Brief M&A: Tiffany (TIF US): Out of the Blue and more

In this briefing:

  1. Tiffany (TIF US): Out of the Blue
  2. HK Connect Flows: $248m Inflows into Meituan on the First Day of Inclusion
  3. Springland And The Latest Retail Takeover
  4. HSCEI Dividends – Better Results Increase Expected Fair Value

1. Tiffany (TIF US): Out of the Blue

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Lvmh Moet Hennessy Louis Vuitton (MC FP) (LVMH) has approached the Board of Tiffany & Co (TIF US) with a proposal for an all-cash acquisition at USD 120 per share of Tiffany. This is a 22% premium to the last closing price on October 25th,  more than 30% over the previous 30-day period VWAP, and 8% higher to Capital IQ consensus, and represents a 15.4x EV/2020e EBITDA (source: Capital IQ, using 20 estimates, own calculations).

This represents, in my view, an opening offer that has been duly rejected by Tiffany’s Board. Tiffany has hired advisors.

Fine Jewellery has recently been one of the fastest growing areas in luxury. Within the luxury industry, characterized by pricing power and product scarcity, adding brands to a portfolio seems a sensible way to achieve growth. LVMH is seeking to add a powerful brand name to complete its offering in the Jewellery and Watches category, which represents c.9% of LVMH sales, vs. 22% of the global luxury market. LVMH would also gain higher exposure to the Far East and the USA. Proforma 2019 revenues for the combination of LVMH and Tiffany in Jewellery and Watches would be c. EUR 8.1 billion.

The successful acquisition of Bulgari provides a reference: the bid price for Bulgari implied 22.3x Adjusted EV/EBITDA 2011e and 18.8x EV/EBITDA 2012e. There could be limited potential synergies, difficult to value. There are no anti trust issues that could derail the operation, in my view.

Trade recommendation: I believe that there is a very high probability that LVMH will enter negotiations with the Board of Tiffany and present a knock-out offer per share of Tiffany, around USD 140 per share, and therefore recommend going long Tiffany.

2. HK Connect Flows: $248m Inflows into Meituan on the First Day of Inclusion

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In our weekly HK Connect Flow series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations.

In a Hong Kong exchange report released in July, the exchange highlighted that flows from mainland China accounted for 12% of the total trading volume in the market and is ahead of the US investors’ 10% and UK investors’ 7% share respectively. 

We split the stocks eligible for the Hong Kong Connect trade into three groups: HSCEI component stocks, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

On October 18th, Shanghai Stock Exchange and Shenzhen Stock Exchange announced that the revised implementation rule for stock connect will be effective on Oct 28th. The new rule allows dual-class shares, such as Xiaomi Corp (1810 HK) and Meituan Dianping (3690 HK) to qualify for mainland investor to invest via the Southbound Hong Kong Connect but the announcement has not specifically stated that Xiaomi and Meituan will be included when the new rule becomes effective.

On October 25th, Shanghai Stock Exchange issued an announcement that confirmed our expectation that Xiaomi and Meituan will be included in the Hong Kong Connect Scheme when the new rule becomes effective on Monday October 28th. We published an in-depth note last week detailing the rationale behind the flow trade on Meituan and reiterate our trade idea.

3. Springland And The Latest Retail Takeover

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PRC department stores and supermarket operator Springland International Holdings (1700 HK) has received a privatization Offer by way of a Scheme at $2.30, a 63.1% premium to last close.

The Offeror is Chen Jiangqiuang, founder and executive director of Springland, holding 73.22%. Netting off 1.18% held by concert parties, the total number of Scheme Shares held by the Independent Shareholders is 25.59%, therefore the blocking stake at the Scheme Meeting is 2.559%.

The headcount test is in force as Springland is incorporated in Cayman Islands.

The Cancellation Price will not be increased, and the Offeror does not reserve the right to do so.

The Scheme Doc is expected to be dispatched on or before the 14 January after receiving an extension from the SFC. The provides an expected completion around the end of February 2020.

The mechanics of the Scheme are straightforward. The Price potentially less so, pitched below successful precedent transactions. But at a four-year high, this transaction should receive the necessary support to get over the line. 

4. HSCEI Dividends – Better Results Increase Expected Fair Value

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Since we published our earlier Insight, the HSCEI dividends futures expiring in December 2020 have moved up 1.9% mainly driven by strong Q3 results led by Chinese insurers, a slightly stronger CNY and a marginally higher HSCEI. Open Interest in the 2020 dividend futures contract has continued to increase as prices push higher.

In this Insight, we look at the Q3 results of companies that announced quarterly results and estimate nine month EPS for non-reporting companies based on their half yearly results and operational statistics/data for the July to September period where provided.

We find that the 2020 dividend futures are trading below our bottom up fair value and provide a 3.7% upside from current prices.

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