Evergrande Real Estate Group (3333 HK) announced an equity offering to raise cash for “refinancing and working capital.” The thing is, US$1.1bn or even US$1.35bn won’t cut it. Evergrande has RMB 820+bn of short-term and long-term interest-bearing debt. This is nothing. But there is a reason for the offering.
End result? They sold only 53% of the minimum they were looking to sell, but that doesn’t change the reason.
It would establish a dangerous precedent if the grumblings of a minority shareholder in Metlifecare Ltd (MET NZ), after the Scheme vote, scuppers the Court sanctioning of the Offer.
The somewhat limited size and Mr Premji’s participation means this event in Wipro Ltd (WPRO IN) must be treated with some delicacy but understanding the process and how it works in all buyback offers gives you a leg up for other buyback offers. It also provides free money for passive funds and long-only funds which own Wipro.
Evergrande confirmed media reports it would launch an equity placement – a so-called top-up placement – for 490 million shares at a price of HK$16.50-17.20, or an 11.1-14.7% discount to the last traded price of $19.34/share. This offer is to raise up to US$1.087bn in funds with US$250mm more from the upsize option if done at the lower end of the range. It ended up placing only 260mm shares at the low end of the range.
The Perhaps Relevant Background Information is that, having bought back shares this summer, Evergrande was very close to its required minimum public float level. It could only buy 20mn shares. If there were more shares outstanding, then Evergrande could buy back those shares too. IF the number of shares outstanding increased by 490 million while the number of shares owned by Mr Hui Ka Yan stayed the same, it would mechanically increase the number of shares that Evergrande could buy back by 490 million shares.
Travis Lundy believes that Evergrande’s issuance of shares, which will increase its equity and increase the Company’s ability to pay down substantially large debt exposures, may also be used to buy back shares in case the Company decides to increase its buybacks under its currently authorised buyback programme.
Travis recommended avoiding the offering. He said “On a near-term or medium-term basis, I do not believe this Equity Issuance of RMB 7bn will measurably improve Evergrande’s ability to reduce debt by RMB 450bn over the next three years. Over the medium-term, raising RMB 7bn of equity at a price at or below where one just bought back equity is not a sign of Good Capital Management. Shares were ultimately placed at a 14.7% discount or HK$16.50/share.” This placement was just over half the expected minimum. Not a good result.
Link announced it had received a conditional, non-binding indicative proposal from a consortium comprising PEP and the Carlyle Group, by way of a Scheme. The indicative cash price is A$5.20/share, a 30% premium to last close. Perpetual, holding 9.65% of shares out, said it would vote for a firm Offer of $5.20/share and above. This is a non-binding proposal and there is no guarantee a firm offer will unfold. But this is a business with which PEP is well acquainted, having orchestrated and developed Link’s initial business 15 years ago.
The Offer includes a reference to a potential scrip alternative. PEXA is at the forefront of a paperless online system to signify property ownership. The company has processed 5.5mn+ transactions to date, and states such as South Australia have mandated its use from August this year. Reportedly, PEXA could be listed next year with a price tag of at least A$2bn. That’s around 1.3x P/B and 20x trailing EBITDA based on financial data in Link’s 2020 annual report.
Link’s operations have been impacted by COVID-19 via the early release program for Australia’s superannuation. The JobKeeper Payment has been extended until 28 March 2021. Super withdrawals may ramp up should this government support be withdrawn or reduced. In addition to the “early release”, Link and super funds have been given an October deadline to transfer low or inactive account balances to the Australian Tax Office under legislation introduced last year. However, this should not have a material impact.
I’d be picking up shares around here. Assuming six months for a deal to unfold and complete, this was trading at a 4.6%/9.9% gross/annualised yield. This is a company the Offerors know well and no doubt, the bulk of the terms attached to the proposal have been fleshed out. The offer pitches Link at a forward PER and EV/EBITDA of 24x and 14.6x, compared to Computershare Ltd (CPU AU)‘s 19.4x and 11.7x.
Travis expects that out of the US$40bn of stock in the float, some $12-15bn is going to change hands then tender those shares into the NTT (Nippon Telegraph & Telephone) (9432 JP) Offer, another $5-10bn will tender their shares, and then another $15+bn of shares will not tender and will instead be squeezed out. This number is surprisingly large and it means some very interesting flows will occur.
This is a VERY big arb. But in fact there are Three Arbs. The regular arb (buy now, tender); Short tender, buy back from MSCI and FTSE downweight days later; Buy The Post Arb leftover and hold to squeezeout. Travis expects the Best Trade of the Risk Arb will be to go short stock into the Tender Offer and buy it in the MSCI and FTSE down-weight coming days later. This one leg (short into Tender, buy back days later) should have the largest gross spread realize-able in the shortest timeframe within this entire event.
The reverse funding trade. If there is $15bn of Docomo in passive portfolios, those passive portfolios will need to reinvest the proceeds in the rest of the index when Docomo gets kicked out. These will be worthwhile trades.
Something on the order of US$18-20bn of stock is owned by financially-minded savers or portfolio investors who will have to reinvest the proceeds of the sale of their Docomo shares. There are 3-4 main destinations: Global large caps; Thematic funds – particularly low vol and high dividend funds, and likely momentum funds; Telecom stocks; Whatever happens to have an IPO or a placement for individuals to buy at the time.
There is roughly US$24bn for active managers and individuals to reallocate, with most of that cash coming into investor pockets in the next six weeks, which means institutional investors will be investing that in the next 6-7 weeks and retail investors may lag slightly. But it is big. And probably means 0.6-0.7% of TOPIX float by end-December and another 0.4-0.5% of TOPIX float to be reinvested in late January. That is a lot of market risk to buy.
At MET’s Scheme Meeting on the 2 October, 90.7% of the votes case voted for the Scheme. 9.14% (or 14.96mn shares) voted against. Of those naysayers, 1,000 shares were held by ResIL Investments Limited, who has, in a detailed letter, flagged what it perceives as breaches in the Takeovers Code, with reference to the valuation methodology in the Scheme Booklet. Those perceived breaches have been submitted to the Takeovers Panel. The High Court hearing was subsequently delayed from the 15 October until the 20 October to enable the Panel to decide on whether to issue a ‘no objection’ statement.
I expect the Scheme to be sanctioned. This would be wholly unacceptable for any dissenting minority shareholders to challenge the validity of the Scheme documents – after the vote was cast and the dissenting shareholder lost. Objections as to any “misleading” information/valuations should be made known ahead of the vote.
ResIL believes MET shareholders may have voted against the MET Scheme, had they been fully informed. However, this was a very fluid transaction. The debate over any upside potential for MET, over and above that discussed in the Scheme Booklet, should have taken place before the vote – or at the vote itself. And 90%+ voted for the Scheme. Moreover, on page 40 of the Scheme Booklet: “voting on the Scheme is a matter for individual shareholders based on their own views as to value and future market conditions …””.
Separately, Omni sees a bargain – taking its stake to 7.46%, from 6.53% previously.
It has been announced that the Delisting Offer for Vedanta Limited “failed in terms of Regulation 19(1) of the Delisting Regulations.” This was due to the time limit being breached with unconfirmed orders still visible in the queue. If the unconfirmed orders had been confirmed by 7pm IST a week ago Friday, things would have been different. As it is, the Offer did not attract 1.341bn shares of confirmed orders and therefore did not achieve 90% support. Even if they’d had an extra day or two, it is not clear that they could have obtained enough shares to offset Life Insurance Corporation of India’s insistence on INR 320/share as being fair (FWIW, Travis is not sure they are wrong, but it is high).
There was considerable kerfuffle in the media about how and why this Delisting Offer failed, and calls for investigations on the unconfirmed bids.
As far as Travis can tell, there are no rules prohibiting another attempt within a year or even a month. When Ricoh India received a delisting proposal in late 2013, it was less than one year from the time the prior Delisting Offer had failed.
Travis said Monday last he would be inclined to buy a big dip vs the peer basket and HZL (if you can find a way to be negatively long). Given that the bulk of the quarterly correlation in the past two years has been VEDL to Peer Basket instead of VEDL-HZL, and the market tends to trade VEDL with an eye on HZL, and HZL is expected to pay down large dividends to VEDL, the VEDL-HZL risk exposure is likely to see some monetization in the next several-12 months. This past week Hindustan Zinc said that the board would meet to consider an interim dividend, with the record date being the 28 October. This would increase the amount of money coming to VEDL shareholders under Vedanta’s Dividend Distribution Policy.
VEDL is cheap vs peers and cheap on a cash-flow basis. Most of the net losses are “accounting losses” as non-cash write-downs. The actual earnings power of ex-HZL Vedanta does not seem nearly as impaired as the Promoters would have you believe.
In this ongoing competitive bidding situation, earlier this week Aware Super made an off-market takeover offer at $6.50/share, including a fully-franked $0.10/share dividend. The Offer was subject to a minimum acceptance condition of 50.1% – flipping from a Scheme previously – and no MACs. Uniti Group Ltd (UWL AU)tabled a $6.67/share Offer three days later, comprising $5.20/cash (including a fully-franked $0.10/share dividend) and 1.07 new Uniti shares. OPC considers Uniti’s revised Offer a superior proposal to Aware’s.
Accompanying its Offer this week, Aware said OPC was an “exceptionally well-run company that has established itself as a leader in the delivery of high-speed fibre-to-the-premises networks’; and that an “investment in OptiComm and the broadband infrastructure sector meets our primary purpose of providing our members with strong, sustainable long-term returns.” It is difficult to see that sentiment being discarded by a counter Offer just 2.6% above its own bid.
Expect Aware to reload – and it has to be above Uniti’s terms to get board support. Uniti may counter again, There’s probably another 5-10% left in this deal. A 2.5% bump over Uniti’s indicative cash/scrip offer is ~$6.84/share. A 5% bump is $7.00/share.
The company has announced it is to buy up to 237.5mm shares at INR 400/share, spending INR 95 billion or ~US$1.3bn. That is 4.16% of shares out. This is a bit smaller than last year’s record US$1.7bn buyback and as always, promoter Mr. Azim Premji and almost all of this related shares are expected to participate. This is the fourth time in five years Wipro has decided to conduct a Buyback Offer. Generically, buyback offers are often ways to allow the promoter to cash out or a way to have the promoter increase his stake by not participating. In rare cases, they offer a decent chance for large public shareholders to participate profitably.
All shareholders will be able to participate up to the 4.16% pro-ration level. There will likely be an opportunity to sell excess shares, but historically investors have only been able to sell ~0.40-0.55% of their excess portion, principally because Mr. Premji offers almost all his shares (and he owns nearly 75%). In this case, I would count on being able to sell about 4.60-4.70% of your position unless the shares go up through the buyback price, which means that As of now, when you buy shares at the current price of say INR 340/share, you are effectively buying them about 1% cheaper on a post-tender breakeven basis plus you get a free call option on about 5% of your holding above INR 400/share. For passive and long-only investors, there is good portfolio construction alpha here.
If you have 1,000,000 shares and you both want to participate AND you want to continue to hold 1,000,0000 shares, if you buy 49,000 shares at INR 340, and later tender 1,049,000 shares, post-buyback you will have ~1,000,000 shares and you will have made a profit of INR 2.94mm (roughly INR 3 per share). The trick is to understand that the 49,000 shares are not part of your equity portfolio but they are part of your “cash.”
Pre-conditions include PRC regulatory approvals – NDRC, MOFCOM, and SAFE. As Shanghai Prime is PRC incorporated, this delisting proposal is by way of a merger by absorption, which involves a Scheme-like vote from disinterested shareholders. There is no tendering acceptance condition attached to this delisting.
Shanghai Prime announced on the 8 September it was replacing Deloittes with PWC, due to an inability to reach a consensus on the audit fee. Deloitte had been the auditor since June 2015.
Priced to complete. The Offer price of $1.60/share is a 68.4% premium to last close, and a 107.8% premium to the close on a completed trading day – evidently some news leakage there. Shares last traded above $1.60 in February 2018. Play the spread here. Assuming payment early March (based on Huadian Fuxin Energy Corp (816 HK)‘s merger by absorption), this is trading (currently HK$1.51/share) at a gross/annualised spread of 5.9%/16.8%. Pretty decent for what is a very clean Offer.
Honda Motor (7267 JP)announced the successful completion of the three tender offers for subsidiary/affiliates Keihin Corp (7251 JP), Showa, and Nissin Kogyo (7230 JP). The results are a little surprising in that all the names managed to get to 92+%. This indicates that some of the passive-tracking TOPIX holders sold into the tender, or their shares were tendered by being borrowed.
MSCI and FTSE selldowns should be Wednesday 21 Oct (to be confirmed). The TOPIX selldown needs to wait until 3 business days after Honda asks each Target Company board to exercise its Demand for Shares Cash-Out, which usually happens no earlier than settlement date (22 Oct). The earliest I see a TOPIX selldown is 27 October at the close. It could be later depending on how much delay Honda puts in before asking for the Demand for Cash Out.
There may be shares to buy cheaply on the close of 21 October and again perhaps on 27 October. Right now, the shares are trading a bit tight, as if people are already short-covering shares borrowed and tendered. Travis does not expect a squeeze on the shares but he would not be surprised to see them trade “too tight” all the way through.
After the sanctioning of APL’s was thrice delayed by the High Court and further updates from the company shed no light on the issues faced, what was inconceivably feared became apparent last Friday night when the Court declined to sanction the Scheme. Here is the High Court judgment. It is ultimately a frustrating read, one in which some of the Offeror’s (Allied (373 HK)) preparatory work was sloppy or poorly prepared. But the great double-take in this ruling is a large portion of the judgment devoted to the headcount test at the Scheme vote.
APH is incorporated in Hong Kong. S674(c) of the Hong Kong Ordinance says “subject to subsection 2(a)…”. Subsection 2(a) replaced the headcount rule with the 10%-of-float veto. The headcount test was abolished in 2012 after a decision was reached on a Companies Bill. It is not clear why Allied’s counsel did not raise this abolishment; but instead, butchered an attempt to show a majority in number had occurred, and as a result of this off-piste analysis, negatively influenced the court on sanctioning the Scheme.
Will Allied Appeal? They should. There are grounds for appeal, especially concerning the irrelevancy of the headcount test which likely influenced the judge’s final opinion. If Allied pass, for whatever reason, shareholders could seek leave to appeal by intervening as interested parties – but I am not a lawyer.
Ricoh still has a LOT of money to spend on a buyback. A lower stock price only means the same amount (JPY 100bn) goes further. But we are still waiting for the new Mid-Term Management Plan. With consensus earnings on Ricoh showing progressively less stability, I expect that the positive news on a buyback is being pushed back further.
The trade to own Ricoh vs a Preferred Basket of Konica Minolta and Canon has worked quite well since late April and early May. Unwind the long Ricoh vs short Konica Minolta and short Canon basket. But not recommending to go short Ricoh here.
YKA commenced trading on the Shenzhen Stock Exchange (ChiNext Board) this past Thursday. Priced at RMB25.70/share, shares closed at RMB56/share on the opening day. And Wilmar’s reaction? Down 6.4% in what appears to be a “sell the news” trade. I now see Wilmar’s discount to NAV at 55%. Wilmar is cheap here.
Since Wilmar’s shares rolled over after the Archer Daniels Midland Co (ADM US)‘s placement and EB issuance in August, the uncertainty as to the timing of YKA’s IPO has been removed; as has the valuation for YKA. CPO prices (accounting for ~20% of Wilmar’s operating profit) are also up and re-testing pre-COVID levels.
Source: CapIQ. CPO, Wilmar, plantation peers and the average in Base 100 from a year ago.
Why did ADM sell? ADM had steadily added to its position over the years, into what has been a profitable investment. The sell-down may be premised on a number of factors, such as shoring up ADM’s balance sheet to fund repurchases; general market uncertainty; and striking while Wilmar was up ahead of YKA’s IPO. ADM still holds 20%, maintaining its board seat. I don’t view the selldown as being Wilmar-specific – more one of profit-taking. The ADM equity placement and EB offering may have snuffed out some flow demand, however, sidelining long onlies until the Q320 earnings are released.
Wilmar’s chairman has also been buying shares ahead of the earnings blackout. Kuok purchased another 2.15mm share at 4.41 on 30-Sep, his largest purchase this year, and the largest since 2018. That suggests a relatively bullish signal ahead of the 3Q20 results, for both Wilmar and YKA.
I see KBC’s discount to NAV at 55% against a one-year average of 58%. The implied stub, however, has fallen to a historic low after KBL announced an intention to list on Shenzhen’s Chi-Next board.
What could KBL command on Chi-Next? KBL is trading at a trailing and forward PER of 15.9x and 10.9x. KBL can probably command upwards of 3x that on Chi-Next looking at the average for electronic materials manufacturers. If placing around 10% of new shares, it is feasible KBL could raise ~HK$10bn. That’s pretty positive. But there is no guarantee a listing will occur, nor where it will trade. KBL can already be accessed via the Shanghai and Shenzhen Southbound Connect programs.
At the stub level, deconsolidated net income in FY19 was lower than the proceeding two years, but still well in excess of the FY15’s, when the implied stub was closest to the current level. Interim results indicate a similar deconsolidated net income in FY20E to that in FY19.
The stub looks to have overshot. From a 10-year view, it has never been lower. It is, however, a weakish stub with KBL accounting for 40%/34% of NAV/GAV – but KBL accounts for 90% of KBC’s market cap. I’d set up the stub here with a view to mean reversion of ~HK$5.40/share (the 12-month average).
Shareholders of PLC approved yesterday with more than 99% of the votes to end the dual structure. Shareholders of NV approved the decision last month with more than 99% of the votes. Unification is expected to become effective on 29 November 2020, with dealings in new Unilever PLC shares (including new Unilever PLC Shares represented by ADS) commencing on 30 November 2020.
Unilever PLC shares will continue to be included in the FTSE 100 (with a higher weighting). Following the listing of Unilever PLC shares on Euronext Amsterdam, the shares will also be included in the AEX Index, as well as the STOXX Europe 600 index (and other relevant pan-European indices). The discount should close as a result of the merger. The trade would be LONG NV / SHORT PLC.
Brian reckons there will be an impact on passive fund activity on NV, but the bigger impact will be on PLC. He estimates the net impact of the unification will see around US$3bn of passive money flow into the stock.
Huya and Douyu announced Huya is offering offered 0.73 American depositary shares of Huya for each ADS of DouYu, implying a ratio of 0.73 Huya ADS per Douyu ADS. Concurrent with the merger will be the assignment of Tencent’s Penguin e-Sports to Douyu for $500m creating a dominant player within China’s game streaming and esports markets.
Tencent Holdings (700 HK), which owns stakes in both companies, will hold ~68% of the merged company. The deal is expected to close in the 1H21 should two-thirds of DouYu’s shares vote in its favour.
Mio maintains that the ratio of 0.73x is slightly disadvantageous to Huya. The payment of $200m in cash to Huya shareholders vs. just $60m in cash to Douyu shareholders evens things slightly but we nevertheless feel that this ratio is overall more favourable for Douyu than it is for Huya.
On EV/EBIT, Huya is trading at 14.6x FY2 consensus to Douyu’s 15.3x despite traditionally trading much higher with a median historical multiple of 24.4x to Douyu’s 14.0x. Even on EV/Sales, Huya trades at 1.74x FY2 consensus while Douyu is being valued at 2.07x. These multiples compare to historical multiples of 2.36x for Huya and 1.71x for Douyu again pointing to Douyu getting a generous ratio.
MSCI Nov20 Index Rebalance Preview. At the current time, Brian sees 6 potential inclusions and 7 potential exclusions across Malaysia, Indonesia, Thailand and the Philippines. There will be a very large impact on most of the potential deletes with over 30 days of ADV to sell, while there are a few potential inclusions with over 10 days of ADV to buy. Brian’s insight: MSCI Nov20 Index Rebalance Preview – ASEAN EM Edition.
Sawada Holdings (8699 JP) saw suitor Upsilon Investments announce its 19th extension of the Tender Offer (that’s three more since the latest insight was written. The new closing is 29 October. The amended Tender Offer filing is here.
The Composite Document for Macau Legend Development (1680 HK) has been delayed until the 21 October, from the 12 October. This was expected but is still a full month earlier than what I would have anticipated.
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.