In this briefing:
- Tencent’s Turn To Run A Ruler Over Leyou
- Cathay Pacific Rights – The Flow Dynamics
- Colowide Partial Tender for Ootoya Is a Sell
- Metlifecare/EQT: The Retirement Solution
- Last Week In Event SPACE: FamilyMart, Sina, Line Corp, Metlifecare, Accordia Golf, Jingjeng, O-Net
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
Again, no price is mentioned.
As always, more below the fold.
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-.
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.
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
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%.
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.
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
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.
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).
In SK Biopharmaceuticals: MSCI Korea Index Inclusion Event, Sanghyun Park expects SK Biopharmaceuticals (326030 KS) to be included in the MSCI November review.
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)
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).
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.
Charmacy (2289 HK)
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.
Fin Street (1502 HK)
China Saftower (8623 HK)
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