Daily BriefsEvent-Driven

Event-Driven: Ant Financial, Softbank Group, Yukiguni Maitake, Tiffany & Co, Allied Properties (H.K.), Lvmh Moet Hennessy Louis Vuitton, Kirindo Holdings, Big Hit Entertainment, International Consolidated Airlines Group, Hinokiya Holdings and more

By September 11, 2020 No Comments

In today’s briefing:

  • Ant Group – Index Inclusion Possibilities & Timeline
  • Softbank Group – Funding Secured by Masayoshi Musk?
  • The TSE’s Listing Criteria Revisions – Part I
  • LVMH/Tiffany: In The Rough. Acts of God and Legal Restraint
  • Allied Props (56 HK). Stalled At The Finish
  • LVMH-Tiffany: Oh Bernie, Not like This.
  • Kirindo (3194) – Another Cheap Bain MBO With Weak Adherence to Fair M&A Guidelines
  • Big Hit Entertainment IPO – Dynamite and Index Fast Entry Possibilities
  • IAG’s Jumbo Rights Issue Takes Off
  • Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation

Ant Group – Index Inclusion Possibilities & Timeline

By Brian Freitas

Ant Financial (1051260D CH) is looking to complete a dual listing on the Shanghai Stock Exchange’s STAR Market and the HKEX (388 HK). Media reports have indicated that the company is looking to raise US$30bn, with US$20bn being raised in China on the STAR Market and US$10bn in Hong Kong. In a filing, Ant said that it plans to sell no less than 10% of its enlarged share capital.

FTSE has started a market consultation to include the STAR Market to the list of eligible market segments within the non Stock Connect indices, and to introduce Fast Entry rules for China A-shares listed on the STAR Market where there are no pricing limits for the first 5 trading days.

In this Insight, we take a look at the timeline for inclusion of the A-shares and the H-shares in various indices and what it would take for the HK listed line to be included in the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX)

Softbank Group – Funding Secured by Masayoshi Musk?

By Mio Kato

The Japanese language Nikkei had an article out yesterday after the close discussing the possibility of a Softbank MBO. Of course, with Softbank you really never know, but to us this smells like an attempt to drive a short squeeze. We discuss why below.

The TSE’s Listing Criteria Revisions – Part I

By Travis Lundy

In late July, the Tokyo Stock Exchange issued Revisions to Listing Rules to Enhance Functions for Raising Funds through the Capital Market. 

The Revisions To The Rules

Document Language
Main Document Source Pages English, Japanese
Presentation English , Japanese
Details English , Japanese
Disclosure related to Business Matters & Growth Potential Preparations (Provisional Version) – MOTHERS-related Japanese

The presentation is the most useful of the documents. 

The presentation starts with something ubiquitously covid-19-related. This covid aspect is, of course, hogwash. 

As the Covid-19 outbreak severely impacts business activities and corporate performance, Tokyo Stock Exchange, Inc. (TSE) recognizes the urgent need to enhance capital market’s functions for companies raising funds in the market, thereby facilitating a swift recovery in the Japanese economy and sustained growth while strengthening the soundness of the market.

This announcement was made with an eye towards the planned equity market restructuring (as previously discussed in insights linked below) in order to re-define listing criteria for each of the three major future sections (A “blue chip” section, a “growth” section, and an “everyone else” section. This was principally RE-announced (because the content is the same as the 21 February announcement) to announce the beginning of the public comment period.

The major revisions are: 

  1. For the First Section (the “blue chip” section): raise minimum market cap, float market cap hurdle, net assets, and profitability hurdle, but lower the minimum number of shareholders, and, relax the criteria for large companies to not get demoted to TSE2 or delisted if the company goes to negative net worth (avoid automatic demotion of Sharp and Toshiba). [note that there are other enhancements in the cash market restructuring designed to garner further approval from international/domestic institutional investors with regard to improvements in governance, etc, for future “blue chip” section companies]
  2. For MOTHERS (the “growth” section): loosen listing criteria (accept even smaller companies with even fewer shareholders. “Improve shareholder confidence through enriching the disclosure system for business plans.”
  3. For TSE2/JASDAQ Standard (the “Everybody Else” section):  standardize listing criteria so that all of the relevant sections have the same criteria (because in the cash market restructuring they will become one), relax TSE criteria to be more like JASDAQ criteria (lower minimum float, lower minimum market cap, lower minimum #shareholders, lower minimum business performance before listing, etc, and then a requirement that JASDAQ-listed stocks adopt the corporate governance code. 

None of these changes are terribly ground-shaking at first glance. And the information was almost completely unchanged from the Overview of the Market Structure Review Outline of the New Market Segments published in February this year. 

  • It will make it possible to have less-liquid stocks all across the spectrum, but all stocks will start to comply with the corporate governance and reporting requirements of the main board.
  • Eventually, with the launch of the restructured market sections, there will be enhanced corporate governance, and there may be a revamped stock index to replace TOPIX, or TOPIX may be re-jigged.
  • Either way I expect that it will not be hugely consequential for years to come. I expect that a new index to replace the equivalent of TOPIX Small will be implemented to allow the transfer of capital into smallcaps – i.e. something akin to a Russell 2000 – which major domestic passive managers will be urged to use with a small allocation to it as they rotate to something like TOPIX Prime which only has large caps.
  • Foreign investors who currently use a large cap universe such as MSCI will not see any good reason to switch to the new TOPIX PRIME Index.
  • Done right, there will be revisions to the index futures, dividend futures, index options, etc products. 
  • Done REALLY right, there will be structured buybacks by companies leaving the indices in phased stages.

But this does create some near-term “issues” for TOPIX and those companies which would try to get in. More discussion below.

LVMH/Tiffany: In The Rough. Acts of God and Legal Restraint

By David Blennerhassett

Bernard Arnault, LVMH Moet Hennessy Louis Vuitton SE-UNSP ADR (LVMUY US)‘s Chairman/CEO, must rue the day his company pitched an Offer for Tiffany & Co (TIF US), a little under two months before COVID-19 first hit the news. 

LVMH and Tiffany reached a definite agreement on the 25 November 2019, wherein LVMH would acquire Tiffany for $135/share (7.7% premium to last close) in a US$16.2bn transaction. Tiffany shareholders approved the merger on the 4 February.

The two parties had initially set August 24 as the first deadline for completing the transaction,  with the possibility of extending the deadline to November 24 at the latest (see page 62 of the Merger Agreement lodged with the SEC) – one year from the initial agreement. This “Outside Date” was extended to the 24 November after the merger failed to close on the 24 August.

In a very brief press release yesterday, LVMH said it will not be able to complete the Tiffany acquisition, in compliance with a directive from the French European and Foreign Affairs Minister to defer the merger. LVMH also said Tiffany had undergone a Material Adverse Affect (MAE).

In a strongly-worded, detailed response, Tiffany said it has no choice but to file a lawsuit to enforce the Merger.

LVMH seeking non-compliance with its contractual obligation on account of a MAE, takes a leaf out of EQT’s gameplay for Metlifecare Ltd (MET NZ). And as in MET’s case (Metlifecare/EQT: The Retirement Solution), LVMH may find itself having to reconsider a new Offer.

More comment below the fold.

Allied Props (56 HK). Stalled At The Finish

By David Blennerhassett

Back on the 20 April, Allied Group Limited (373 HK) (AGL) made an Offer for 75%-held Allied Properties Hk (56 HK) (APH), by way of a Scheme, at $1.92/share (cash), a 34.2% premium to last close. The Offer consideration was Final, and would be split between a $0.42/share Scheme Consideration and a $1.50 Scheme Dividend.  The Scheme Doc was despatched on the 19 June. The Court Meeting was held on the 15 July and the resolutions to approve the Scheme was approved. Shares continue to trade until the 14 August (inclusive). Cheques were supposed to be despatched on or before the 8 Sept.

Then something went awry. 

The sanctioning of the Scheme has now thrice been delayed by the High Court. At the last session on the 7 September, submissions from APL were made to the Court “whether the Scheme was approved by a majority in a number of APL Shareholders present and voting in person or by proxy at the Court Meeting“.

Huh? The headcount test doesn’t apply to Hong Kong-incorporated companies like APH.

As always, more below the fold.

(Shares are currently suspended, so there is no trade here. Look away now if this is not your thing – it will save you time).

LVMH-Tiffany: Oh Bernie, Not like This.

By Rickin Thakrar

In a somewhat bizarre three-paragraph press release, Bernard Arnault owned Lvmh (MC FP) yesterday attempted to renege on its deal with Tiffany (TIF US) on the basis that it received a letter from the French government asking it to delay its purchase until January 2021 due to strained trade relations with the US. Based on this request by the French government, LVMH stated it would not be able to complete the transaction by November 24th, the outside date in the completion documents.

Tiffany has quickly responded – filing suit in a Delaware court stating that LVMH has been ‘deliberately stalling to avoid completing the deal and saying that LVMH had ‘unclean hands.’ Tiffany has also sought an expedited ruling prior to the November 24th deadline.  

We previously argued that LVMH could accrue walkaway rights through an attempt at a regulatory delay (LVMH/​Tiffany – Could Regulatory Delays Give LVMH a New ‘out’? ) However, rather than accruing these rights, we believe LVMH may have inadvertently undermined this argument by claiming it can not complete due to a request from the French government. We believe LVMH’s best argument to exit this deal was through the accrual of walkaway rights. We believe litigation surrounding these arguments will only expedite the reasoning for the regulatory delay and LVMH may not accrue rights if it is determined that LVMH caused the delay itself, and ahead of the November 24th deadline. Our updated view on the deal is below.

Kirindo (3194) – Another Cheap Bain MBO With Weak Adherence to Fair M&A Guidelines

By Travis Lundy

At 9pm last night, basically a full day after Kyodo carried a news story that Kirindo Holdings (3194 JP) was going to be taken private by Bain, the company dropped a load of documents onto the TDNet exchange document filing system indicating that indeed Bain would conduct a Tender Offer to privatise the company and delist it. 

I imagine bankers spent all day putting the information together. It’s kind of a complicated document and structure – more so than normal. But at heart, it is an MBO where at the end, Bain Capital will have about 60% of the resultant enterprise, and the Teranishi family will have about 40%. Given that the two familymembers who will 

The founder and current chairman Teranishi Tadayuki (91) does not appear to be selling in the end, but his son Teranishi Toyohiko, the president (63) appears to be the solid leader through the next stage. This appears to be a kind of succession planning construct, not unlike the Nichii Gakkan Co (9792 JP) MBO and several others in the past couple of years.

Succession-planning MBOs are all the rage. There are good reasons for this. I expect this trend to only accelerate from here. 

More below the fold. 

Big Hit Entertainment IPO – Dynamite and Index Fast Entry Possibilities

By Brian Freitas

Established in 2005, Big Hit Entertainment (1255064D KS) is an entertainment company that manages the popular seven member boy band BTS. ‘Dynamite‘, BTS’ first full English single has topped the Billboard charts for the second consecutive week.

The IPO will see 7.13m shares being offered at a price range of between KRW 105,000-135,000 per share and will raise between US$629m and US$809m. The offering price will be be decided on 28 September based on institutional investor demand, and shares are expected to start trading in October.

At the upper end of the price band, the shares could just about make it into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX). With retail demand expected to be extremely high, shares could rise substantially on listing day and and if they stay there for the next 15 trading days would make the stock eligible for inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX), though the inclusion would only happen at the regular rebalance on 10 December.

Fast entry inclusion in the MSCI GIMI and FTSE GEIS looks a lot tougher, especially given there will be a lock-up on some of the institutional allocation, though a huge jump in the stock price could just about make the stock eligible.

IAG’s Jumbo Rights Issue Takes Off

By Jesus Rodriguez Aguilar

IAG launched the rights issue announced on 31 July and approved at the AGM on 8 September.

  • EUR 2,741 mn (GBP 2,491 mn), c. 63% of its current market capitalisation.

The funds will be used to strengthen the balance sheet and reduce debt (increasing for solvency). This approach rules out state aid, as has happened with Lufthansa or KLM-AirFrance. Qatar Airways (25.1% holding), has irrevocably undertaken to subscribe for its pro-rata entitlement.

The right issue would be expected to be completed by the end of September.

This rights issue will have a positive impact in the cost of debt for IAG, allowing 2020 losses to be shared among a larger number of shares; and be highly dilutive in 2021.

Upon announcement, the discount to TERP was 35.86%. Discount and dilution (60%) are higher than what was expected by the market.

Vs. peers, IAG is hit by the higher dependency of profits on premium long-haul traffic, especially the North Atlantic corridor, where some analysts estimate that IAG obtains almost half of its profits.

On today’s session, there has been high volatility in the share price with a day high/low of 207.7p/190.7p, and closed at 200.0p vs a prior closing of 200p, with roughly GBP 30 mn traded in London; similar story in Madrid, a day range of EUR 2.1-2.28, with roughly EUR 23 mn traded there.

The theoretical value of the subscription rights is EUR 0.7716 (according to my calculations), therefore IAG should trade around EUR 1.43 ex-rights. The low subscription price should ensure the success of the rights issue, but high volatility is to be expected. The rights will start trading on 14 September and I will update on any further developments.

Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation

By Travis Lundy

The first insight in this event coverage was Yamada Denki Partial TOB For Hinokiya (1413 JP). In that insight I wrote that this was a transaction where the founding family was selling and the company was getting a new sponsor. If the forecasts for this year and the Medium Term Plan are anywhere near accurate, this is a very cheap stock. 

If you can buy it cheap to terms (say 3-4% below terms), because of the structure of the shareholder base and the conditions of the Offer, I expect this will leave one with a very attractive net average breakeven buy price. 

This insight contains the Arb Grids showing breakeven forward price, breakeven PER, breakeven PBR based on market price, pro-ration, and company guidance. 

More detail below. 

Before it’s here, it’s on Smartkarma