 JP)  announced yesterday (11th June 2020) that it has entered into an agreement to divest a portfolio of select non-core over-the-counter (OTC) and prescription drugs which are sold exclusively in Asia Pacific to South Korea’s Celltrion Inc (068270 KS)  for US$278m.
  • Takeda will receive up to US$266m upfront in cash and up to an additional US$12m in potential milestone payments, subject to customary legal and regulatory closing conditions. The transaction is expected to conclude at the end of this year.
  • The company has been divesting its non-core assets in order to reduce its debt and focus on its core areas. While the sale of non-core assets will result in a decline in the company’s top line in the short-term, we remain positive on the company’s mainstay products.
  • On the other hand, we expect the deal to help Celltrion expand its presence in the diabetes and hypertension drug market (local-brand treatments) which should offer the company with sustainable revenue growth.

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Brief M&A: Bitauto’s Privatisation Enters into a Definitive Agreement and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Bitauto’s Privatisation Enters into a Definitive Agreement
  2. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion
  3. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?

1. Bitauto’s Privatisation Enters into a Definitive Agreement

Rev%20decline

On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

We had previously highlighted the attractive Bitauto privatisation spread risk/reward. Overall, we think that with the definitive agreement signed, the privatisation has a high chance of success. 

2. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion

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  • The Japanese drug maker, Takeda Pharmaceutical (4502 JP)  announced yesterday (11th June 2020) that it has entered into an agreement to divest a portfolio of select non-core over-the-counter (OTC) and prescription drugs which are sold exclusively in Asia Pacific to South Korea’s Celltrion Inc (068270 KS)  for US$278m.
  • Takeda will receive up to US$266m upfront in cash and up to an additional US$12m in potential milestone payments, subject to customary legal and regulatory closing conditions. The transaction is expected to conclude at the end of this year.
  • The company has been divesting its non-core assets in order to reduce its debt and focus on its core areas. While the sale of non-core assets will result in a decline in the company’s top line in the short-term, we remain positive on the company’s mainstay products.
  • On the other hand, we expect the deal to help Celltrion expand its presence in the diabetes and hypertension drug market (local-brand treatments) which should offer the company with sustainable revenue growth.

3. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?

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The way Prosus let Just Eat go during the bidding war seemed like a strategic retreat. This move led to speculation that Prosus was pulling back so it could make a bolder move for the combined Just Eat Takeaway (JET LN) at a later stage. Fall in the share price of the combined group would have been a good opportunity to acquire JET. The COVID-19 crisis put paid those plans. During the lockdown, British people ate a lot of delivered food. Just Eat business flourished. 

Now with a bid on Grubhub Inc (GRUB US) on the tape, if Prosus wants JET it has to make its move very soon. Below I analyse the financial ability of Prosus to bid on JET.

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Brief M&A: Metlifecare/EQT: The Retirement Solution and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Metlifecare/EQT: The Retirement Solution
  2. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net
  3. Leyou in Tencent’s Crosshairs
  4. ITOCHU Attempts to Take FamilyMart Private at a Bargain
  5. Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou

1. Metlifecare/EQT: The Retirement Solution

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On the 6 July, ahead of the 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/AVPG pitched a non-binding indicative offer to acquire all Metlifecare Ltd (MET NZ) shares for NZ$6.00/share (vs. the initial Offer of NZ$7/share) under a Scheme of Arrangement. The July meeting was subsequently deferred. 

At the time, this revised Offer appeared a decent compromise for all parties. MET can avoid protracted litigation, which was expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.

So it was no surprise four days later that MET entered into a new Scheme Implementation Agreement.

The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.

The new SIA required a majority of MET directors – not all – recommend that shareholders vote in favour of the scheme. The directors unanimously agreed the scheme should be put to shareholders. But Chairman Kim Ellis stopped short of recommending shareholders vote in favour of the revised Scheme. Nevertheless, the majority was secured.

This is a done deal. Shareholders are expected to vote on the Scheme late September with a tentative implementation date late October.

2. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net

Image 1534922821594425054242

Last Week in Event SPACE …

  • Interestingly, the impact of FamilyMart Co Ltd (8028 JP)‘s shareholder dynamic on price may not be what “smart” active investors think it is. And the results may not be what people think it normally would be. Once again, it is possible that greedy bears get stuck.
  • Sina Corp (Class A) (SINA US)‘s totally unremarkable non-binding MBO.
  • Overall, buying LINE Corp (3938 JP) at the current price (JPY 5570/share) seems like an iffy bet. Any injury to global equity markets due to worsening COVID-19 situation, or regulation against global internet names, or a drop from record multiples of the entire space in the US might lead to less bullishness of a bump. 
  • EQT blinks first and returns to the negotiation table with Metlifecare Ltd (MET NZ).
  • Hibiki Path Advisors, the largest true minority investor for Accordia Golf Trust (AGT SP) has announced that it is not satisfied with the price offered. They have a number of complaints, and some of them have merit. Not all of them do. 
  • PRC clean energy plays remain very much in vogue as Beijing Jingneng Clean Energy (579 HK)  flags a potential offer from its parent.
  • Fibre optic component play O-Net Technologies (Group) (877 HK) announces a privatisation Offer.
  • Plus, other events, CCASS movements and Mood Spins.

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

M&A – ASIA

FamilyMart Co Ltd (8028 JP) (Mkt Cap: $10.1bn; Liquidity: $35mn)

The Nikkei reported that 50.1% owner Itochu Corp (8001 JP) had “decided” today to launch a takeover bid for Familymart to take it private. The Tender Offer has been announced at ¥2300/share. It is less than the ¥2750/share implied by the purchase price in the Tender Offer in 2018 which got Itochu from 41.5% to 50.1%. Travis Lundy expects ‘the market’ will clamour for more, but the shareholder structure on this is no less “interesting” than it was in April 2018 when he wrote about the previous tender, saying Itochu Tender For FamilyMart – Winnie Sees a Hunny Pot But Greedy Bears Get Stuck. Here is the Tender Offer doc.

  • This deal is highly opportunistic.  Because this resembles a situation which would be addressed by the METI Fair M&A Guidelines from a year ago, there could be some noise for a majority of minority or other measures meant to support minority shareholder rights. That support will be limited for structural reasons, which is probably the reason why the minimum threshold for success is not two-thirds, but instead is an additional 50mm shares, which is 10%. 
  • The pricing is low. Very low. The Enterprise Value at TOB Price against Next Year EBITDA is 5+x. It was 11x in the Tender Offer just two years ago.  That means the Financial Advisors did not do their job. They said “fair” was a lower price at half the valuation. Plus this time 20% of the equity value of FamilyMart is in other shareholdings. The FamilyMart Special Committee and/or Board DID do their job, but I think less well than they could have. They could have pointed out the halving of the valuation. 
  • Travis expects this deal has a marginally higher probability of failure than of being bumped and becoming successful. But both failure and bump are a higher probability than they would normally be. If it is successful, I would expect the shares to trade just through terms early, then quickly higher, then pause, wait for the bump, maybe trade a bit higher, then deal at the bumped price or not. 
  • Travis does not see tremendous downside post-tender. CVS may be out of fashion, but I do not believe that Itochu will not try to make things work better and smoother than before even if they only own 50.1%. That will mean Itochu will own more of the economics from PB and logistics, but so be it. Also, this event could be the trigger that allows investors to re-assess the value of FamilyMart, or indeed of a well-run CVS business. If the shares trade through terms, and there is no bump, it is unlikely this goes through… unless there is a spoiler, like the Nikkei Inc says that FamilyMart will be deleted from the Nikkei 225 if Itochu only buys 9.9%.

links to:
Travis’ insight: FamilyMart Tender Offer – Winnie and HunnyPot Redux
Oshadhi Kumarasiri‘s insight: ITOCHU Attempts to Take FamilyMart Private at a Bargain


Sina Corp (Class A) (SINA US) (Mkt Cap: $2.6bn; Liquidity: $26mn)

SINA looks sets to join the growing list of Chinese companies seeking to delist in the US and relist, ostensibly in Hong Kong. Yesterday, Sina announced the receipt of a preliminary non-binding “going private” proposal from New Wave – a company controlled by its chairman/CEO Charles Chao – at US$41/share,  a ~20% premium to the average closing price during the 30 trading days prior to the announcement. 

  • SINA’s jewel is microblogger Weibo Corp (Adr) (WB US) – China’s Twitter Inc (TWTR US)equivalent – in which it holds a ~45% equity stake but controls ~71% of the vote. However, Weibo is not immune to the impact form COVID-19. In 1Q20, Weibo’s total net revenues was $323.4mn, a 19% decline yoy. Advertising and marketing revenues for 1Q20 was $275.4mn, a decrease of 19% compared to $341.1 million for the same period last year. Weibo’s consensus target price has declined to US$42.09/share, down 14% YTD.
  • Due diligence still needs to be carried out but such a condition is rudimentary – Chao has been with the company since 1999, and has been the chairman/CEO since 2011. The Board has also formed a special committee consisting of independent directors to evaluate and consider the Proposed Transaction. It is doubtful the Offer won’t be supported.
  • This appears a highly opportunistic Offer, however, Chao has 58% of the vote in the bag. I would not anticipate a bump – it’s just not how things are usually done for the privatisation of Chinese companies in the US. Shares trade at a tight gross spread of 1.4%.  I would not chase it here. 

(links to my insight: Sina Corp: Management Buyout Offer)


LINE Corp (3938 JP) (Mkt Cap: $12.4bn; Liquidity: $15mn)

On the 30 June after the close, LINE, Z Holdings, Softbank Corp, and Z Holdings (“the Relevant Parties”) announced that the deal would likely not complete by the originally scheduled October 1st deadline. So while the official word is there is no anticipated change to terms (a reference to the way shares were trading through terms at the time), shares trade higher.  The market, at 3.5% through terms, is now betting on a bump to the LINE TOB Price. To make that a decent winning bet, investors have to think there is a greater-than 50% chance of a bump of 10% or more… with no chance of a regulatory block in there.

  • There is a chance of a regulatory impediment. It could be Korean-Japanese geopolitical issues. It could be Japanese government worries on cashless payment systems. It could be anti-trust regulators inviting comment from competitors and competitors putting a stick in the spokes. I am not overly concerned about Taiwan, Thailand, or Japan, but one wonders if the Korea angle is problematic. 
  • We do not know what LINE H1 earnings will look like. There is a special gain on the sale of a security holding. We do not know what it is or what impact it will have. If LINE H1 earnings and commentary are strikingly positive, that could help a bump argument. I do not know enough about the way things have evolved in Q2 to know whether the improvement in Q1 accelerated to a level which is not already forecast by management and the Street. 
  • THE TRADE:  At ¥5380 or just below terms, making the bet on a bump was “easy.” It did not cost much as shareholder approval at Z was already achieved. At ¥5570 Friday, it is substantially less easy.  If Travis owned shares in LINE, he would be lightening up here rather than buying more.He would have no qualms about being out completely at this price.He would have no qualms at buying at terms for the minor optionality, but thinks the reward/risk ratio of a bump after buying at terms is not great if the stock is trading at terms when the conditions are met, allowing the Tender Offer to go ahead. 

(links to Travis’ insight: Market Is Pricing a LINE Bump – Should It?)


Metlifecare Ltd (MET NZ) (Mkt Cap: $0.8bn; Liquidity: $3mn)

Ahead of MET’s 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/QVPG have pitched a non-binding indicative offer to acquire all MET shares for NZ$6.00/share under a Scheme of Arrangement. This compares to the original Scheme consideration of NZ$7.00 per share in cash. Consequently, the July meeting has been deferred.  This would appear a decent compromise for all parties. MET can avoid protracted litigation, which is expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.

  • Before entering into a new SIA, APVG requires Metlifecare to fully settle the litigation in respect of the SIA dated 29 December 2019. By “fully settle”, this means Metlifecare drops its litigation to enforce the December 2019 SIA. Both sides would agree to walk away wearing their own costs. Though not mentioned in the announcement, APVG’s proposal will require OIO approval. APVG withdrew their original OIO application before securing final approval so they will have to lodge another application. The expectation is that it would be a quick process this time around as the previous application was very close to approval according to my contact at MET.
  • According to today’s announcement, the Guardians of the New Zealand Superannuation Fund (who I believe still have ~19.8% of shares out, as per the 2019 annual report) is “broadly supportive of Metlifecare urgently progressing APVG’s non-binding indicative offer“.
  • How is the final dividend treated? The announcement is silent on this, and in my back & forth with MET, it is not yet clear how it will be addressed. MET paid a final dividend (June Y/E) of NZ$0.075/share in FY19. Assuming a firm offer unfolds, one that could complete in 4Q20, I would think to get full shareholder support, the dividend would have to be included. To note, the Offer price under the December SIA was to be reduced by any dividend paid. This is the reason no interim divined was declared for the Dec 19-end interim period.
  • This remained (at the time of the insight) a pre-event, although one with a very high likelihood of formal offer emerging. For those investors who bundled into MET when it consistently closed below NZ$4/share after EQT announced its intention to terminate the Scheme – I recommended (in Metlifecare: Down But Not Out – Get Long) going long at $4.34/share – I suggest taking profit.
  • UPDATE: As expected, MET has entered into a new Scheme Implementation Agreement with Asia Pacific Village Group Limited/EQT to acquire all Metlifecare’s shares for NZ$6.00/share. 

    The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.

(link to my insight: Metlifecare: EQT Blinks And Tables A Revised Offer


Accordia Golf Trust (AGT SP) (Mkt Cap: $0.5bn; Liquidity: $1mn)

Hibiki Path Advisors – the second-largest shareholder in AGTand one who has been noisy on behalf of all shareholders – issued a Press Release which stated they were disappointed with the price and that it will be voting against the proposed divestment in the case the price is not revised higher. The easiest points to address for AGT independent board members in requesting Accordia Golf parent to pay a slightly higher price are the idea of there already being a slightly favourable transfer to the parent in the form of high royalty fees as a percent of gross operating profit. The elimination of fees to the Trustee Manager could be deemed to be another “benefit”.

  • The real question to the buyer and to the IFA is whether the value of the golf courses might be higher if they stopped running it as a golf course business and instead carpeted 100+ golf courses across Japan with solar farms. IF the parent made more money from converting them to solar farms, that would be worthwhile getting a bump. Of course, I expect the parent wouldn’t tell you if that was their plan.  If one pushed for a small bump, it might be possible. Otherwise, the relatively low threshold for approving this deal suggests that Hibiki Path may not win unless they put substantially greater pressure on the Trustee Manager. They should probably try to get ISS and SIAS involved.
  • The shares opened on 30 June at S$0.685 which was too low. They traded lower, only trading higher after a competitor to Smartkarma realized they had left out a S$0.014 payment to be made. The shares traded much of 3 July at S$0.690-0.695. Even at S$0.695 the shares are probably cheap as an arb to defined terms unless you think the contingent claims portion will be stripped out. I would not expect they will be, but one could argue the point.
  • The letter may mean a jump in price. I think the threat to this deal and the noise made by Hibiki Path so far are unlikely to trigger either an opinion by the IFA that the price is not high enough, nor a serious threat to the deal being completed at proposed terms. However, an honest response by the independent committee could be a way of getting a slightly higher price out of the buyers, ESPECIALLY now that the effects of COVID-19 have been seen to be limited. Travis expects that buying at or below S$0.69 is still a good reward/risk profile to an arb expecting deal completion. 

(link to Travis’ insight: Major Accordia Golf Trust Shareholder Has Issues With Price & Process


Beijing Jingneng Clean Energy (579 HK) (Mkt Cap: $2.2bn; Liquidity: $1mn)

After being suspended the previous Friday morning pursuant to the Code on Takeovers and Mergers. Jingjeng has announced its parent (Beijing energy Holdings “BEH”) has indicated an intention to make a voluntary cash general Offer. No price was mentioned.  BEH holds 471.6mn H shares, or around 16.7% of H shares out, therefore the blocking take at a Scheme-like vote would be 8.33% of H-shares out.  This would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

  • Jingneng is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a Scheme-like vote (≥ 75% for, ≤10% against). Such an Offer may or may not require an additional tendering acceptance condition.
  • Tendering condition? It’s not clear. This announcement used the words “conditional voluntary cash general offer“. Similar wording is used in the Harbin Electric Co Ltd H (1133 HK)Huaneng Renewables Corp H (958 HK) & AVIC International Holdings (161 HK)transactions, wherein a tendering condition was present. At a guess, it’s probably a condition to a firm Offer.
  • What Price? The average premium for past Merger by Absorption deals is 47%. That backs out a possible fair value of ~$2.30, around a three-year high, with a deal size of $5.4bn. $2.30/share is ~0.75x P/B, which compares with ~0.64x P/B for recent energy privatisations.  Shares closed at $2.04 on Friday. There is a clear directive to privatise clean energy plays. Now is the time to run a ruler over other peers (China Datang Corp Renewable Power (1798 HK) ), in addition to other SOE-controlled entities (possibly Asia Satellite Telecom Holdings Ltd (1135 HK), Cosco International Holdings (517 HK) & Tianjin Development Holdings (882 HK)) potentially subject to a delisting proposal.

(link to my insight: Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?


O-Net Technologies (Group) (877 HK) (Mkt Cap: $0.6bn; Liquidity: $3mn)

On the 6 July, O-Net, a leader in the provision of high-technology products and optical networking components, was suspended pursuant to the Code on Takeovers and Mergers. An Offer, by way of a Scheme, has now been announced. The cancellation price is HK$6.50/share, a 23.57% premium to last close. The price will not be increased. Disinterested Shareholders comprise 375.196mn shares, or 44.99% of shares out. Therefore 10% blocking stake is attached to ALL of the Scheme Shares held by the Disinterested Shareholders at the Scheme Meeting is 37.52mn shares or 4.499% of shares out. O-Net is Cayman incorporated therefore the headcount test applies. Assuming the deal gets up, this may be wrapped up by late October.

  • A condition to the Scheme is that Kaifa’s shareholders approve the acquisition. This should be a simple majority vote. CapIQ has SOE China Electronics Corporation holding a little over 39%. I don’t see the vote as being a risk to the deal. It is currently expected that a shareholders’ meeting will be convened by Kaifa within one month from this Offer announcement.
  • O-Net should be a key beneficiary from global 5G investment. Applying various metrics and with respect to a global basket of peers, I argued there was potentially 33% upside from the undisturbed price to an Offer price. We got 23.57%. That’s probably going to be enough. Shares were trading around a two-year high and have all but batted away COVID-19. 
  • I see the gross/annualised spread at 3.7%/13.5%, assuming cheques are issued late October. That level looks about right. This is not a slam dunk premium – the average premium for Asia-Pac transactions this year is ~33%. Still, O-Net was up 27% YTD, ahead of the Offer announcement, so optically, the offer is not viewed as opportunistic. All in, this deal should get up. 

links to my insights:
O-Net (877 HK): Swish Switches Offer
O-Net Tech (877 HK): Tripping The Light Fantastic


J.B. Chemicals & Pharmaceuticals (JBCP IN) (Mkt Cap: $0.7bn; Liquidity: <$1mn)

The Promoters of JBCP announced on 3rd July they had signed an SPA with KKR & Co Inc (KKR US) to sell up to 54% of the company’s total shares from their holdings. Pursuant to SEBI Regulations, this triggered the obligation for the Acquirer to launch a Mandatory Open Offer to buy shares from Public Shareholders at similar Terms.  To fulfil this requirement, the Acquirer has launched a Partial Tender Offer to buy up to 26% of the company’s total shares from non-promoter shareholders at a cash price of INR745.00/share. Tender Offers in India have a statutory timeline that requires the settlement to be within 72 business days from the date of the announcement which means the Offer could be completed in the next 4 months. 

  • The Open Offer Quantity will be fixed at 20,093,346 shares (26% of voting capital) and how much the Promoters will get to sell will depend on what portion of the Open Offer Quantity gets filled. If Open Offer gets fully filled (26%), Promoters will be able to sell up to 38.9% in total (so that the Acquirer’s stake does not exceed 64.9%). If no shares are acquired in the Open Offer, the Promoters will be able to sell the entire SPA quantity of 54% (given that Total Foreign Shareholding in the Company remains at or below 74%). 
  • The Open Offer is not conditional upon any minimum level of acceptance.  If all non-promoter shareholders (44.09%) tender their shares, 58.97% of the total tendered quantity will be purchased. (Minimum Fill Ratio = 58.97%). If non-promoter shareholders representing less than 26% tender their shares, all shares tendered will be purchased. (Maximum Fill Ratio = 100%).
  • The upside is ~3.4% to the tender offer price, which is a relatively low annualized return over 4 months. However, on a longer-term basis, expecting growth and a desire by KKR to exit after several years through a sale to someone else, one can expect a Delisting Offer at a higher price could be in the offing. For that, this situation is bullish as the odds are better of a higher price than a lower price. If you trade this situation, the trade is to know you have a put option for 60-75% of your position at a price 3.4% higher than here. Janaghan Jeyakumar thinks a 70-80% pro-ration rate is likely if the shares stay at the current level minus a little bit. If the shares drop to below INR 700 prior to the Tender Offer, that would be a great place to buy.

(link to Janaghan’s insight: J.B.Chemicals (JBCP IN): Partial Tender Offer by KKR


In Leyou – Is Sony Targeting Splash Damage as Microsoft Targets Warner Brothers Interactive, Mio Kato reckons Sony Corp (6758 JP)‘s reported interest in Leyou Technologies (1089 HK) is highly credible. Against the backdrop of Microsoft’s reported interest in acquiring Warner Brothers Interactive Entertainment, he feels the move would make sense as both players move to strengthen 1st party development capabilities. In Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou, he also discusses Sony’s 1.4% stake purchase in Unreal Engine creator Epic Games for $250mn and how they might impact Leyou. Also, Leyou’s chairman Yuk has now entered into an exclusivity agreement with Tencent Holdings (700 HK). No price is mentioned.

M&A – UK

Rockrose Energy PLC (RRE LN) (Mkt Cap: $0.3bn; Liquidity: $3mn)

On 6th July, UK-based independent Oil & Gas company Rockrose made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn. The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash. This all-friendly Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020. The Acquirer has also reserved the right to implement the Acquisition by way of a Takeover Offer.The Offer Price translates to premia of 63.7%, 90.7%, and 68.5% to the stock’s pre-announcement closing price, 3-month VWAP, and 6-month VWAP respectively.

  • The Scheme will require approval from Target Shareholders representing 75% of votes cast. Irrevocables from Target Shareholders holding 35.3% (4,651,113 shares) have agreed to vote in favour of the Deal.  If the second largest shareholder Cavendish Asset Management (1,442,648 shares or ~11% stake). If they also vote in favour, the maximum required approval rate could fall to 45% for the remaining shareholders. 
  • This Deal seems like a rescue. As a publicly-listed company, RockRose was mainly interested in acquisitions in the upstream Oil and Gas sector which they intended to fund through further equity offerings. However, at present, they feel raising further equity capital would be “unduly dilutive” after the drastic decline in stock price in recent months caused by Oil Price Shocks and COVID-19 fears. Given this context, the Offer Terms seem acceptable.  
  • Given the board’s unanimous recommendation and the willingness of insiders to accept the Deal, others might be convinced to sell too.  At the time of writing, RockRose shares are trading at GBP18.34 translating to a gross spread of 0.87% with roughly 2 months to completion.  Janaghan expects RockRose shares to trade close to terms until completion. This could be a simple and short-dated “rate-of-return” trade. I expect the Deal to complete as-is.
(link to Janaghan’s insight: RockRose-Viaro Deal: Trading Close to Terms

INDEX REBALS

The next quarterly rebalance for the FTSE Taiwan 50 Index  will be effective 21 September and the changes will be announced on 4 September. Passive funds will need to trade at the close on 18 September. The data used to determine changes to the index will use the closing prices on 24 August. In FTSE Taiwan50 Index Rebalance Preview – First Look Sees Two Changes, Brian Freitas sees two potential inclusions/exclusions from the index. Silergy Corp (6415 TT) and Realtek Semiconductor (2379 TT) are potential additions and would replace China Life Insurance (2823 TT) and Lite On Technology (2301 TT)


M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $24mn)

Activist Polygon (1.025% stake in MásMóvil, worth c. EUR 31 mn) has sent a letter to the CNMV (Securities Market National Commission, the Spanish market watchdog) regarding the terms of the Lorca Telecom (KKR, Cinven and Providence funds) voluntary takeover bid for MásMóvil. The letter provides reasons why the current offer (especially the irrevocable undertakings) seems unfair for the minority shareholders

  • Jesus Rodriguez Aguilar reckons there are three possible scenarios from here: i) a counterbid by other private equity firms, such as Carlyle or CVC (who have mulled a bid for MásMóvil in the past); ii) one of the incumbents —Telefónica, Vodafone or Orange— counteroffers at a higher price. This seems difficult (see further in the note); and iii)  :orca Capital does not get the 90% acceptance required to squeeze out and delist MásMóvil, so the current shareholders share in the possible upside of a hypothetical Vodafone Spain acquisition.
  • Jesus’ recommendation is LONG MásMóvil: the downside risk at the last close (EUR 22.68 vs a bid of EUR 22.50) is low and there are reasons to hold for an improved bid. The Domínguez de Gor family (8% stake) has already said that it will not consider the bid unless there is an improved price of EUR 24 per share. The acceptance period of the Lorca Capital bid should start in September.

(link to Jesus’ insight: MásMóvil – Lorca Capital: Summer Lull

EVENTS

In  New Rules on Prefs Trading, Listing, & Delisting in Korea, Sanghyun discussed the new rules for the trading, listing, and delisting of the local preferred shares announced by the Korea FSC. The minimum shares out and market cap for new listings are now 1mn shares and ₩5bn, effective October this year. As for delisting, those prefs below 0.2mn shares or ₩2bn market cap will lose their spot, starting October next year with a grace period of one year,

OTHER M&A & EVENT UPDATES

  • Iberdrola SA (IBE SM)released its Secondary Bidder’s Statement on Infigen Energy (IFN AU) announcing the FIRB condition had been fulfilled. Infigen for its part announced updated Supplementary Target Statements on both the Iberdrola deal … and the UAC Energy deal
  • The Halcyon Agri Corp (HACL SP) rights issue mandate was granted by the AGM. 
  • Yixin Group Ltd (2858 HK)‘s Composite Doc has been delayed until the 7 April 2021, to allow time for the satisfaction of all conditions.
  • Cardinal Resources (CDV AU) has completed the issuance of shares (26mn or A$11.96mn) to Shandong as per the BIA. Difficult to see Norgold coming back into the mix from here. Bidder/Target Statements due out on or before the 22 July. 
  • Golden Meditech Holdings (801 HK) announced that an “application has been made by the Company and the Offeror to the Executive for consent to the extension of the latest date for despatching the Scheme Document from 8 July 2020 to 26 August 2020 and the Executive has granted the consent.” That about 10 days past my initial estimate. 
  • SAIC Motor HK Investment Limited – presumably an entity under SAIC Motor (600104 CH) – will acquire 20.87% of shares out from UCAR, and 14.76% from Amber Gen – both at $3.10/share – taking its take to 28.92%. Car Inc (699 HK) closed at $2.53 yesterday. This will give shares a boost.
  • Sanyo Shokai (8011 JP) ‘dissident’ investor RMB Capital has upped their stake in the company to 7.6%.
  • Hohsui Corp (1352 JP) was put on notice that it has until 31 March 2021 to lift its market cap in order to stay in the TSE1, or else it will get demoted to the TSE2. 
  • Both Anicom Holdings (8715 JP) and Benefit Japan (3934 JP) announced that the TSE had put each on notice for possible demotion to the TSE2 (from the TSE1) if they do not maintain a shareholder count of 2,000 or more by the end of the grace period (31 March 2021). 

CCASS

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

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

Name

%chg

Into

Out of

42.00%
BNP
Outside CCASS
15.15%
Citic
Partners Cap
17.07%
Haitong
Every Joy
Charmacy (2289 HK)
18.32%
MS
ML
Source: HKEx

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

Name

% chg

Into

Out of

Fin Street (1502 HK)
17.53%
Guotai
Outside CCASS
13.83%
GS
Outside CCASS
14.53%
SBI
Outside CCASS
China Saftower (8623 HK)
12.29%
Chaoshang
Outside CCASS
Source: HKEx

3. Leyou in Tencent’s Crosshairs

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Leyou Technologies (1089 HK)’s long-drawn takeover saga has potentially taken its final twist. After market close on Friday, Leyou announced that Mr Yuk, Leyou’s controlling shareholder with a 69.2% stake, entered into a three months exclusivity agreement with Tencent Mobility, a wholly-owned subsidiary of Tencent Holdings (700 HK), to sell his stake. If the stake sale completes, it can result in the possible acquisition and privatization of Leyou by Tencent. 

Leyou has been subject to intense privatisation speculation with various suitors such as iDreamsky Technology Limited (1119 HK)/CVC, Zhejiang Century Huatong A (002602 CH), Sony Corp (6758 JP) and Tencent in pole position at different points in time since September 2019.

Ultimately, the previous negotiations collapsed as although Mr Yuk wants to sell his Leyou stake as evidenced by his long-drawn negotiations with the bidders, he is holding firm with his valuation. Warframe’s improving performance, Tencent’s deep-pockets and Mr Yuk’s stubbornness suggest that the chances of a deal getting done are high. At the last close price of HK$2.89 per share, our privatisation price estimate of HK$3.31 per share implies a gross spread of 14.4%.

4. ITOCHU Attempts to Take FamilyMart Private at a Bargain

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It was reported yesterday (9th July 2020), that Itochu Corp (8001 JP) has launched a tender offer to take FamilyMart Co Ltd (8028 JP) private by acquiring the remaining 49.9% stake held by the minority investors. The offer price is set at ¥2,300 per share, a 31.1% premium to the last close price of ¥1,754. However, the offer price is at a 19.9% discount to the 52-week high and 0.8% discount to the one-year average price.

Travis Lundy’s insight; FamilyMart Tender Offer – Winnie and HunnyPot Redux discussed the background, offer details, shareholding structure, offer price and the chances of success.

This insight is focused on the fair value calculation of the financial advisors.

5. Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou

Sony has taken a small 1.4% stake in Unreal Engine creator Epic Games for $250m. The size of the stake could be a reflection of some caution on valuation given the weak momentum for Fortnite in 2019 but both companies seem intent on working more closely together which a) is not good news for Xbox and b) opens up some interesting possibilities even outside gaming. We also feel that it is positive for Leyou. More below.

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Brief M&A: Bitauto’s Privatisation Enters into a Definitive Agreement and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Bitauto’s Privatisation Enters into a Definitive Agreement
  2. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion
  3. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?
  4. ASX200 Index Review – A Handful of Changes

1. Bitauto’s Privatisation Enters into a Definitive Agreement

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On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

We had previously highlighted the attractive Bitauto privatisation spread risk/reward. Overall, we think that with the definitive agreement signed, the privatisation has a high chance of success. 

2. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion

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  • The Japanese drug maker, Takeda Pharmaceutical (4502 JP)  announced yesterday (11th June 2020) that it has entered into an agreement to divest a portfolio of select non-core over-the-counter (OTC) and prescription drugs which are sold exclusively in Asia Pacific to South Korea’s Celltrion Inc (068270 KS)  for US$278m.
  • Takeda will receive up to US$266m upfront in cash and up to an additional US$12m in potential milestone payments, subject to customary legal and regulatory closing conditions. The transaction is expected to conclude at the end of this year.
  • The company has been divesting its non-core assets in order to reduce its debt and focus on its core areas. While the sale of non-core assets will result in a decline in the company’s top line in the short-term, we remain positive on the company’s mainstay products.
  • On the other hand, we expect the deal to help Celltrion expand its presence in the diabetes and hypertension drug market (local-brand treatments) which should offer the company with sustainable revenue growth.

3. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?

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The way Prosus let Just Eat go during the bidding war seemed like a strategic retreat. This move led to speculation that Prosus was pulling back so it could make a bolder move for the combined Just Eat Takeaway (JET LN) at a later stage. Fall in the share price of the combined group would have been a good opportunity to acquire JET. The COVID-19 crisis put paid those plans. During the lockdown, British people ate a lot of delivered food. Just Eat business flourished. 

Now with a bid on Grubhub Inc (GRUB US) on the tape, if Prosus wants JET it has to make its move very soon. Below I analyse the financial ability of Prosus to bid on JET.

4. ASX200 Index Review – A Handful of Changes

Image

S&P Dow Jones Indices announced changes to the S&P/ASX 200 (AS51 INDEX) today. The changes are effective at the open of trading on 22 June and passive funds will need to complete their rebalancing activity at or by the close on 19 June.

There are 5 additions in the review: Centuria Industrial Reit (CIP AU), Megaport Ltd (MP1 AU), Mesoblast Ltd (MSB AU), Oil Basins Ltd (OBL AU) and Perseus Mining (PRU AU).

There are 6 deletions in the review: Estia Health (EHE AU), Hub24 Ltd (HUB AU), Jumbo Interactive (JIN AU), Mayne Pharma (MYX AU), Pilbara Minerals (PLS AU) and Pinnacle Investment Management Group.

With only 6 days to implementation day there could be big moves ahead. As I type, the adds are down 2.61% on average while the deletes are 6.31% lower on average.

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Brief M&A: New Rules on Prefs Trading, Listing, & Delisting in Korea and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. New Rules on Prefs Trading, Listing, & Delisting in Korea
  2. O-Net’s Privatisation Bid
  3. Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth
  4. O-Net (877 HK): Swish Switches Offer
  5. FamilyMart Tender Offer – Winnie and HunnyPot Redux

1. New Rules on Prefs Trading, Listing, & Delisting in Korea

10

The Korea FSC announced the new rules for the trading, listing, and delisting of the local preferred shares.

The minimum SO and MC for new listings are now 1M shares and ₩5bil, effective October this year.

As for delisting, those prefs below 0.2M shares or ₩2bil MC will lose their spot, starting October next year with a grace period of one year. 

For those whose SO < 500,000 shares, they will be trading on a single-price with a 30-minute cycle. Similarly, those with a P/C price disparity > 50% will face the same trading rule for three days.

2. O-Net’s Privatisation Bid

Overview

O-Net Technologies (Group) (877 HK) designs, manufactures and sells optical networking products for the high-speed telco and data communications systems as well as machine vision systems and sensors for smart manufacturing market. After market close on Wednesday, it announced a privatisation offer by way of a scheme of arrangement from Optical Beta Limited. The offeror will offer HK$6.50 cash per scheme share. The bid represents a premium of 23.57% over the closing price of HK$5.26 per share on the last trading day (3 July 2020).

The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and <10% rejection by all disinterested shareholders. Overall, we believe that the privatisation bid will be successful. 

3. Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth

Image 60442885331594296941716

Colowide, a company whose heavily leveraged nature we discussed earlier, has made a TOB for Ootoya, a traditional Japanese restaurant for those looking for reasonably priced, but freshly made food. It is hostile. The crux of the disagreement being Colowide’s desire to integrate Ootoya into its centralised kitchen network vs. Ootoya’s insistence on preparing food on-site as its founder intended. The initial salvo in this battle was Colowide moving to try and replace Ootoya’s management with the 19.16% stake it acquired from founding family members and built further in the market. This move which was roundly rejected by the retailer-heavily shareholder base of Ootoya. With that move unsuccessful, Colowide has moved forward with a tender offer at ¥3,081 (46% above the undisturbed Wednesday close and still 18% above today’s limit-up close). We examine Ootoya’s business and valuation below.

4. O-Net (877 HK): Swish Switches Offer

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On the 6 July, O-Net Technologies (Group) (877 HK), a leader in the provision of high-technology products and optical networking components, was suspended pursuant to the Code on Takeovers and Mergers.

An Offer, by way of a Scheme, has now been announced. The cancellation price is HK$6.50/share, a 23.57% premium to last close and a 43.18% premium to the six-month average close. The price will not be increased.

Disinterested Shareholders comprise 375.196mn shares, or 44.99% of shares out. Therefore the blocking stake at the Scheme Meeting is 37.52mn shares or 4.499% of shares out – or HK$197mn using the undisturbed close. The 10% blocking stake is attached to ALL of the Scheme Shares held by the Disinterested Shareholders. 

O-Net is Cayman incorporated therefore the headcount test applies. 

Assuming the deal gets up, this may be wrapped up by late October.

As always, more below the fold.

5. FamilyMart Tender Offer – Winnie and HunnyPot Redux

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Today (Weds 8 July 2020) after the close, but before FamilyMart Co Ltd (8028 JP) released its earnings, the Nikkei reported that 50.1% owner Itochu Corp (8001 JP) had “decided” today to launch a takeover bid for Familymart to take it private. The Nikkei said…

The two companies will deepen their ties in procurement of food and consumer goods, as well as in  areas such as customer data analysis and digital payments.

At market price, the minority holding is worth ¥445bn. The Nikkei suggested it might take ¥500-600bn to buy out minorities. 

The Background

Itochu held a stake in FamilyMart back in the 90s when large-scale retailer Seiyu owned the biggest stake. Seiyu decided to get out of the CVS business to help rescue its large-scale GMS business, and sold its stake in FamilyMart to Itochu in 1998 so that Itochu ended up with a 30.6% stake. Over the years Itochu had acquired a bit more, both directly and indirectly held, so that in spring of 2015, the company owned 36.9% when FamilyMart and UNY made a decision to integrate their businesses. Itochu owned a stake in UNY in the low single digits so that post-merger, they would have been diluted to the high 20s. That would have meant losing negative control so in February 2016, after the deal terms were announced, Itochu announced that over the following 7 months it would buy 6.4 million shares (or roughly 10.6% of the non-Itochu-held float) of FamilyMart in the market in order to hold 43.6% of FamilyMart so that when UNY Group Holdings and FamilyMart merged under a new Holdco called FamilyMart UNY Holdings, Itochu would again have negative control – at 33.4% of shares outstanding – of NEWCO.

The merger later in 2016 led to a Nikkei 225 inclusion (FamilyMart took over UNY’s spot) which led to buying, and something of a short squeeze. Then in 2016-2017 they bought more, then in late 2017, Itochu started buying still more, creeping up to 41.45% of the company by early April 2018 when it was announced that Itochu would conduct a partial tender offer to get to 50.1%. At around that time, FamilyMart announced it would sell a 40% stake in the UNY GMS business it had acquired when it bought UNY Holdings (where what it had really wanted was the 6000+ convenience stores in the Circle K and Sunkus chains) to Pan Pacific International Holdings (7532 JP) (then called Don Quixote), and form a partnership to re-do some existing UNY stores and help improve margins in others. Several months later in early autumn 2018, FamilyMart arranged to sell the remainder of Don Quixote and UD Holdings to Don Quixote, and to launch a Partial Tender Offer to buy 20% of Don Quixote. That Tender failed because the shares traded through terms quite quickly, and only briefly came back below on “bad earnings” after the end of that Tender Offer, but Don Quixote still ended up with UNY and the results over the past 18 months have shown it was a fantastic buy. Those same 18 months have seen Don Quixote shares rise 40+% from the price FamilyMart had tried to pay, and FamilyMart has instead bought 9.7% of PPIH in the market as of 20 May 2020.  

The Tender Offer

The Tender Offer has, as I write, been announced ¥2300/share, which is less than the top of that range. It is also less than the ¥2750/share implied by the purchase price in the Tender Offer in 2018 which got Itochu from 41.5% to 50.1%. I expect ‘the market’ will clamour for more, but the shareholder structure on this is no less “interesting” than it was in April 2018 when I wrote about the previous tender, saying Itochu Tender For FamilyMart – Winnie Sees a Hunny Pot But Greedy Bears Get Stuck.

Because this resembles a situation which would be addressed by the METI Fair M&A Guidelines from a year ago, there could be some noise for a majority of minority or other measures meant to support minority shareholder rights. That support will be limited for structural reasons, which is probably the reason why the minimum threshold for success is not two-thirds, but instead is an additional 50mm shares, which is 10%. 

Additionally, the Target Opinion statement out says that while the price offers some investors a reasonable exit, the price is not sufficient for FamilyMart to be able to recommend to shareholders that they tender, so instead they ask shareholders to make their own decision. 

Interestingly, the impact of the shareholder dynamic on price may not be what “smart” active investors think it is. And the results may not be what people think it normally would be. Once again, it is possible that greedy bears get stuck.

As always, there is more below the fold. 

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Brief M&A: Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net
  2. Leyou in Tencent’s Crosshairs
  3. ITOCHU Attempts to Take FamilyMart Private at a Bargain
  4. Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou
  5. New Rules on Prefs Trading, Listing, & Delisting in Korea

1. Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net

Image 7922478021594290982679

Last Week in Event SPACE …

  • Interestingly, the impact of FamilyMart Co Ltd (8028 JP)‘s shareholder dynamic on price may not be what “smart” active investors think it is. And the results may not be what people think it normally would be. Once again, it is possible that greedy bears get stuck.
  • Sina Corp (Class A) (SINA US)‘s totally unremarkable non-binding MBO.
  • Overall, buying LINE Corp (3938 JP) at the current price (JPY 5570/share) seems like an iffy bet. Any injury to global equity markets due to worsening COVID-19 situation, or regulation against global internet names, or a drop from record multiples of the entire space in the US might lead to less bullishness of a bump. 
  • EQT blinks first and returns to the negotiation table with Metlifecare Ltd (MET NZ).
  • Hibiki Path Advisors, the largest true minority investor for Accordia Golf Trust (AGT SP) has announced that it is not satisfied with the price offered. They have a number of complaints, and some of them have merit. Not all of them do. 
  • PRC clean energy plays remain very much in vogue as Beijing Jingneng Clean Energy (579 HK)  flags a potential offer from its parent.
  • Fibre optic component play O-Net Technologies (Group) (877 HK) announces a privatisation Offer.
  • Plus, other events, CCASS movements and Mood Spins.

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

M&A – ASIA

FamilyMart Co Ltd (8028 JP) (Mkt Cap: $10.1bn; Liquidity: $35mn)

The Nikkei reported that 50.1% owner Itochu Corp (8001 JP) had “decided” today to launch a takeover bid for Familymart to take it private. The Tender Offer has been announced at ¥2300/share. It is less than the ¥2750/share implied by the purchase price in the Tender Offer in 2018 which got Itochu from 41.5% to 50.1%. Travis Lundy expects ‘the market’ will clamour for more, but the shareholder structure on this is no less “interesting” than it was in April 2018 when he wrote about the previous tender, saying Itochu Tender For FamilyMart – Winnie Sees a Hunny Pot But Greedy Bears Get Stuck. Here is the Tender Offer doc.

  • This deal is highly opportunistic.  Because this resembles a situation which would be addressed by the METI Fair M&A Guidelines from a year ago, there could be some noise for a majority of minority or other measures meant to support minority shareholder rights. That support will be limited for structural reasons, which is probably the reason why the minimum threshold for success is not two-thirds, but instead is an additional 50mm shares, which is 10%. 
  • The pricing is low. Very low. The Enterprise Value at TOB Price against Next Year EBITDA is 5+x. It was 11x in the Tender Offer just two years ago.  That means the Financial Advisors did not do their job. They said “fair” was a lower price at half the valuation. Plus this time 20% of the equity value of FamilyMart is in other shareholdings. The FamilyMart Special Committee and/or Board DID do their job, but I think less well than they could have. They could have pointed out the halving of the valuation. 
  • Travis expects this deal has a marginally higher probability of failure than of being bumped and becoming successful. But both failure and bump are a higher probability than they would normally be. If it is successful, I would expect the shares to trade just through terms early, then quickly higher, then pause, wait for the bump, maybe trade a bit higher, then deal at the bumped price or not. 
  • Travis does not see tremendous downside post-tender. CVS may be out of fashion, but I do not believe that Itochu will not try to make things work better and smoother than before even if they only own 50.1%. That will mean Itochu will own more of the economics from PB and logistics, but so be it. Also, this event could be the trigger that allows investors to re-assess the value of FamilyMart, or indeed of a well-run CVS business. If the shares trade through terms, and there is no bump, it is unlikely this goes through… unless there is a spoiler, like the Nikkei Inc says that FamilyMart will be deleted from the Nikkei 225 if Itochu only buys 9.9%.

links to:
Travis’ insight: FamilyMart Tender Offer – Winnie and HunnyPot Redux
Oshadhi Kumarasiri‘s insight: ITOCHU Attempts to Take FamilyMart Private at a Bargain


Sina Corp (Class A) (SINA US) (Mkt Cap: $2.6bn; Liquidity: $26mn)

SINA looks sets to join the growing list of Chinese companies seeking to delist in the US and relist, ostensibly in Hong Kong. Yesterday, Sina announced the receipt of a preliminary non-binding “going private” proposal from New Wave – a company controlled by its chairman/CEO Charles Chao – at US$41/share,  a ~20% premium to the average closing price during the 30 trading days prior to the announcement. 

  • SINA’s jewel is microblogger Weibo Corp (Adr) (WB US) – China’s Twitter Inc (TWTR US)equivalent – in which it holds a ~45% equity stake but controls ~71% of the vote. However, Weibo is not immune to the impact form COVID-19. In 1Q20, Weibo’s total net revenues was $323.4mn, a 19% decline yoy. Advertising and marketing revenues for 1Q20 was $275.4mn, a decrease of 19% compared to $341.1 million for the same period last year. Weibo’s consensus target price has declined to US$42.09/share, down 14% YTD.
  • Due diligence still needs to be carried out but such a condition is rudimentary – Chao has been with the company since 1999, and has been the chairman/CEO since 2011. The Board has also formed a special committee consisting of independent directors to evaluate and consider the Proposed Transaction. It is doubtful the Offer won’t be supported.
  • This appears a highly opportunistic Offer, however, Chao has 58% of the vote in the bag. I would not anticipate a bump – it’s just not how things are usually done for the privatisation of Chinese companies in the US. Shares trade at a tight gross spread of 1.4%.  I would not chase it here. 

(links to my insight: Sina Corp: Management Buyout Offer)


LINE Corp (3938 JP) (Mkt Cap: $12.4bn; Liquidity: $15mn)

On the 30 June after the close, LINE, Z Holdings, Softbank Corp, and Z Holdings (“the Relevant Parties”) announced that the deal would likely not complete by the originally scheduled October 1st deadline. So while the official word is there is no anticipated change to terms (a reference to the way shares were trading through terms at the time), shares trade higher.  The market, at 3.5% through terms, is now betting on a bump to the LINE TOB Price. To make that a decent winning bet, investors have to think there is a greater-than 50% chance of a bump of 10% or more… with no chance of a regulatory block in there.

  • There is a chance of a regulatory impediment. It could be Korean-Japanese geopolitical issues. It could be Japanese government worries on cashless payment systems. It could be anti-trust regulators inviting comment from competitors and competitors putting a stick in the spokes. I am not overly concerned about Taiwan, Thailand, or Japan, but one wonders if the Korea angle is problematic. 
  • We do not know what LINE H1 earnings will look like. There is a special gain on the sale of a security holding. We do not know what it is or what impact it will have. If LINE H1 earnings and commentary are strikingly positive, that could help a bump argument. I do not know enough about the way things have evolved in Q2 to know whether the improvement in Q1 accelerated to a level which is not already forecast by management and the Street. 
  • THE TRADE:  At ¥5380 or just below terms, making the bet on a bump was “easy.” It did not cost much as shareholder approval at Z was already achieved. At ¥5570 Friday, it is substantially less easy.  If Travis owned shares in LINE, he would be lightening up here rather than buying more.He would have no qualms about being out completely at this price.He would have no qualms at buying at terms for the minor optionality, but thinks the reward/risk ratio of a bump after buying at terms is not great if the stock is trading at terms when the conditions are met, allowing the Tender Offer to go ahead. 

(links to Travis’ insight: Market Is Pricing a LINE Bump – Should It?)


Metlifecare Ltd (MET NZ) (Mkt Cap: $0.8bn; Liquidity: $3mn)

Ahead of MET’s 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/QVPG have pitched a non-binding indicative offer to acquire all MET shares for NZ$6.00/share under a Scheme of Arrangement. This compares to the original Scheme consideration of NZ$7.00 per share in cash. Consequently, the July meeting has been deferred.  This would appear a decent compromise for all parties. MET can avoid protracted litigation, which is expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.

  • Before entering into a new SIA, APVG requires Metlifecare to fully settle the litigation in respect of the SIA dated 29 December 2019. By “fully settle”, this means Metlifecare drops its litigation to enforce the December 2019 SIA. Both sides would agree to walk away wearing their own costs. Though not mentioned in the announcement, APVG’s proposal will require OIO approval. APVG withdrew their original OIO application before securing final approval so they will have to lodge another application. The expectation is that it would be a quick process this time around as the previous application was very close to approval according to my contact at MET.
  • According to today’s announcement, the Guardians of the New Zealand Superannuation Fund (who I believe still have ~19.8% of shares out, as per the 2019 annual report) is “broadly supportive of Metlifecare urgently progressing APVG’s non-binding indicative offer“.
  • How is the final dividend treated? The announcement is silent on this, and in my back & forth with MET, it is not yet clear how it will be addressed. MET paid a final dividend (June Y/E) of NZ$0.075/share in FY19. Assuming a firm offer unfolds, one that could complete in 4Q20, I would think to get full shareholder support, the dividend would have to be included. To note, the Offer price under the December SIA was to be reduced by any dividend paid. This is the reason no interim divined was declared for the Dec 19-end interim period.
  • This remained (at the time of the insight) a pre-event, although one with a very high likelihood of formal offer emerging. For those investors who bundled into MET when it consistently closed below NZ$4/share after EQT announced its intention to terminate the Scheme – I recommended (in Metlifecare: Down But Not Out – Get Long) going long at $4.34/share – I suggest taking profit.
  • UPDATE: As expected, MET has entered into a new Scheme Implementation Agreement with Asia Pacific Village Group Limited/EQT to acquire all Metlifecare’s shares for NZ$6.00/share. 

    The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.

(link to my insight: Metlifecare: EQT Blinks And Tables A Revised Offer


Accordia Golf Trust (AGT SP) (Mkt Cap: $0.5bn; Liquidity: $1mn)

Hibiki Path Advisors – the second-largest shareholder in AGTand one who has been noisy on behalf of all shareholders – issued a Press Release which stated they were disappointed with the price and that it will be voting against the proposed divestment in the case the price is not revised higher. The easiest points to address for AGT independent board members in requesting Accordia Golf parent to pay a slightly higher price are the idea of there already being a slightly favourable transfer to the parent in the form of high royalty fees as a percent of gross operating profit. The elimination of fees to the Trustee Manager could be deemed to be another “benefit”.

  • The real question to the buyer and to the IFA is whether the value of the golf courses might be higher if they stopped running it as a golf course business and instead carpeted 100+ golf courses across Japan with solar farms. IF the parent made more money from converting them to solar farms, that would be worthwhile getting a bump. Of course, I expect the parent wouldn’t tell you if that was their plan.  If one pushed for a small bump, it might be possible. Otherwise, the relatively low threshold for approving this deal suggests that Hibiki Path may not win unless they put substantially greater pressure on the Trustee Manager. They should probably try to get ISS and SIAS involved.
  • The shares opened on 30 June at S$0.685 which was too low. They traded lower, only trading higher after a competitor to Smartkarma realized they had left out a S$0.014 payment to be made. The shares traded much of 3 July at S$0.690-0.695. Even at S$0.695 the shares are probably cheap as an arb to defined terms unless you think the contingent claims portion will be stripped out. I would not expect they will be, but one could argue the point.
  • The letter may mean a jump in price. I think the threat to this deal and the noise made by Hibiki Path so far are unlikely to trigger either an opinion by the IFA that the price is not high enough, nor a serious threat to the deal being completed at proposed terms. However, an honest response by the independent committee could be a way of getting a slightly higher price out of the buyers, ESPECIALLY now that the effects of COVID-19 have been seen to be limited. Travis expects that buying at or below S$0.69 is still a good reward/risk profile to an arb expecting deal completion. 

(link to Travis’ insight: Major Accordia Golf Trust Shareholder Has Issues With Price & Process


Beijing Jingneng Clean Energy (579 HK) (Mkt Cap: $2.2bn; Liquidity: $1mn)

After being suspended the previous Friday morning pursuant to the Code on Takeovers and Mergers. Jingjeng has announced its parent (Beijing energy Holdings “BEH”) has indicated an intention to make a voluntary cash general Offer. No price was mentioned.  BEH holds 471.6mn H shares, or around 16.7% of H shares out, therefore the blocking take at a Scheme-like vote would be 8.33% of H-shares out.  This would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

  • Jingneng is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a Scheme-like vote (≥ 75% for, ≤10% against). Such an Offer may or may not require an additional tendering acceptance condition.
  • Tendering condition? It’s not clear. This announcement used the words “conditional voluntary cash general offer“. Similar wording is used in the Harbin Electric Co Ltd H (1133 HK)Huaneng Renewables Corp H (958 HK) & AVIC International Holdings (161 HK)transactions, wherein a tendering condition was present. At a guess, it’s probably a condition to a firm Offer.
  • What Price? The average premium for past Merger by Absorption deals is 47%. That backs out a possible fair value of ~$2.30, around a three-year high, with a deal size of $5.4bn. $2.30/share is ~0.75x P/B, which compares with ~0.64x P/B for recent energy privatisations.  Shares closed at $2.04 on Friday. There is a clear directive to privatise clean energy plays. Now is the time to run a ruler over other peers (China Datang Corp Renewable Power (1798 HK) ), in addition to other SOE-controlled entities (possibly Asia Satellite Telecom Holdings Ltd (1135 HK), Cosco International Holdings (517 HK) & Tianjin Development Holdings (882 HK)) potentially subject to a delisting proposal.

(link to my insight: Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?


O-Net Technologies (Group) (877 HK) (Mkt Cap: $0.6bn; Liquidity: $3mn)

On the 6 July, O-Net, a leader in the provision of high-technology products and optical networking components, was suspended pursuant to the Code on Takeovers and Mergers. An Offer, by way of a Scheme, has now been announced. The cancellation price is HK$6.50/share, a 23.57% premium to last close. The price will not be increased. Disinterested Shareholders comprise 375.196mn shares, or 44.99% of shares out. Therefore 10% blocking stake is attached to ALL of the Scheme Shares held by the Disinterested Shareholders at the Scheme Meeting is 37.52mn shares or 4.499% of shares out. O-Net is Cayman incorporated therefore the headcount test applies. Assuming the deal gets up, this may be wrapped up by late October.

  • A condition to the Scheme is that Kaifa’s shareholders approve the acquisition. This should be a simple majority vote. CapIQ has SOE China Electronics Corporation holding a little over 39%. I don’t see the vote as being a risk to the deal. It is currently expected that a shareholders’ meeting will be convened by Kaifa within one month from this Offer announcement.
  • O-Net should be a key beneficiary from global 5G investment. Applying various metrics and with respect to a global basket of peers, I argued there was potentially 33% upside from the undisturbed price to an Offer price. We got 23.57%. That’s probably going to be enough. Shares were trading around a two-year high and have all but batted away COVID-19. 
  • I see the gross/annualised spread at 3.7%/13.5%, assuming cheques are issued late October. That level looks about right. This is not a slam dunk premium – the average premium for Asia-Pac transactions this year is ~33%. Still, O-Net was up 27% YTD, ahead of the Offer announcement, so optically, the offer is not viewed as opportunistic. All in, this deal should get up. 

links to my insights:
O-Net (877 HK): Swish Switches Offer
O-Net Tech (877 HK): Tripping The Light Fantastic


J.B. Chemicals & Pharmaceuticals (JBCP IN) (Mkt Cap: $0.7bn; Liquidity: <$1mn)

The Promoters of JBCP announced on 3rd July they had signed an SPA with KKR & Co Inc (KKR US) to sell up to 54% of the company’s total shares from their holdings. Pursuant to SEBI Regulations, this triggered the obligation for the Acquirer to launch a Mandatory Open Offer to buy shares from Public Shareholders at similar Terms.  To fulfil this requirement, the Acquirer has launched a Partial Tender Offer to buy up to 26% of the company’s total shares from non-promoter shareholders at a cash price of INR745.00/share. Tender Offers in India have a statutory timeline that requires the settlement to be within 72 business days from the date of the announcement which means the Offer could be completed in the next 4 months. 

  • The Open Offer Quantity will be fixed at 20,093,346 shares (26% of voting capital) and how much the Promoters will get to sell will depend on what portion of the Open Offer Quantity gets filled. If Open Offer gets fully filled (26%), Promoters will be able to sell up to 38.9% in total (so that the Acquirer’s stake does not exceed 64.9%). If no shares are acquired in the Open Offer, the Promoters will be able to sell the entire SPA quantity of 54% (given that Total Foreign Shareholding in the Company remains at or below 74%). 
  • The Open Offer is not conditional upon any minimum level of acceptance.  If all non-promoter shareholders (44.09%) tender their shares, 58.97% of the total tendered quantity will be purchased. (Minimum Fill Ratio = 58.97%). If non-promoter shareholders representing less than 26% tender their shares, all shares tendered will be purchased. (Maximum Fill Ratio = 100%).
  • The upside is ~3.4% to the tender offer price, which is a relatively low annualized return over 4 months. However, on a longer-term basis, expecting growth and a desire by KKR to exit after several years through a sale to someone else, one can expect a Delisting Offer at a higher price could be in the offing. For that, this situation is bullish as the odds are better of a higher price than a lower price. If you trade this situation, the trade is to know you have a put option for 60-75% of your position at a price 3.4% higher than here. Janaghan Jeyakumar thinks a 70-80% pro-ration rate is likely if the shares stay at the current level minus a little bit. If the shares drop to below INR 700 prior to the Tender Offer, that would be a great place to buy.

(link to Janaghan’s insight: J.B.Chemicals (JBCP IN): Partial Tender Offer by KKR


In Leyou – Is Sony Targeting Splash Damage as Microsoft Targets Warner Brothers Interactive, Mio Kato reckons Sony Corp (6758 JP)‘s reported interest in Leyou Technologies (1089 HK) is highly credible. Against the backdrop of Microsoft’s reported interest in acquiring Warner Brothers Interactive Entertainment, he feels the move would make sense as both players move to strengthen 1st party development capabilities. In Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou, he also discusses Sony’s 1.4% stake purchase in Unreal Engine creator Epic Games for $250mn and how they might impact Leyou. Also, Leyou’s chairman Yuk has now entered into an exclusivity agreement with Tencent Holdings (700 HK). No price is mentioned.

M&A – UK

Rockrose Energy PLC (RRE LN) (Mkt Cap: $0.3bn; Liquidity: $3mn)

On 6th July, UK-based independent Oil & Gas company Rockrose made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn. The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash. This all-friendly Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020. The Acquirer has also reserved the right to implement the Acquisition by way of a Takeover Offer.The Offer Price translates to premia of 63.7%, 90.7%, and 68.5% to the stock’s pre-announcement closing price, 3-month VWAP, and 6-month VWAP respectively.

  • The Scheme will require approval from Target Shareholders representing 75% of votes cast. Irrevocables from Target Shareholders holding 35.3% (4,651,113 shares) have agreed to vote in favour of the Deal.  If the second largest shareholder Cavendish Asset Management (1,442,648 shares or ~11% stake). If they also vote in favour, the maximum required approval rate could fall to 45% for the remaining shareholders. 
  • This Deal seems like a rescue. As a publicly-listed company, RockRose was mainly interested in acquisitions in the upstream Oil and Gas sector which they intended to fund through further equity offerings. However, at present, they feel raising further equity capital would be “unduly dilutive” after the drastic decline in stock price in recent months caused by Oil Price Shocks and COVID-19 fears. Given this context, the Offer Terms seem acceptable.  
  • Given the board’s unanimous recommendation and the willingness of insiders to accept the Deal, others might be convinced to sell too.  At the time of writing, RockRose shares are trading at GBP18.34 translating to a gross spread of 0.87% with roughly 2 months to completion.  Janaghan expects RockRose shares to trade close to terms until completion. This could be a simple and short-dated “rate-of-return” trade. I expect the Deal to complete as-is.
(link to Janaghan’s insight: RockRose-Viaro Deal: Trading Close to Terms

INDEX REBALS

The next quarterly rebalance for the FTSE Taiwan 50 Index  will be effective 21 September and the changes will be announced on 4 September. Passive funds will need to trade at the close on 18 September. The data used to determine changes to the index will use the closing prices on 24 August. In FTSE Taiwan50 Index Rebalance Preview – First Look Sees Two Changes, Brian Freitas sees two potential inclusions/exclusions from the index. Silergy Corp (6415 TT) and Realtek Semiconductor (2379 TT) are potential additions and would replace China Life Insurance (2823 TT) and Lite On Technology (2301 TT)


M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $24mn)

Activist Polygon (1.025% stake in MásMóvil, worth c. EUR 31 mn) has sent a letter to the CNMV (Securities Market National Commission, the Spanish market watchdog) regarding the terms of the Lorca Telecom (KKR, Cinven and Providence funds) voluntary takeover bid for MásMóvil. The letter provides reasons why the current offer (especially the irrevocable undertakings) seems unfair for the minority shareholders

  • Jesus Rodriguez Aguilar reckons there are three possible scenarios from here: i) a counterbid by other private equity firms, such as Carlyle or CVC (who have mulled a bid for MásMóvil in the past); ii) one of the incumbents —Telefónica, Vodafone or Orange— counteroffers at a higher price. This seems difficult (see further in the note); and iii)  :orca Capital does not get the 90% acceptance required to squeeze out and delist MásMóvil, so the current shareholders share in the possible upside of a hypothetical Vodafone Spain acquisition.
  • Jesus’ recommendation is LONG MásMóvil: the downside risk at the last close (EUR 22.68 vs a bid of EUR 22.50) is low and there are reasons to hold for an improved bid. The Domínguez de Gor family (8% stake) has already said that it will not consider the bid unless there is an improved price of EUR 24 per share. The acceptance period of the Lorca Capital bid should start in September.

(link to Jesus’ insight: MásMóvil – Lorca Capital: Summer Lull

EVENTS

In  New Rules on Prefs Trading, Listing, & Delisting in Korea, Sanghyun discussed the new rules for the trading, listing, and delisting of the local preferred shares announced by the Korea FSC. The minimum shares out and market cap for new listings are now 1mn shares and ₩5bn, effective October this year. As for delisting, those prefs below 0.2mn shares or ₩2bn market cap will lose their spot, starting October next year with a grace period of one year,

OTHER M&A & EVENT UPDATES

  • Iberdrola SA (IBE SM)released its Secondary Bidder’s Statement on Infigen Energy (IFN AU) announcing the FIRB condition had been fulfilled. Infigen for its part announced updated Supplementary Target Statements on both the Iberdrola deal … and the UAC Energy deal
  • The Halcyon Agri Corp (HACL SP) rights issue mandate was granted by the AGM. 
  • Yixin Group Ltd (2858 HK)‘s Composite Doc has been delayed until the 7 April 2021, to allow time for the satisfaction of all conditions.
  • Cardinal Resources (CDV AU) has completed the issuance of shares (26mn or A$11.96mn) to Shandong as per the BIA. Difficult to see Norgold coming back into the mix from here. Bidder/Target Statements due out on or before the 22 July. 
  • Golden Meditech Holdings (801 HK) announced that an “application has been made by the Company and the Offeror to the Executive for consent to the extension of the latest date for despatching the Scheme Document from 8 July 2020 to 26 August 2020 and the Executive has granted the consent.” That about 10 days past my initial estimate. 
  • SAIC Motor HK Investment Limited – presumably an entity under SAIC Motor (600104 CH) – will acquire 20.87% of shares out from UCAR, and 14.76% from Amber Gen – both at $3.10/share – taking its take to 28.92%. Car Inc (699 HK) closed at $2.53 yesterday. This will give shares a boost.
  • Sanyo Shokai (8011 JP) ‘dissident’ investor RMB Capital has upped their stake in the company to 7.6%.
  • Hohsui Corp (1352 JP) was put on notice that it has until 31 March 2021 to lift its market cap in order to stay in the TSE1, or else it will get demoted to the TSE2. 
  • Both Anicom Holdings (8715 JP) and Benefit Japan (3934 JP) announced that the TSE had put each on notice for possible demotion to the TSE2 (from the TSE1) if they do not maintain a shareholder count of 2,000 or more by the end of the grace period (31 March 2021). 

CCASS

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

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

Name

%chg

Into

Out of

42.00%
BNP
Outside CCASS
15.15%
Citic
Partners Cap
17.07%
Haitong
Every Joy
Charmacy (2289 HK)
18.32%
MS
ML
Source: HKEx

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

Name

% chg

Into

Out of

Fin Street (1502 HK)
17.53%
Guotai
Outside CCASS
13.83%
GS
Outside CCASS
14.53%
SBI
Outside CCASS
China Saftower (8623 HK)
12.29%
Chaoshang
Outside CCASS
Source: HKEx

2. Leyou in Tencent’s Crosshairs

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Leyou Technologies (1089 HK)’s long-drawn takeover saga has potentially taken its final twist. After market close on Friday, Leyou announced that Mr Yuk, Leyou’s controlling shareholder with a 69.2% stake, entered into a three months exclusivity agreement with Tencent Mobility, a wholly-owned subsidiary of Tencent Holdings (700 HK), to sell his stake. If the stake sale completes, it can result in the possible acquisition and privatization of Leyou by Tencent. 

Leyou has been subject to intense privatisation speculation with various suitors such as iDreamsky Technology Limited (1119 HK)/CVC, Zhejiang Century Huatong A (002602 CH), Sony Corp (6758 JP) and Tencent in pole position at different points in time since September 2019.

Ultimately, the previous negotiations collapsed as although Mr Yuk wants to sell his Leyou stake as evidenced by his long-drawn negotiations with the bidders, he is holding firm with his valuation. Warframe’s improving performance, Tencent’s deep-pockets and Mr Yuk’s stubbornness suggest that the chances of a deal getting done are high. At the last close price of HK$2.89 per share, our privatisation price estimate of HK$3.31 per share implies a gross spread of 14.4%.

3. ITOCHU Attempts to Take FamilyMart Private at a Bargain

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It was reported yesterday (9th July 2020), that Itochu Corp (8001 JP) has launched a tender offer to take FamilyMart Co Ltd (8028 JP) private by acquiring the remaining 49.9% stake held by the minority investors. The offer price is set at ¥2,300 per share, a 31.1% premium to the last close price of ¥1,754. However, the offer price is at a 19.9% discount to the 52-week high and 0.8% discount to the one-year average price.

Travis Lundy’s insight; FamilyMart Tender Offer – Winnie and HunnyPot Redux discussed the background, offer details, shareholding structure, offer price and the chances of success.

This insight is focused on the fair value calculation of the financial advisors.

4. Sony – Epic Games Stake Purchase Is Small but VERY Interesting and Positive for Leyou

Sony has taken a small 1.4% stake in Unreal Engine creator Epic Games for $250m. The size of the stake could be a reflection of some caution on valuation given the weak momentum for Fortnite in 2019 but both companies seem intent on working more closely together which a) is not good news for Xbox and b) opens up some interesting possibilities even outside gaming. We also feel that it is positive for Leyou. More below.

5. New Rules on Prefs Trading, Listing, & Delisting in Korea

5

The Korea FSC announced the new rules for the trading, listing, and delisting of the local preferred shares.

The minimum SO and MC for new listings are now 1M shares and ₩5bil, effective October this year.

As for delisting, those prefs below 0.2M shares or ₩2bil MC will lose their spot, starting October next year with a grace period of one year. 

For those whose SO < 500,000 shares, they will be trading on a single-price with a 30-minute cycle. Similarly, those with a P/C price disparity > 50% will face the same trading rule for three days.

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