Brief M&A: HSI – Potential Impact of WVR Share Inclusion & Finance Sector Capping and more

In this briefing:

  1. HSI – Potential Impact of WVR Share Inclusion & Finance Sector Capping
  2. Activist Murakami-San Going After Toshiba Sub Nuflare?
  3. Daeduck Electronics Demerger Summary
  4. Daeduck Electronics Announces the Establishment of a Holding Company Structure
  5. FLT Merger with FCOT: Bigger, Broader and Better

1. HSI – Potential Impact of WVR Share Inclusion & Finance Sector Capping

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On 8 November, Hang Seng Indexes announced the results of the quarterly index review of the HSI and HSCEI. While making no changes to the HSI, Hang Seng Indexes announced plans to conduct a market consultation on various topics related to the HSI, including eligibility of Weighted Voting Right companies for inclusion in the index and the weighting of the Finance sector in the index. The consultation is targeted to be conducted in the first quarter of 2020 and it is expected that the result of the consultation will be announced in May 2020.

In this Insight, we look at the potential impact on the HSI if one or both of these changes go through.

2. Activist Murakami-San Going After Toshiba Sub Nuflare?

When Toshiba Corp (6502 JP) announced the three tender offers for its three affiliates discussed in the last three insights below, all three Tender Offers were announced at prices which were “light” – they were quite clearly not overpaying.

Recent Insights on Toshiba Restructuring and Buyout of Subs

DateStockTitle
16 Oct 2019Toshiba Toshiba Buyback Ending: The Next Catalyst Is Restructuring 
24 Oct 2019Toshiba Tec Toshiba Restructuring Coming – Toshiba Tec Is STILL the Right Horse. 
12 Nov 2019Toshiba Plant Toshiba Restructuring – It’s Coming, Subs Are Up, Wording Is Important 
13 Nov 2019Toshiba Plant Toshiba Tender for Toshiba Plant (1983) – Lighter Than It Should Be 
13 Nov 2019Nishishiba Elec Toshiba Tender for Nishishiba Electric (6591) – Also Cheap 
13 Nov 2019Nuflare Technology Toshiba Tender for Nuflare Technology (6256) – Lightish to Too Light 

The price for Nuflare was set at a 50% premium to where it had been trading six weeks prior but not after having been lifted from Toshiba’s original proposal of ¥9,520/share which was ~3.6x the EBITDA that the financial advisors to Nuflare were looking at for March 2021.

Nuflare’s Independent Committee and their own Financial Advisors came up with a higher DCF “fair value” then Toshiba bid ¥11,900/share which was near the bottom of the fair value ranges estimated by both Deloitte Tohmatsu – Nuflare’s own advisor (¥11,452-15,655) and by Mizuho Securities (the advisor to the Independent Committee) at ¥11,368-14,992. The averages come out to be ~¥13,550 and ~¥13,150 just to get to the DCF fair value range mid-point. 

The bid was light. 

My analysis was that the EV/2021 EBITDA multiple was ~5.4x and the Adusted EV/EBITDA multiple was 4.85x. From there, EBITDA was forecast by both parties to rise significantly in the following 3-4 years. Neither was a particularly great place to be a seller.

The New News

Yesterday, after the close, it was disclosed that Minami Aoyama Fudosan, a company run by famed Japanese activist Yoshiaki Murakami, had purchased 575,100 shares or a 5.02% stake, “with the aim to provide advice to management and to submit important proposals, depending on the investment situation.”  

That is code for “disagree with management.”

Now things get interesting.

3. Daeduck Electronics Demerger Summary

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Daeduck Electronics finally announces a holding company conversion through a demerger. It is a classic equity spin-off event at a split ratio of 36.65% to 63.35%. Specifically, Holdco takes 36.65%, whereas Opco gets 63.35%. Holdco will be a surviving entity as a pure holding company. Both companies will get listed on KOSPI. As usual, this event doesn’t grant the shareholders a put option. But it still requires shareholder approval. They scheduled the EGM for Mar 27 next year. Upon shareholder approval, the trade suspension will begin on Apr 28 and run until May 20 next year. The KRX will list the new shares on May 21. The current market cap is ₩800bil, with a DTV of a little more than US$5M.

4. Daeduck Electronics Announces the Establishment of a Holding Company Structure

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It was announced after market close on December 2nd that Daeduck Electronics Co (008060 KS)will establish a holding company structure which was determined after a BOD meeting today. The NEWCO that will be spun off will be the operating company (OPCO) which will focus on the PCB business. The existing company will act as the holding company (HOLDCO) which will focus on its holding of the OPCO and investments in new businesses. 

The spin-off ratio is HOLDCO (0.3665063) to NEWCO (0.6334937), which is based on the financials of the company as of September 30, 2019.  The date of the spin-off is scheduled to be on May 1st, 2020. 

Overall, we believe the positives outweigh the negatives on this deal and we think that the stock is poised for a 10-20% appreciation (retest the recent highs of 12,000 won level) in the next few weeks as a result of this strategy to establish a HOLDCO & OPCO structures. 

5. FLT Merger with FCOT: Bigger, Broader and Better

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Frasers Logistics & Industrial (FLT SP) announced the proposed merger with Frasers Commercial Trust (FCOT SP) along with the acquisition of the remaining 50% interest in Farnborough Business Park. Under the scheme consideration, one unitholder of FCOT will receive S$0.151 in cash and 1.233 new FLT units at an issue price of S$1.240 per FLT unit. The total consideration to be paid equals S$1.680 per unit. 

Overall, we believe that FLT’s proposed merger offer for FCOT is fair. As there is room for upside from a larger diversified asset base, cost savings and inorganic growth, we believe that the merger is good for both sets of unitholders.

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