In this briefing:
- Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation
- Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?
- Philips to Divest Domestic Appliances Business – Potential for Margin Expansion
- India – Companies Start to Amend FPI Limits Down From The Sectoral Cap
- DP World Squeezeout – Governance Discount Deserved (And Served) So Minorities Lose
- Intesa Sanpaolo (ISP IM) has taken the initiative making an all share – allegedly not hostile, but clearly unsolicited – offer for Unione Di Banche Italiane (UBI IM), valuing UBI at 0.5x its stated 2019YE PBV
- Intesa has put forward a solid case for the UBI offer, and Intesa management is reassuring investors by committing to a dividend payment equivalent to a yield of 7.7% for 2020 and 2021
- In order to allay antitrust concerns, Intesa has put in place an agreement with Banca Popolare Dell’Emilia Rom (BPE IM) to sell a pool of upto 500 going-concern branches as well as insurance operations to UnipolSai SpA (US IM), contingent on a successful offer
- Although this offer does not directly address the consolidation of Italy’s “long tail” of small banks, Intesa CEO Carlo Messina sees it as the opportunity to create an “Italian champion” in European banking and potentially to act as a catalyst for further domestic consolidation
- There has been an uncomfortable silence from UBI management and our sense is that CEO Victor Messiah, who had only just presented UBI Banca’s stand-alone 2020-22 Business Plan yesterday, will, we believe, need some convincing (a higher offer price?); the share price is tellingly trading at a slight premium to the implied offer price
- In the wake of Intesa’s offer for UBI, Banco BPM SpA (BAMI IM) has one less potential high quality consolidation partner; yet we see the read-across for the rest of the Italian bank sector as positive; the need for domestic mergers with greater scale is clear, in order counter the drag of negative rates in the Eurozone
- Risks to the deal include tougher than expected regulatory hurdles, a poor response by UBI shareholders relating to the offer as well as potential “poison pill” measures by UBI Banca management
- One of the big winning sectors in the Korean stock market this year has been the rechargeable batteries related stocks including Samsung Sdi (006400 KS) and LG Chem Ltd (051910 KS). In the past few days, there has been some increasing news flow in the local media regarding a potential transfer of the rechargeable batteries modules and packs business from LG Electronics (066570 KS) to LG Chem.
- On a relative basis, this transfer would likely to have a GREATER POSITIVE impact on LG Electronics since the battery modules and packs business has been losing money in the past several years and this transfer would allow LG Electronics to reduce the operating losses from this business unit (Vehicle Component Solutions).
- For now, nothing has been decided regarding the potential transfer of the rechargeable battery modules and packs business from LG Electronics to LG Chem. This is just in the discussion stage right now. However, this business transfer seems to make a lot of sense and one could wonder why they did not complete this move earlier (especially from the point of view of LG Electronics shareholders).
- Dutch health technology company, Philips during its 4Q2019 results release, announced that it will be reviewing options for future ownership of its Domestic Appliance business.
- The domestic appliance business is engaged in the sale of coffee machines, air purifiers and air fryers and the company has booked the domestic appliance business under its Personal Health Segment.
- Philips has a long history of business restructuring where it previously divested/spun-off its semiconductor, TVs and lighting businesses in order to narrow down its focus on healthcare equipment and personal health products.
- In this insight, we take a look at the company’s Domestic Appliance business, potential valuation and the impact on Philips’ revenue and margins.
As announced in India’s 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment (FPI) limit in companies will be raised from 24% to the sectoral limits effective 1 April 2020.
The companies have an option to reduce the FPI limit to 24% or 49% or 74%, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively before 31 March 2020. Companies that reduce their FPI limit have the option to increase the FPI limit to 49% or 74% or the sectoral cap in the future. However, once the limit has been increased to a higher level, it cannot be reduced to a lower threshold.
With a month and a half to go, a few companies have sent out postal ballots to shareholders for a vote on lowering the FPI limit from the sectoral cap. We revisit our earlier Insight India – Increase in FPI Limits to Drive Passive Inflows and update the numbers.
Dubai-owned ports operator DP World has been a fixture in the M&A and offshore M&A space the last decade, with a dozen and a half transactions to its credit the last 5-6yrs – all but one a purchase (it sold Chilean Puertos y Logistica last year to a unit of Caisse de dépôt et placement du Québec). The goal has been to transition away from being a pure ports operator to become the world’s leading end-to-end logistics provider.
Occasionally its deals have made really public news, in particular the pre-IPO deal in 2006 to buy The Peninsular and Oriental Steam Navigation Company (P&O), a British-owned company which operated 5 major US ports (and 16 smaller ones) which was strongly supported by the Bush administration, questioned by the Coast Guard, then in Feb 06 approved by CFIUS. Then when a US partner of P&O saw they might get forced into a partnership with DPW, they raised the issue with their Democratic Party Congresspeople, who raised a stink. DPW offered to postpone. In early March, the US House voted overwhelmingly to block the deal via a bill, and the next day, DPW effectively withdrew its bid for ownership and said it would sell the package to a US entity. It was eventually bought by AIG.
The stock IPOed in November 2007 at US$1.30/share (equivalent to US$26/share; the stock underwent a 1:20 reverse split in 2011) and then fell like a rock. Four months after listing the stock was trading 40% lower. A year after that, at the lowest point in the GFC (early March 2009), the stock traded as low as 85% below the IPO price.
The stock took the next nine years to (impressively) climb back up to IPO price-equivalent in January 2018 before falling back by half as of yesterday.
The NEW News
Earlier today, DP World (DPW DU) made an announcement that Port and Free Zone World, a wholly-owned subsidiary of state investment vehicle Dubai World, is set to acquire the 19.55% of DP World’s shares listed on the Nasdaq Dubai (the other 80.45% is owned by the SOE).
The Offer Price is US$16.75, which is a 28.8% premium to Sunday’s closing price of US$13/share.
The statements by the CFO and CEO point to how taking a long-term view is optimal for the company, whereas markets take a short-term view.
“The DP World Board has concluded that the disadvantages of maintaining a public listing outweigh the benefits. Delisting from Nasdaq Dubai is in the best interest of the company, enabling it to execute its medium to long-term strategy. DP World is focussed on the transformation of the Group and takes a long-term view of investment returns and value creation. In contrast, public markets typically hold a short-term view. As a result of this gap, the DP World strategy is not fully appreciated by the equity markets, and consequently is not reflected in the company’s share price performance.”
Yuvraj Narayan, Group Chief Financial, Strategy and Business Officer of DP World
“The global ports and logistics industry has been undergoing a significant transition as a result of the consolidation of the customer base and the vertical integration of several competitors. DP World must be able to continue responding effectively to this rapidly changing landscape and to invest in the future.
Returning to private ownership will free DP World from the demands of the public market for short term returns which are incompatible with this industry, and enable the company to focus on implementing our mid-to-long-term strategy to build the world’s leading logistics provider, backed by our globe-spanning network of ports, economic zones, industrial parks, feeders, and inland transportation.
Our focus will continue to be on integrating our acquisitions with our global network of interconnected ports, logistics businesses and economic zones. DP World’s world-spanning footprint puts us in a strong position to lead the disruption of the industry creating a better future for all cargo owners through smarter trade.”
Sultan Ahmed bin Sulayem, Group Chairman and Chief Executive Officer of DP World
The statements out are what they are. Investors can ignore them. That is not what is happening here.
The powers that be in Dubai are squeezing minorities out at a huge discount to where these assets would trade if sold on their own. It is far, far below where peers trade.
The claim that public markets cannot support such a long-term business is strange.
- The market supports Brookfield (either Brookfield Asset Management (BAM US) or Brookfield Infrastructure Partners Lp. (BIP US)) just fine.
- And does so with higher than the six turns of 2020e EBITDA (the debt/EBITDA ratio which DPW would have post the leveraged buyout (after it takes on an additional $8.1bn of net debt to complete the transaction and pay back the acquirer).
- Brookfield has higher debt multiples, and trades at 2-3x the EV/EBITDA ratio and similarly high multiples of EV/EBITDA less capex) compared to DPW (depending on how you measure Brookfield EV/EBITDA, and there should be some question about that).
- DPW has better ROA, better ROE, better ROC, and better Net Income Margins than either of the Brookfield businesses.
The difference, of course, is investor trust in management and board governance. Minorities were basically always stuck here. And just how stuck they are/always were is shown in the call presenting the deal. There were some unhappy campers.
It is not a pretty governance picture.