Brief M&A: Samsung Elec C/1P Trade: 1P Still Overpriced Even with Year-End Dividend and more

In this briefing:

  1. Samsung Elec C/1P Trade: 1P Still Overpriced Even with Year-End Dividend
  2. Zijin Mining Acquisition of Continental Gold: Seeking Value Through Acquisition
  3. Liberbank (LBK SM) – Unicaja (UNI SM) Second Time Around
  4. JDI – LG Display to Benefit from Apple’s Mini-LED Adoption but Buy JDI Instead
  5. Nuflare – Shift to Multibeam Is the Risk but Will Being Part of Toshiba Really Help?

1. Samsung Elec C/1P Trade: 1P Still Overpriced Even with Year-End Dividend

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Samsung Elec is again giving an entry point for a share class trade as the pair is at a -1.6σ on a 20D MA. The C/1P price ratio is also below the 120D mean and the 1Y mean. The 1P discount to its underlying share is 17.6%, which suggests that 1P is in an overvalued territory relative to the common.

2. Zijin Mining Acquisition of Continental Gold: Seeking Value Through Acquisition

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Zijin Mining Group Co Ltd H (2899 HK) announced the acquisition of Continental Gold (CNL CN) in an all-cash offer of C$5.5/share or C$1.4B. Newmont Mining (NEM US) holds ~20% of Continental Gold has backed the transaction. The board of Continental has recommended the deal to its shareholders.

We believe that Zijin’s offer for CNL is fair given that CNL has already returned nearly 140% YTD. The company is already trading above its peers on FY20 EBITDA and book value multiples but below on resource-based valuations.

3. Liberbank (LBK SM) – Unicaja (UNI SM) Second Time Around

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According to media, a group of shareholders of both Liberbank SA (LBK SM) and Unicaja Banco SA (UNI SM) are urging to again open negotiations to merge both banks and there is reportedly consensus for an exchange ratio of 59 Unicaja/41 Liberbank. The combined bank would have pro-forma assets of c. EUR 98 billion, thus becoming the 6th top domestic player.

Both Abanca and Unicaja need to gain scale and capture the synergies that would come with the acquisition of Liberbank. The buyer will surely be spared from the next round of consolidation in the Spanish banking sector.

Since last negotiations (abruptly finished in May), both banks have strengthened its solvency and have CET1 fully loaded ratios over 13%. Liberbank and Unicaja are succeeding in the cleansing of their balance sheets from NPAs (more than EUR 2 billion in the last year), moreover, an increase in the value of their bond portfolios is also helping. This would mean that the ECB would not require a massive rights issue to strengthen the capital of the merged entity. A EUR 500 million contingent convertibles (CoCos) issue and another EUR 300 million in subordinated debt would be enough.

A further catalyst is that Fundación Unicaja, the main shareholder of Unicaja must reduce its shareholding percentage in Unicaja from c. 50% to below 40% before the end of 2020. A merger with Liberbank would help to achieve this goal.

The operation would be structured as an acquisition of Liberbank by Unicaja, with payment in new Unicaja shares, in my view.

Assuming the PV of cost synergies is 778 million (see calculations under “Synergies”) and that they are evenly split between Liberbank and Unicaja, EUR 389 million would go to Liberbank shareholders, or 0.128 per share of Liberbank in synergies, added to last close price would give EUR 0.438 per share of Liberbank.

Recommendation is long Liberbank with a target of EUR 0.438 per share, a 41% upside to the last close price.

Risks: the float in Unicaja is currently 28%, so there is a short squeeze risk in a position to capture the spread, specially if Abanca enters the fray.

4. JDI – LG Display to Benefit from Apple’s Mini-LED Adoption but Buy JDI Instead

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News is that Apple will be adopting mini LED technology for its next generation of Macbook Pro and Ipad Pro models. LG Display and General Interface Solutions are mentioned as key suppliers but we feel there may be a better play on this news.

5. Nuflare – Shift to Multibeam Is the Risk but Will Being Part of Toshiba Really Help?

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With the announcement of Murakami’s interest in Nuflare, we examined the details surrounding the company’s challenges in developing multibeam mask writers as these seem to be the key swing factor in determining whether earnings are likely to trend as the company has outlined in its release or whether sellside analysts have it right, and the company is likely to suffer steadily declining earnings.

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