Brief Singapore: Last Week in Event SPACE: Sembcorp, Cathay, Nichii Gakkan, Unilever, Just Eat/Grubhub and more

In this briefing:

  1. Last Week in Event SPACE: Sembcorp, Cathay, Nichii Gakkan, Unilever, Just Eat/Grubhub

1. Last Week in Event SPACE: Sembcorp, Cathay, Nichii Gakkan, Unilever, Just Eat/Grubhub

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 Last Week in Event SPACE …

  • 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)

EVENTS

Sembcorp Industries (SCI SP) / Sembcorp Marine (SMM SP) 

SMM is conducting a 5:1 Rights Offering at a 29-35% discount to TERP at S$0.20/share vs last at S$0.85 and recent VWAP average of S$0.74/share in order to pay down debt and have more working capital in the COVID-19 downturn to both demand and ability to work. After this, SMM will pay back debt owed to its parent SCI (offsetting SCI’s rights outlay). After that, SCI will spin out all its shares held in SMM. SCI is injecting capital – in effect a debt for equity swap – to get it back, then spin off the shares for good. It is a transfer of substantial control to Temasek, leaving Temasek owning a just-under-50% stake in SCI, and a stake in SMM which could vary significantly from about 30% to about 59%.

  • You could also think of SMM as a short, because a lot of the SCI holders – 30-35% of SCM post-capital raise – will be happy to realise the value of the SMM shares they receive, and get out as soon as they possibly can. They’d get out sooner, but there is almost no stock borrow on SCM for them to hedge.
  • You could think of SCI as a spin-off trade, extracting value. The nature of the relative valuations (high multiples at SMM and low multiples at SCI) and the accounting for higher EBITDA lower net income companies like SCM means that the accounting optics to SCI shareholders are fantastic. SCI holders who get SCM then sell it are effectively buying (owning) SCI cheap, and selling SCM expensively. SMM is being cast adrift. 
  • If this is great for SCI shareholders (the liquidation of Holdcos almost always extract value at the parent level), that means it is either bad for Temasek or for minority holders of SMM. One might say both, but there has long  been speculation that Temasek would try to merge the beleaguered SMM with Keppel, upon which it is now in the process of trying to conduct a Partial Offer. 

Links to:
Travis Lundy‘s insight: SembCorp Marine and SCI – A Gloriously Messy Recap and De-Merger – Big Win for SCI.
Travis’ insight: Sembcorp Marine Rights Offer – Cast Away
my insight: StubWorld: The Liquidation Of Sembcorp’s Holdco
Ke Yan‘s insight: SMM Rights Issue & Demerger Is One Step Closer to Keppel O&M+SMM Merger


Cathay Pacific Airways (293 HK)  (Mkt Cap: $4.3bn; Liquidity: $5mn)

Cathay’s rescue package was inevitable. Having the Hong Kong government stump up ~67% of the $40.95bn package did come as a slight surprise. The government backstop suggests this was a matter of expediency on Cathay’s part as opposed to desire. This also appears a “kicking the can down the road” scenario. 

  • The Hong Kong government is not in the business to run an airline. Just like in China, the government does not directly run airlines. As Cathay will want to (or should) refinance the pref shares in the next two to three years owing to the onerous coupon step-up, the Hong Kong government will also be happy to exit. One possible option could be to transfer the pref shares to Air China at some later date.
  • For Swire, when shares were suspended ahead of the announcement, this appeared an ideal time to unshackle itself from the inevitability of exiting its position. Injecting HK$5.3bn to maintain a largely similar stake in a heavily debt-laden operation, when the likelihood of necessary refinancing/rights issues possibly 2-3 years out, does not, to me, warrant a narrowing in the discount NAV. 
  • For SIA, which already had direct government interest, its reorganisation package, though heavily dilutive, provided long-term funding and clarity on its shareholder structure. This package for Cathay falls short on clarity and gives the impression of an interim fix or a compromise. 
  • My back of the napkin calcs estimates Cathay could burn through the entire pref share proceeds by year-end. Cathay may well need to go around cap in hand again, and sooner than the market thinks.  The TERP price of $7.20 provides an indicative price level, as the name implies, and I see no reason why shares should trade at a significant premium to this price. SIA, using Friday’s close is trading 5% below its announcement-date TERP.

links to my insights:
Cathay Pacific’s Government Stop Gap
Cathay Pacific: A Bonfire For Money


Unilever NV (UNA NA)Unilever PLC (ULVR LN) 

UNA announced plans to unify its Group legal structure under a single parent company, ULVR. They’ve attempted a unification back in 2005 and 2018. Conditions required are approvals of shareholders in Unilever NV and Unilever PLC in EGM; consultations with employee representative bodies, and applicable regulatory consents.

  • UNA shares were (at the time Jesus Rodriguez Aguilar‘s insight) trading at a discount of 2.2% to ULVR. That discount should close as a result of the merger. That’s not a lot of skin in the game for a transaction expected to close in 4Q20.

(link to Jesus’ insight: Unilever’s DLC Unwinding)

M&A – ASIA

Nichii Gakkan Co (9792 JP) (Mkt Cap: $1bn; Liquidity: $5mn)

When this deal was announced on 8 May, it took about 3 minutes to conclude that the deal was done at the wrong price. It took an hour with the document to find a half dozen holes in the method and reasoning by which insiders, and Bain, and the Board had decided that a ¥1500/share price for an MBO was fair.  The NEW News is a press release from LIM Advisors, one of Asia’s long-time specialists. The letter points out several ways that inherent conflicts of interest were present, and such conflicts of interest were not adequately mitigated through good governance.

  • Investors have been short-changed. LIM Advisors has written a letter which is public. It could be more public.  LIM suggests a fair price should be ¥2400/share or higher. Travis thinks a minimum should be ¥2100 but thought a price up to ¥2600 is explainable easily enough.  Given the existing funding assets of the family, and the desire of Bain to get a high IRR on whatever they put in, Travis would suggest ¥2000-2300  are probably as high as this could go. 
  • The fact that we have not seen a Large Shareholder Report of a 5% holder though volume traded so far since the announcement (on market) is equivalent to 22.8% of shares outstanding.
  • The fact that this deal managed to go through the process and get independent legal signoff, audit signoff, accounting sign-off and ticked the boxes that the Supreme Court deems need to be ticked to make this a “fair price” shows two things: the Supreme Court’s decision in the case of JCOM was, in fact, significantly flawed, OR, this particular case sees ALL of its advisors and Board to be lacking in requisite governance skills or ethics sufficient to conduct a fair process.  Travis happens to believe BOTH are the case. 

(link to Travis’ insight: An Activist Appears in Nichii Gakkan (9792): Good!)


Hexaware Technologies (HEXW IN) (Mkt Cap: $1.7bn; Liquidity: $9mn)

On the 5 June 2020, Hexaware announced it had received a Delisting Proposal from the Promoter and 62.4% owner HT Global IT Solutions Holdings Limited (an entity owned by a Barings Private Equity Asia fund) the day before. The Delisting Proposal Letter proposed an Indicative Offer Price of Rs.285/share, where the stock bounced to in April, and below where it spent the two years to March.  Delisting Offers (also known as Exit Offers) offer interesting dynamics as they are different than takeover price discovery in most other places. There is a long, detailed discussion of the process in Indian Delisting/Exit Offers – Know Your Process and The Games Played.

  • Hexaware Intimation of Board Meeting regarding the Delisting Proposal was differently phrased than either Vedanta Ltd (VEDL IN) or Adani Power Ltd (ADANI IN)‘s. The document says in #5 that it shall appoint a Merchant Banker. It does not specify it will do so at the meeting.#6 talks about the contents of the Board Meeting and says that it will consider the proposal for voluntary delisting but does not mention the Merchant Banker.
  • Travis’ concludes the Merchant Banker appointment has not been made, and the Board Meeting this Friday the 12th will not be able to see a Board Resolution to support the Delisting Proposal, and to proceed.

  • Travis recommends being long Hexaware now and buying on any dips.  IF Hexaware shares dipped sharply on Friday after the “Outcome of Board Meeting” announcement release is posted, and some early buyers take profits, he recommend using that opportunity to buy more. 

  • UPDATE: Hexaware ‘s Board Meeting Outcome out as expected. The company took on the Delisting Proposal, appointed ICICI as Merchant Banker, and authorized personnel to do the back check on insider activity. And the shares did not dip.

link to Travis’ insights:
Hexaware:  Dips and Doodles in the Delisting Proposal Process
Hexaware Delisting Proposal – This Could Go Higher


LIXIL VIVA (3564 JP) (Mkt Cap: $1bn; Liquidity: $11mn)

Arcland Sakamoto (9842 JP), LIXIL VIVA, and Lixil Group (5938 JP) announced a multi-leg agreement where Arcland Sakamoto would launch a Tender Offer to take over enough shares in LIXIL Viva so that after the Tender Offer, Arcland and LIXIL Group would own enough to squeeze out minorities. Then Arcland will inject some capital into LIXIL Viva, enabling it to buy back shares from LIXIL Group so that Arcland will be the sole owner. There are a couple of specific reasons for doing it this way which only support an improved price for minorities, so the structure is not terribly objectionable, but the minimum threshold for tender success being only 12% out of the ~45% minority ownership is a part of Japanese tender offers on companies with large incumbent stake holdings which should be fixed at some point.

  • This deal was not un-flagged. There were media suggestions last year, and more media reports earlier this year. The run-up in price is partly due to that expectation. As a result, the agreed price between the beauty contest buyer and the main owner has almost no premium to last trade. This will upset some people, but the company is at the expensive end of its peers. It is not by any means an egregiously unfair price.
  • The transaction structure is a bit more complex than normal, but it accomplishes the same thing – a dirt-simple Tender Offer as far as minorities are concerned.  Only 12.12% of the 45.5% float is required to get this deal over the line. That should be doable, but one could imagine some fearless souls trying to push the shares up slightly above terms to try to trigger a bump. 
  • Travis expects there are enough local funds, financial institutions, and retail investors to be able to get this across the line at ¥2,600/share. He would get long just below terms. 

(link to Travis’ insight: Lixil Viva (3564 JP) Takeout Tender Offer)


After gaining ~40% in the three trading days to close last week, Jinmao Hotel & Jinmao (China) Hotel Investments and Management Limited (6139 HK) (Jinmao Hotel) was suspended 8 June “pursuant to the Code on Takeovers and Mergers“. Jinmao Hotel is 66.77%-held by China Jinmao Holdings (817 HK), which in turn is ultimately controlled by SOE Sinochem Group. Back on the 23 January, Jinmao Hotel announced it had been informed by Sinochem that it was planning a strategic restructuring. Details of the restructuring plan and its implementation were subject to relevant approval and regulatory procedures. With an Offer potentially forthcoming, in Jinmao Hotels (6139 HK) In The Cross Hairs, I provided a cursory overview of Jinmao Hotel, how an Offer may unfold, and how this may affect China Jinmao.
UPDATE: An Offer by way of a Scheme was announced Friday (12 June), at an offer price of $4.80/share, a 30.4% premium to last close. The Offer price is final. Irrevocables total 21.04%. The Offeror and concert parties hold 67.81%, therefore the blocking stake at the Unitholders Meeting will be 3.219% of shares out. That’s probably enough to get this deal up.


Niit Technologies (NITEC IN) announced a 3.13% Buyback Offer at a premium (INR 1725/share) had been approved in December 2019. Shares popped and traded in larger volume. This was a good signal from the management and promoter. Foreigners ended up increasing their stake in the first quarter as retail and some local mutual funds sold the pop. Finally in mid-May, SEBI arranged for some temporary relaxation of regulations, which meant NIIT Technologies could proceed more quickly. It launched the buyback three weeks ago with an Offer Period starting 29 May and closing on 11 June. Paperwork was due 13 June. But as pointed out by Travis in NIIT Technologies Tender Buyback – Offer If You Can, this only worked if you owned the shares as of Record Date 12 March 2020. 


In Facebook Enters into a Licensing Deal with Saregama to Further Expand Its Foothold in India, Shifara Samsudeen discussed Facebook Inc A (FB US) entering into a global licensing deal with India’s Saregama India (SARE IN). The two companies have not disclosed any details regarding the deal such as the pricing or terms of the deal. In mid-March, Spotify Technology SA (SPOT US)  entered into a licensing deal with Saregama where about 100k songs from Saregama’s catalog will be added to Spotify’s streaming platform.


With Hanwha Group’s initial investment in Nikola Corp (NKLA US) up 16x since November 2018, Douglas Kim discusses in A Surge in Value of Nikola Corp – ‘Tesla’ of Hydrogen Trucks: A Merger of Hanwha Corp & H-Solutions?  the possibility of a merger of H-Solution and Hanwha Corporation (000880 KS), which could reduce the long-awaited risks about the transfer of the ownership of the Hanwha Group from the Chairman to his sons and also improve the overall transparency of the Hanwha Group.


Sanghyun Park discusses Mirae Asset Daewoo (006800 KS)‘s latest buyback in Mirae Asset Daewoo Buyback & 2PB Dividend Play. It plans to buy back a total of 16mn common shares from June 8 to September 7. It is 1.97% of the total shares out and 2.43% of the ordinary shares. This buyback brings up the total treasury shares from 17.16% to 19.59%. 

M&A – US

China Distance Education Holdings Ltd (ADR) (DL US) (Mkt Cap: $0.3bn; Liquidity: $1mn)

The top shareholders of China Distance, Mr.Zhengdong Zhu and his spouse Ms. Baohong Yin, made a “Preliminary Non-Binding Proposal” to acquire all the outstanding shares of the company.  The Offer Price will be US$9.08 in cash per ADS (US$2.27 per ordinary share) and this translates to an implied market cap of US$307mn for the company. This Offer is non-binding. This deal could possibly be executed in the form of a statutory merger which will require Target Shareholder approval – typically two-thirds of votes cast in the shareholder meeting.

  • The Acquirers are co-founders of the company and they currently hold around 39.17% of total shares which also equate to 39.17% of voting power.  The other directors and executive officers held another 3.56% (as of Jan 2020) which means the total insider holding (together with the Acquirers) could be around 42.73% The second largest shareholder, YM Investments controls another 19.1%. This is the controlling shareholder of Orchid Asia Group. It is possible YM Investments is in negotiations with the Acquirers. 
  • Janaghan Jeyakumar considers this Offer to be light. The Offer comes 66.1% below the all-time high of US$26.78.  The Offer Price translates to a premium of 25.8% to the undisturbed price and is 24.4%, 26.3%, and 23.9% higher than the 1-month, 3-month, and 1-year VWAPs respectively. Considering how far the stock has dropped from its all-time high, these numbers seem slightly weak.  The Offer translates to EV/Revenue(LTM) and EV/EBITDA(LTM) multiples of 1.25x and 5.70x, respectively, which are both far below the peer medians of 3.52x and 18.83x respectively. 
  • Janaghan recommends waiting for a binding proposal to be announced. If this does not result in a Binding Offer and if the stock reverts back to its pre-announcement level of US$7.22, this would be a 12.1% drop from the current trading price. However, the drop could be much larger than this – the stock almost plunged close to US$6.00 in the first week of April 2020 and momentarily traded below US$6.15 as recent as 14th May 2020. A fall to US$6.00 would translate to a loss to 26.9%.  Until a Binding Offer is announced, expect the stock to trade with a lot of noise.

M&A – EUROPE

In Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?, Patryk Basiewicz reckons the way Prosus let Just Eat go during the bidding war seemed like a strategic retreat. This move led to speculation that Prosus (PRX NA) was pulling back so it could make a bolder move for the combined Just Eat Takeaway (JET LN) at a later stage. Now with a bid on Grubhub Inc (GRUB US) on the tape, if Prosus wants JET it has to make its move very soon. New JET can be bought by a determined bidder. The founder of Takeaway.com NV (TKWY NA) is diluted and legal blocks to a takeover have been removed. Patryk shows that Prosus’ current funding capacity, at conservative levels,  just matches its needs to buy and fix JET. 

STUBS

In Heineken / Heineken Holdings NAV Discount, Jesus recommends going long Heineken Holding NV (HEIO NA), short Heineken NV (HEIA NA). He sees the current discount to NAV at 9.2%, but the five-year average is 7.2% 

PAIRS

Japan’s convenience stores outperformed the Topix index by over 10 percentage points during the COVID-19 led equity sell off in March 2020. Over the next two and a half months, the Topix index outperformed convenience stores as the overall market recovered from March 2020 low level. Oshadhi Kumarasiri analysed the share price movements of Seven & I, Lawson and FamilyMart Co Ltd (8028 JP) and found out that Seven & I and Lawson had the highest correlation for daily share price performance.
  • 84% of Lawson’s convenience stores are in Japan while 91% of its overseas convenience stores are in China. Oshadhi expects better economic conditions in Japan and China will favour Lawson, driving a 13% decline in the Seven & I/Lawson EPS ratio. Oshadhi targets a Seven & I/Lawson price ratio is 0.58, and a Long Short pair trade between Lawson and Seven & I could yield about 11% in market-neutral returns.

(link to Oshadhi’s insight: Japan Convenience Store Pair Trade: Long Lawson/Short Seven & I)


Kasikornbank PCL (KBANK TB) / Bangkok Bank Public (BBL TB)

On 27 May, the Thai NVDR Company announced that the Bank of Thailand had extended the approval for the Thai NVDR Co. to hold BBL shares up to 35% of the paid-up capital. The new limit extension runs to 23 December 2020. This was surprising since the NVDR limit for KBANK had been reduced from 35% to 25% of paid up capital with effect from 23 January, and the holding on BBL’s NVDRs on 27 May was 23.89%.

  • MSCI decided not to add BBL to the Standard indices in the May SAIR since the 35% NVDR issuance limit extension was due to expire in June and MSCI wanted to avoid potential reverse turnover in case the limit extension was not granted. There is a possibility that BBL is added to the MSCI indices in the August QIR, though there is still the overhang of the limit extension expiring in December.
  • KBANK has outperformed BBL by 14% on a total return basis since Brian’s last insight, and he recommends taking profit at these levels.

(link to Brian Freitas‘s insight: BBL / KBANK : BBL NVDR Issuance Limit Extended to December, Possible MSCI Inclusion & Trade Unwind)

INDEX REBALS

FTSE Russell has announced the results of the June index review for the FTSE TWSE Taiwan 50 Index. The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As Brian expected (in FTSE TWSE Taiwan 50 Index Review – Expensive Inclusion, Cheap Exclusion), there is one addition Wiwynn Corp (6669 TT) and one deletion Pou Chen (9904 TT) in the review. Brian estimates 0.24 days of ADV to buy on Wiwynn and 0.88 days of ADV to sell on Pou Chen. Short interest has been rising on both stocks, though short interest is 4% of free float on Wiwynn. 


FTSE Russell also announced the preliminary list of inclusions and exclusions to the Russell 3000 Index (RAY INDEX). The changes are effective 29 June and passive funds will look to trade at or by the close on 26 June. There are 200 additions and 145 deletions in this review. The rebalance leads to one of the highest volume days in the US markets with over US$9 trillion benchmarked to the FTSE Russell US indices. While stocks such as Zoom Video Communications Inc (ZM US)Slack Technologies Inc (WORK US)Datadog Inc (DDOG US)Pinterest Inc (PINS US) and CloudFlare (NET US) have been added to the index in this reconstitution, the real trade, as discussed by Brian in Russell 3000 Index Review – The BIG One, lies elsewhere.


Provided Wheelock (20 HK)‘s privatisation is successful, as discussed by Brian in Wheelock Privatisation – Impact On Wharf Holdings (4 HK) & Wharf REIC (1997 HK), there will be small passive buying from the FTSE and MSCI trackers on Wharf Real Estate Investment (1997 HK) due to an increase in the free float while there will be net selling on Wharf Holdings (4 HK) across the MSCI Hong Kong/ MSCI China trackers. WREIC could see around 19m shares of buying at the Hong Kong Hang Seng Index (HSI INDEX) September rebalance due to an increase in the free float.


Euronext announced the results of the quarterly review for the Cotation Assistée en Continu (CAC) family of indices. The constituent changes will be effective from 22 June and the rebalancing trades will need to be done at the close on 19 June. For the benchmark CAC 40 (CAC INDEX)Teleperformance (RCF FP) has been included and Sodexo SA (SW FP) has been excluded. InCAC40 Index Review – Teleperformance In, Sodexo Out, Brian estimates over 5 days of ADV to buy on Teleperformance and over 2 days of ADV to sell on Sodexo. Fundamentally, Teleperformance trades in line with its peers while Sodexo trades cheaper than its peer group. 


In Brian’s insight ASX200 Index Review – A Handful of Changes, S&P Dow Jones Indices announced changes to the S&P/ASX 200 (AS51 INDEX). The changes are effective at the open of trading on 22 June and passive funds will need to complete their rebalancing activity at or by the close on 19 June. There are 5 additions in the review: Centuria Industrial Reit (CIP AU)Megaport Ltd (MP1 AU), Mesoblast Ltd (MSB AU)Oil Basins Ltd (OBL AU) and Perseus Mining (PRU AU). There are 6 deletions in the review: Estia Health (EHE AU)Hub24 Ltd (HUB AU)Jumbo Interactive (JIN AU)Mayne Pharma (MYX AU)Pilbara Minerals (PLS AU) and Pinnacle Investment Management Group.

TAKEOVER RULES

Quiddity M&A: Australia Foreign Investment Reforms

On the 5 June 2020, the Treasury of the Australian Government released a 34-page document titled Foreign investment reforms, outlining the “most comprehensive” reform to Australian foreign investment review framework since the Foreign Acquisition and Takeovers Act (FATA) was introduced in 1975. The new powers afforded the government – a draft legislation for consultation will be released next month –  will primarily address new national security test, streamlining the approval processes for certain privately controlled institutional investment funds that hold purely passive foreign government funds; and Stronger penalties and enforcement powers.

  •  What can and cannot pass muster under the government’s purview is long overdue. But I doubt the new foreign investment framework will provide granularity for transactions such as CK Infrastructure Holdings (1038 HK) / APA Group (APA AU) – and whether it has government backing. Still, ensuring greater compliance with conditions placed on foreign investors is not a bad thing.
  • Most investors undertake investments in non-sensitive areas, therefore the introduction of the new national security test should not affect how they interact with the foreign investment review framework. If an investment was previously exempt from screening, it will remain exempt – unless the investment raises national security concerns and falls below existing monetary thresholds.  
  • Full details will be known next month – and there is still work to be done as to what exactly constitutes a sensitive national security business – but it largely appears business as usual under the guise of a better organised foreign investment framework. I don’t subscribe to the notion this reform will materially raise transaction costs, eliminating marginal transactions.  The pushback is that the existing foreign investment system has a tendency to be arbitrary and opaque; and that the new reforms may only serve to add more opacity. 

(link to my insight: Quiddity M&A: Australia Foreign Investment Reforms)

OTHER M&A & EVENT UPDATES

CCASS

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.   

Name

%chg

Into

Out of

66.42%
CTW
Lamtex
17.46%
Guotai
HSBC
F8 Enterprises (8347 HK)
11.39%
Pinestone
Bluemont
Source: HKEx

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

Name

% chg

Into

Out of

36.45%
HSBC
Outside CCASS
TBK (1960 HK)
15.00%
Lego
Outside CCASS
Source: HKEx

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