Daily Briefs

Brief M&A: Naspers & Prosus IPO/Spin-Off Part III – The Dreaded Discount and Implied Valuations and more

In this briefing:

  1. Naspers & Prosus IPO/Spin-Off Part III – The Dreaded Discount and Implied Valuations
  2. Naspers & Prosus – Another Think Part II:  Indices, Flows, and Ownership
  3. Last Week in Event SPACE: Naspers, Toyota, Askul, Aveo, Maanshan, Autech, Olympus, Abbvie/Allergan
  4. Allergan Plc Acquisition by AbbVie Inc. – A Botox Deal with Some Wrinkles
  5. Nexon Inside Stories: Taking Short-Term Path for Sale?

1. Naspers & Prosus IPO/Spin-Off Part III – The Dreaded Discount and Implied Valuations

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Prosus (PROSUS NA) will begin trading on Euronext Amsterdam on 11th Sep 2019 after being spun out of Naspers (NPN SJ). It will be a US$100bn+ market cap company with a free float of at least US$17bn+. 

There will be no primary or secondary shares issued by Prosus. At the time of listing, the only people holding shares will be Naspers and its shareholders. Being a spin-off, its more akin to direct listing rather a traditional IPO. 

In my previous two insights I looked at the non-Tencent businesses that Prosus owns to come up with an overall valuation for Prosus of US$146bn. However, being a HoldCo will result in Prosus trading at a discount to that valuation.

In this insight, I’ll look at what the discount could be and also provide a table with implied valuation at different share price levels.

2. Naspers & Prosus – Another Think Part II:  Indices, Flows, and Ownership

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In just over a week the world will get what may possibly be the largest single listing of immediately sell-able equity “float” in history. It is not an IPO. And there is only one way for most people to have any ownership prior to the opening bell 9am local Amsterdam time (7am GMT). 

In Naspers & Prosus – Another Think Part I:  About The Discount I discussed some of the “fundamental” ideas about The Discount. 

Why would Prosus (PRX NA) need a discount to the underlying assets, and then why would Naspers (NPN SJ) need a discount to Prosus. Most will “see” the need why, but getting a handle on the logical underpinnings can help. 

This followup insight looks at the flows – expected and possible – around the Prosus spinoff, based on ownership distribution, index treatment at the event and following, and how ownership could and then looks at how future flows could occur. 

A lot of people are getting the flows wrong. And there is a near-term opportunity for aggressive foreign investors looking to switch at a possibly good level.  

Understanding the details is in my mind a Good Thing.

3. Last Week in Event SPACE: Naspers, Toyota, Askul, Aveo, Maanshan, Autech, Olympus, Abbvie/Allergan


Last Week in Event SPACE …

  • Prosus (PRX NA) should trade at a premium to Naspers (NPN SJ) (ignoring the tiny economic shrapnel of the S.A. assets inside Naspers which Prosus will not own) because of the tax basis differential between the two shareholding structures.
  • Toyota Motor (7203 JP) has bought into Suzuki Co Ltd (6785 JP) at a good price for a great company, underpinning its stable growth and the most assured strategy in a CASE future.
  • Askul Corp (2678 JP) is not a situation with imminent definable 30% upside and a clear exit. It’s probably more one of drift as ASKUL tries to reorient itself towards profitable growth.
  • Aveo Group (AOG AU)‘s huge property write-down all but guarantees Brookfield’s Offer is a done deal.
  • The 1%/4% gross/annualised spread on Maanshan Iron & Steel H (323 HK)‘s MGO pre-event doesn’t make for attractive odds.
  • Scion Asset Management goes The Big Long on “undervalued and overlooked” smaller valued companies such as Autech Corp (067170 KS) in anticipation of a big bubble in passive investing.
  • Better governance in Japan is a slow-moving process and anything which gives it a friendly kick, such as the Olympus Corp (7733 JP) ToSTNeT-3 buyback, is a good thing.
  • It’s hairy, like the Celgene Corp (CELG US) / Bristol Myers Squibb Co (BMY US) situation, but arb accounts with the resources to monitor it closely should consider having exposure to the Abbvie Inc (ABBV US) / Allergan Plc (AGN US) deal.
  • Plus, other events, CCASS movements (including IPO lock-ups) and Mood Spins.

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


Naspers (NPN SJ) / Prosus (PRX NA) / Tencent Holdings (700 HK) 

With the Prospectus out for Prosus, Travis Lundy goes deep on why Prosus should trade at a premium to Naspers.

Some of the reasons have to do with the actual structure of the transfer of assets. Other reasons have to do with what Prosus could become. Still other reasons have to do with how ownership, jurisdiction, index flows and “new investment.”

Travis recommends a long Naspers vs Tencent+hedge trade here. He expects Prosus to trade tighter and the “basket” to be worth more Sep11-18 than today.

Watch out for Part II addressing interesting flow dynamics based on ownership levels, index participation, index changes, the spinoff structure/mechanics, etc.

(link to Travis’ insight: Naspers & Prosus – Another Think Part I:  About The Discount)

Ch. Karnchang Public (CK TB) / Bangkok Expressway And Metro (BEM TB) 

CK’s shares declined (or aptly, continued their YTD decline) following the release of the company’s 1H19 results on the 14 August. Then shares completely rolled over on the 21 August after an analyst meeting discussed CK’s all-time low construction projects backlog, coupled with a court ruling disqualifying a consortium involving CK from a mega-airport project. I currently see the discount to NAV at 33% against a one-year average of ~10%, having peaked at +16.4% back in September last year.

  • The unlisted construction segment has an all-time low backlog of Bt38.6bn as of 2Q19. This compares to Bt121bn as at FY12 year-end, following which, there has been a steady decline over the past seven years. New projects are expected to be signed in the 2H19 but none will hit earnings until 2020. Stripping out earnings from the three listcos held by CK indicates the construction segment is expected to return a loss in FY19. 
  • There is considerable speculation baked into these construction companies – and Thailand is not short on contractors – which also accounts for the drastic recent sell down. Backlog concerns are not unique to CK as seen by the performance of its peers. For now, I would avoid setting up this stub. A 33% discount to NAV does not look excessive in light of weak forecast earnings. 

(link to my insight: StubWorld: Intouch Sell-Off As Investors Follow Temasek’s Lead)

Gcl Poly Energy Holdings Limited (3800 HK) / Gcl New Energy Holdings (451 HK)

Back in early June, I discussed in StubWorld: New Interest In GCL’s New Energy that GCL, the 62.28% shareholder of GNE, had entered into a Cooperation Intent Agreement with China Hua Neng Group (a subsidiary of SOE China Huaneng Group) to sell 51% of GNE, the completion of which would trigger an unconditional MGO for GNE. The new development is the transfer of 20% of shares out, or 3.8bn shares, in GNE from HSBC to Get Nice Securities yesterday. This is part of GCL’s stake. It’s not the full 51% attached to the June agreement, but it is the single largest share movement in GNE since GCL’s stake moved into CCASS in May 2015.

  • I see GCL’s discount to NAV at 46% against a one-year average of 16%.  I’ve used consensus forward stub EBITDA from CapIQ and pegged to polysilicon peer multiplies. That consensus deconsolidated EBITDA has declined to HK$2.9bn today, from $5.2bn a little less than three months ago. The discount to NAV has widened considerably since the 2019 interim results were announced. The implied stub has never been lower.
  • The June announcement indicates the SOE is seeking 51%, suggesting the intention is to acquire a majority control but also maintain the listing. To assist this approach, the Offer Price may be pitched around the undisturbed price. An SOE backstopping GNE’s debt is a good thing. Shares popped on the news back in June, but have settled back down to the undisturbed price level, which makes it more interesting.
  • GCL is less straightforward. A 51% stake in GNE is worth ~HK$2.5bn or 42% of its current market cap. But without GNE’s consolidated figures, losses at GCL’s unlisted ops become apparent. Plus, it needs to service its debt pile. As a simpler organisational structure, perhaps GCL may itself be subject to renewed takeover interest. But I would not chase the stub here. GNE is the stock in play.

(link to my insight: New Development In GCL’s New Energy)


Toyota Motor (7203 JP) (Mkt Cap: $183bn; Liquidity: $310mn)

Toyota and Suzuki Motor (7269 JP) announced a capital tie up with Toyota acquiring a 5% stake in Suzuki for ¥96bn, with Suzuki investing ¥48bn in Toyota. The press release stated “these share acquisitions will be implemented after the companies obtain approvals from the foreign competition authorities”. This is significant because it implies that approval (tacit or explicit) has already been received from domestic authorities. Of these foreign authorities, the Toyota-Suzuki relationship is most pertinent in Indonesia, India and Pakistan where the two manufacturers together control 63-80% of the respective markets.

  • If Toyota is able to integrate Suzuki, Mazda, and Subaru into its stable, it would become the largest auto manufacturer in many regions including North America, Oceania, ASEAN, Japan, the Indian Subcontinent and South Africa. In the USA, adding Subaru and Mazda’s unit sales would actually put the group’s share at 20%, above even GM’s 17%.  Suzuki would also plug Toyota’s most glaring weakness which is profitably manufacturing small vehicles. 
  • If this alliance goes through, even if takes a significant amount of time, we believe that it will almost guarantee the group’s dominance of the entire Asian belt from just East of the Middle East down through South East Asia and Australasia and up to Japan, with China and Korea being the main two economies where it would not be the leading manufacturer. 
  • Does This Make Suzuki a Buy? Not exactly. Mio Kato, CFA believes the move is positive and does firm up Suzuki’s future prospects but tangible results will take some time. The valuation picture also looks a little mixed. On PB, Suzuki looks extremely attractive at just 1.3x PB despite comfortably generating a double-digit RoE. There is clearly value here, but momentum in India remains weak.

(link to Mio Kato‘s insight: Toyota: Slow Creeping Expansion of the Toyota Group)

Aveo Group (AOG AU)  (Mkt Cap: $828mn; Liquidity: $8mn)

Investor dissatisfaction with Brookfield’s Offer price of A$2.21/security  – against $2.21/security when a strategic review was announced a year beforehand – should attenuate after Aveo reported a LOSS for the full year of A$213.4mn after booking an A$259.3mn decrease in the property valuation of the Retirement Portfolio. As a result, the net tangible assets per security declined to $3.50 as at 30 June 2019 from $3.92 as at 30 June 2018 and $3.83/security as at December year-end.  

  • Seng Huang Lee –  and Eric Lee, both directors of Aveo and Mulpha International (MIT MK), Aveo’s largest shareholder with 24.4% – support the Offer, which all but guarantees Mulpha will support the Scheme. Mulpha’s shareholder vote to sell its holding in Aveo should be simple majority. And Lee holds ~45%. Mulpha has no comment on the deal at present; no action is required until the Scheme document is issued. It is not clear whether Mulpha, should it support the Offer, will opt for cash or scrip.
  • Apart from Perpetual increasing its stake last November, Omni Partners emerged as a substantial shareholder on the 19 August. There have been no other buyers of shares, despite half a dozen (initial) interested parties. Perpetual ceased to be a substantial shareholder on the 16 August.
  • Currently trading at a gross/annualised spread of 1%/6%, assuming mid-November completion. That’s tight, but this deal now looks a lock, having previously considered the Offer to be fair. Aveo has not closed above terms since the Scheme Implementation Deed announcement.

(link to my insight: Aveo’s Offer To Get Up After Huge Writedown)

Askul Corp (2678 JP) (Mkt Cap: $1.4bn; Liquidity: $15mn)

Around four weeks ago at its AGM, Askul’s founder and former CEO Iwata Shoichiro was dethroned, and former COO Yoshioka Akira appointed the new CEO. The results of the AGM were something of a shocker. It was a foregone conclusion that Iwata-san was out, but he only got 20.8% support. Importantly, what it shows is that Yahoo Japan (4689 JP) and Plus Corporation – who combined had 29mm shares – were joined by another 5mm shares (~10% of the company) to vote out Iwata-san. Even if every single share which did not vote had voted for Iwata-san it still would have ended in overwhelming defeat.

  • An interesting interview with new ASKUL CEO Yoshioka-san surfaced in the online version of the Diamond Weekly. The main themes of the article are: 1) We like our independence; 2) We have multiple suitors and will arrange for multiple new partners and investors to own shares. They want a B2B partner; and 3) ASKUL will not sacrifice profit for the sake of growth-as-fast-as-possible.
  • Taken with the previous forecasts presented by ASKUL, the takeaways for investors should be: ASKUL will be more profitable this year and next; ASKUL sees it can get more scale on B2B; There is no competitive tension here on the stock price; and there will likely be no transaction which will result in an exit at a higher price for existing investors (such as a tender offer, or a buyback at a premium). 
  • The emphasis on profitable growth rather than growth with large losses will mean better profits and slower LOHACO growth but revenue growth should continue unabated, and the possibility of a buyback of some of Yahoo Japan’s shares could – if not executed with a slightly complicated three-way method – lead to a higher ROE arithmetically. 

(link to Travis Lundy‘s insight: ASKUL:  Post AGM Shakeout, ASKUL Independence Means Less Event-y, More Drifty-Growthy)

Maanshan Iron & Steel H (323 HK)  (Mkt Cap: $2.9bn; Liquidity: $7mn)

Maanshan announced on the 22 July that the completion of an equity interest from Anhui SASAC to China Baowu would trigger a conditional Mandatory General Offer (MGO) for H shareholders at $2.97/share, a 1.37% premium to last close. The key outstanding condition is the CSRC waiving China Baowu’s obligation to make an Offer for the A-Shares. As the equity transfer is being done at nil consideration with government support, it appears to meet a specific clause under the A-share listing regulations – according to a CSRC application announced this week – therefore sidestepping this obligation. This improves the likelihood of the MGO being triggered.

  • The MGO is conditional on 343.87mn H shares tendering or ~20% of total H shares outstanding and 4.46% of total A&H shares, which together would give China Baowu 50% of Maanshan. 475mn shares have traded since the MGO announcement. Arb players are active, either on a potential re-rate over the US/China trade dispute. Or simply to tender if the dispute continues. 
  • I doubt the number of shares currently in arb hands is sufficient for the 50% acceptance condition attached to the MGO to be met. But this deal still has a way to go – the Composite Document has been delayed until the 31 October. I still don’t see this MGO getting up though.
  • The MGO is propping up Maanshan shares, therefore, a case exists for a pair trade with Angang Steel Co Ltd (H) (347 HK), with the ratio at 1.1x, up from 0.95x at the first announcement. But the long-term ratio (1,3,5,10) has shown a steady increase.  Maanshan also has a greater exposure to long steel – ~48% of production volume vs. <20% for Angang – which could give the company an advantage from any government infrastructure stimulus.

(link to my insight: Playing The Re-Rate On Maanshan’s MGO)

Adani Ports & Special Economic Zone (ADSEZ IN)  (Mkt Cap: $11bn; Liquidity: $17mn)

Adani announced in June, shortly after earnings, that it would buy back up to 39.2mm shares at a price of up to Rs 500 each. That was when the shares were trading at ₹425 each. That was at a premium of 17.6%. Since then, the shares have fallen.  The previous Friday the company confirmed that it would buy shares back in a Tender Offer between 6 September and 20 September 2019 at a price of ₹500/share.  That was a premium of 43.1%. 

  • The total to be bought back is ₹19.6bn or 39.2mm shares at ₹500/share. The total is 99.5% of what is possible under the rules (as applied to ADSEZ), and under the buyback rules, another buyback may not be done for a year after this one is complete. To participate fully as an Entitled Shareholder, you must have been a shareholder of record as of 21 June 2019. 
  • Under the most recent set of rules as promulgated by SEBI in September 2018, 15% of the 39.2mm share buyback will go to the ~38.7mm shares held by small lot domestic retail shareholders. The other 85% will go to the 39.2mm shares being tendered by the promoters.
  • Based on where the stock price was, with the Tender Offer Price at ₹500/share, Travis would tender. He expects some people will not tender and the pro-ration could be as high as 8%. 

(link to Travis’ insight: Adani Ports (ADSEZ) Tender Offer Buyback)

Tailim Packaging Ind (011280 KS) (Mkt Cap: $390mn; Liquidity: $14mn)

Tailim Packaging and Tailim Paper have been up for sale and are in the last stages of the M&A process. Tailim Packaging is one of the largest makers of corrugated cardboard in Korea. A private equity firm called IMM PE acquired both companies in 2015 and have put these companies up for sale. The local media have mentioned around ₩700bn (US$580 million) to more than ₩1tn (US$830mn for the combined stakes of 70.9% of Tailim Packaging and a 100% stake of Tailim Paper.

  • Hansol Group (Hansol Paper), TPG, Bain Capital, Shining Paper (China), and Sae-a Trading have all expressed interest in acquiring Tailim Packaging and Tailim Paper. 
  • Tailim Packaging shares are up 193% from the end of 2017 and it appears that its share price has already baked in the M&A premium. Douglas Kim believes there is a higher likelihood that Tailim Packaging shares underperforms in the coming months as the company is actually acquired by one of these five companies. 

(link to Douglas’ insight: Korea M&A Spotlight: Who Will Acquire Tailim Packaging & Tailim Paper?)

Bombay Stock Exchange (BSE IN)  (Mkt Cap: $368bn; Liquidity: $1mn)

In early May this year, the operator of the BSE announced a buyback of shares via tender offer method to take place later this year. Shareholders approved, the record date (29 July 2019) came and went and now the BSE Limited posted its Letter of Offer. If you held shares as of 29 July, you are Entitled to sell shares (a minimum of roughly 13% of your shares) at ₹680/share between 30 August and 16 September 2019 when the Tender Offer Closes. The buyback is for 6.764mm shares for a total of ₹4.6bn. This is not as small as it looks as it is about 13% of the shares outstanding, and it is being done at a premium of 31.7% to the closing price of 26 August 2019.

  • If you owned shares of BSE Limited prior to the Record Date, you can sell at a 31% premium to current price. Travis expects you will be able to sell 15-20%, or even possibly 25-30% of your shares.
  • Travis is Bullish the development of Indian capital markets going forward, and bullish the ability for Indian exchanges to be able to monetise activity. It may take a while, but he views exchanges as infrastructure.  You could not pay him to be short this stock at this earnings multiple.
  • Currently, if you are long BSE, you are long at a March 2020e PER of 14.6x. If you expect a 15% pro-ration is possible from selling your shares, then you could sell 15% of your shares at ₹680/share and the other 85% of your position would have a “breakeven” on the decision of 13.7x PER.

(link to Travis’ insight: BSE Limited (BSE IN)  – Tender Offer Buyback and Great Long-Term Buying Opportunity)

Echo Resources (EAR AU) (Mkt Cap: $152mn; Liquidity: $1mn)

Echo announced today it has entered a bid implementation agreement in which Northern Star Resources (NST AU) has offered to acquire all shares it does not own in Echo at $0.33/share in cash, a 39.4% premium to last close. The Offer is conditional on NST holding at least 90% of shares out. NST currently owns 21.7% of shares. The directors of Echo, with 1.7%, have confirmed, in the absence of a superior offer, they will accept the Offer.

  • The strategy behind this takeover is to consolidate the Yandal gold project with NST’s nearby Jundee gold mine, together with securing the Bronzewing processing plant to alleviate a logjam for NST’s own gold production. With gold at current levels, NST is also running a ruler over the Superpit gold mine in Kalgoorlie/Boulder, currently owned by Barrick Gold (GOLD US) and Newmont Mining (NEM US)
  • The Bidder’s Statement is due out on the 25th September; the Offer would be then open for acceptances. The earliest close is the 29 October. Trading at a gross spread of 1.5%. This is a done deal and volume has been punchy.

(link to my insight: Northern Star’s Recommended Offer For Echo)

Polatechno (4239 JP) (Mkt Cap: $281mn; Liquidity: $0mn)

Functional chemicals (and explosives) maker Nippon Kayaku (4272 JP)  announced that it would purchase the 33.5% of JASDAQ-listed Polatechno that it did not already own, via Tender Offer, at ¥993/share – a whopping 92% premium to last price (which is admittedly scraping off multi-year lows). Polatechno’s Board agreed to support the Tender Offer. This would get the stock back to its 18-month high.

  • It requires a minimum tender of 22.38% of the 33.55% not owned, which looks like they need to dislodge 66.7% of minorities. Conveniently, the exact number of shares that they need to make this a success is the exact number of shares held by Arisawa Mfg (5208 JP) (see the next deal below).
  • This deal should trade VERY tight. But there is zero reason to expect more than this. The company is cash-rich, but business hasn’t been growing, and at the takeover price it is about 6.5x EV/EBITDA using a reasonably “investor-friendly” calculation method.
  • Because Nippon Kayaku has 66.45% and Arisawa has pledged to tender its 22.38%, that gets Nippon Kayaku to 88.83% even if nobody else tenders. A Tower-managed fund/company has 3.97%, domestic financials have another 2.3%, and retail has ~4%. The combination of these will almost certainly get this over 90% which means there will be an early squeeze out. Even if nobody else tenders, this gets a squeezeout. 

(link to Travis’ insight: Polatechno (4239 JP) TOB – Big Premium, Done Deal)

Arisawa Mfg (5208 JP)  (Mkt Cap: $336n; Liquidity: $2mn)

In reference to the Polatechno deal above, Arisawa will take in ¥9.215 billion via tendering 22.38% of Polatechno. That is a fair bit of change for a ¥31.3bn market cap company. Arisawa simultaneously announced a forecast revision downwards because of lower equity affiliate income going forward. To offset equity weakness going forward, they also announced a stock buyback. For 10% of the company. 

  • The company trades at about 0.7x book. The company has announced a ¥3.2bn buyback, using some of the proceeds of the ¥9.2bn sale of the Polatechno position. That is about 9% of market cap at current (post announcement pop) price. 
  • If the company were to use the other ¥6bn and the ¥10bn it has invested in corporate bonds as “pure investment” – returning it to shareholders – that would return an additional 50% of market cap, and the ROE would not quite double but it would get almost to double digits.
  • Two activist-type investors are now announced as large shareholders. They hold close to 16% between them. Travis would be/get long because of the expectation of further activist buying and efforts by the company to get rid of them, even if that means reducing the company’s equity through large buybacks.

(link to Travis’ insight: Arisawa (5208) Activism:  Biggish Buyback, But Lots More Potential Behind)


Autech Corp (067170 KS)  (Mkt Cap: $144mn; Liquidity: $4mn)

Small-cap activism? According to a recent filing, Scion Asset Mgmt’s ownership of Autech recently increased from 8.62% to 9.75% (as of August 23rd, 2019). While Scion Asset Mgmt (of The Big Short fame) has mentioned that it wants to participate in the management of the company, it has yet to provide full details of its proposals including demand for the higher dividend payout. 

  • At the end of June 2019, Chairman Kang Sung-Hee had a 23.85% stake in the company. Kang Shin-Wook and Kang Shin-Hyung also had 2.21% stakes each in the company at the end of June 2019. Therefore, Chairman Kang and related parties own 28.27% stakes. Foreign ownership has increased significantly in the past couple of years, rising from 6.6% from the end of 2017 to 20.7% today. 
  • Based on the current shareholding structure, it would appear difficult to make a case for a direct proxy fight between Scion Asset Mgmt and Chairman Kang & related parties. Scion Asset Mgmt has yet to reveal how confrontational it wants to become in its fight against Autech Corp’s management team.

(link to Douglas’ insight: Scion Asset Mgmt “Goes Activist” On Autech Corp)

Olympus Corp (7733 JP)  (Mkt Cap: $15bn; Liquidity: $44mn)

Olympus announced that Sony Corp (6758 JP) had approached Olympus saying it wished to sell its 68,975,800 shares (5.05% of shares out) in Olympus.  Olympus responded by saying that it would by buy back up to 85,000,000 shares in a ToSTNeT-3 buyback.  This is a pretty good response by Olympus.

  • Sony had not been a company prone to cross-holdings. This holding genuinely had a purpose, which it has now served.  This is Sony taking the JPX/TSE’s guidelines – without specifically mentioning the Corporate Governance Code – from March 2018 to heart. Finally, another blue-chip taking the hint and stepping up to do the right thing. 
  • A large chunk of this report is like a ToSTNeT-3 101 course. Travis explains how to participate and who takes priority over who, and the embedded weirdness of these buybacks on who gets filled.

(link to Travis’ insight: SONY’s Good Governance Sale: The OLYMPUS (7733) ToSTNeT-3 Buyback)

JPX Nikkei 400 Rebalance – How It Went

The first conclusion is that JPX Nikkei 400 rebalances are not meaningful. They have not been, they will not be until a LOT more money starts tracking them. Passive trackers have had five years and a lot of positive press to decide to switch and they haven’t. This year, the arithmetic average performance of the Adds vs the Deletes from pre-announcement to event was -6bp. That is a bit better than the historical average. The only GOOD trade with JPX Nikkei 400 rebals is to predict next year’s rebals this year. 

  • Travis does not foresee the passive investment market moving dramatically to the JPX Nikkei 400 going forward. It is something of a deadweight in passive land. It has validity because the BOJ buys ETFs but it has too much turnover and is more “active” conceptually than real passive, and the things for which it is famous matter only a tiny bit to what is in the actual index. 
  • The odds have been, over five years, that the average Added name (equal-weighted) will underperform the average Deleted name by 150bp over the next 2 months. After an average 25% outperformance over the past year, that’s acceptable reversion. But it is still there.
  • The best trade is to get long next year’s Adds and short next year’s Deletes now. Watch this space. A follow up piece with this trade is coming shortly.

(link to Travis’ insight: JPX Nikkei 400 Rebalance – 2019 Edition Done)

Nifty50 Review

Nestle India (NEST IN) will be added after all. In Brian Freitas‘ earlier note, Nifty50 Rebalance Preview – Rule Change Causes Confusion, he had highlighted the recent rule change for the Nifty family of indices and thought it unlikely that NEST would be added to the Nifty 50 since it was not a part of the Nifty100 index. Being a member of the Nifty 100 was a necessary condition to be included in the Nifty50. The change is effective from 27 September, so all rebalancing will need to be done by the close of 26 September. With at least six days of volume to buy, NEST may move higher in the short term. 

(link to Brian’s insight: Nifty 50 Index Review – Tearing up the Rulebook)

HSCEI Index Review

The HSCEI index review is effective 9 September and passive funds and index arb desks will be rebalancing their portfolios at or by the close on 6 September. With just over a week to go to the implementation date, Brian also looked at the performance of the inclusions and exclusions since announcement date and look at historical rebalances to determine if there is a trade in the week before implementation (spoiler alert: there is).

(link to Brian’s insight: HSCEI Index Review – Time to Play?)

M&A – US

Abbvie Inc (ABBV US) / Allergan Plc (AGN US) 

On June 25, 2019, Abbvie announced its acquisition of Botox-maker Allergan in a $63bn cash and stock deal in which AGN holders will receive a fixed ratio of 0.866 shares of ABBV + $120.30 cash in exchange for each AGN share. In the two-plus months since the deal’s announcement the arbitrage spread has widened from $14.76 on the day of the announcement to $17.51 on August 30, and had traded in the $18+ range recently.

  • Pharma deals are always a bit hairy due to the greater than average likelihood of deals breaking in the sector compared to the entire M&A universe. A very large deal like this one is even more likely to have a few potential competition issues that need to be addressed, especially in light of recent FTC actions indicating a tougher stance.
  • In addition, the need for Chinese regulatory approval makes this situation sensitive to American/Chinese trade negotiations. It is not above China to sacrifice a merger involving an American-centric corporation on the political altar, as we saw with the Nxp Semiconductors Nv (NXPI US) deal just over 13 months ago. And NXPI is incorporated in the Netherlands, so its non-U.S. status didn’t save that deal. Therefore, this is probably the greatest risk with this deal and likely one of the main reasons for the large spread.
  • Despite this risk, John DeMasi likes having some exposure to this deal in light of its attractive spread and risk/reward ratio and committed parties. It’s clear from the background section that Allergan was not shopped, and if this deal were to fall apart for reasons unrelated to antitrust issues or a material adverse change at Allergan, there could be another interested party in the wings, or the Company could pursue a spin-off/break-up scenario as speculated before this deal was announced to help enhance shareholder value. Such moves would help mitigate the downside risk.

(link to John’s insight: Allergan Plc Acquisition by AbbVie Inc. – A Botox Deal with Some Wrinkles)


For the month of August, 16 new deals were discussed on Smartkarma with an overall announced deal size of ~US$23bn. This does not include insights written on rumoured bids for Asiana Airlines (020560 KS) and Hitachi Chemical (4217 JP), or ongoing merger negotiations such as the Sanyo Chemical Industries (4471 JP) / Nippon Shokubai (4114 JP) situation.

The average premium for the new deals announced in August was 40%, while the average for the first eight months of 2019 is ~32%.

(link to my insight: (Mostly) Asia M&A: August 2019 Roundup)



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.   


% chg


Out of

Outside CCASS
Outside CCASS
China Cloud (33 HK)
Outside CCASS
Get Nice
Smart-Core (2166 HK)
Outside CCASS
Fair Eagle
Source: HKEx

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


% chg


Out of

Futex (8506 HK)
China Reserve
Outside CCASS
TS Wonders (1767 HK)
Head & Shoulders 
Outside CCASS
Guan Chao (1872 HK)
China Int
Outside CCASS
Source: HKEx

4. Allergan Plc Acquisition by AbbVie Inc. – A Botox Deal with Some Wrinkles

Presentation%20p7%20 %20agn abbv%20combined%20drugs%20portfolio

On June 25, 2019, Abbvie Inc (ABBV US) announced its acquisition of Botox-maker Allergan Plc (AGN US) in a $63 billion cash and stock deal in which AGN holders will receive a fixed ratio of 0.866 shares of ABBV + $120.30 cash in exchange for each AGN share.

In the two-plus months since the deal’s announcement the arbitrage spread has widened from $14.76 on the day of the announcement to $17.51 on August 30, and had traded in the $18+ range recently. The discount at which AGN trades compared to the value of the deal has gone from 8.3% on June 25, 2019 to nearly 10% on Friday, August 30th. Due to the time value of money one would expect the spread and discount to slowly diminish over time. So what would explain the opposite occurring over the past two months and how attractive is this trade to merger arbitrage/event-driven investors?

I explore these questions and others in this piece below.

5. Nexon Inside Stories: Taking Short-Term Path for Sale?

What’s really going on inside Nexon Korea? Two senior executives were fired. At the same time, a flamboyant man nicknamed ‘Heo-Nos (Heo + Thanos)’ is already working as if he is a new CEO. It first seemed that this was just a mere management reshuffle. But it now seems that there are more interesting stories, which may indicate that KJJ is planning a new round of sale event.

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