Daily BriefsEvent-Driven

Event-Driven: Soho China Ltd, Washington H. Soul Pattinson and Co. Ltd, Shinsei Bank, Oil Search Ltd, Woori Financial Group and more

In today’s briefing:

  • SOHO China (410 HK): At Least There Is Dialogue
  • Milton – WHSP: Endgame
  • Flash Webinar | SBI’s Hostile Tender to Control Shinsei Bank
  • Shinsei Bank – Valuations
  • Marvelous Milton Moves to Merger and Flows, Lots of Flows
  • Oil Search/Santos: PNG a Potential Party Pooper
  • Privatization of Woori Financial by the End of 2021

SOHO China (410 HK): At Least There Is Dialogue

By David Blennerhassett

The speculation and conjecture continues in the takeover of Soho China Ltd (410 HK)‘s tier-1 property assets.

The last piece of positive news occurred on the 3 August 2021, when Blackstone received a notice from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law (AML) had been formally accepted by SAMR for review. 

The announcement, however, stopped short of stating the review was simplified, and simply said the application has been formally accepted, and “notwithstanding such formal acceptance, the Offeror and the Company may still be requested to provide further information and materials for the regulators’ review“.

In 2020, simple cases took 14 days on average to process. By the middle of last month, you knew you were in for the long haul, and the 30-day Phase 1 period expired on the 1 September.

I’m not aware an official announcement occurs when the review spills into Phase 2 (ostensibly another 90 calendar days); but Blackstone/SOHO were expected to clarify proceedings in its monthly update announcement.

On the 6 September, SOHO announced its SAMR application was still ongoing, and that…

The Offeror has received further requests to provide additional information for the regulators’ review. It is uncertain when the review process will be completed.

The Composite Document is now expected to be dispatched on or before the 31 December 2021. 

Without either party expounding on the situation, the application now moves into Phase II.

China’s AML provides the following periods for review:
  • Phase I. The initial review period is for 30 calendar days. Under the simplified procedure, SAMR generally grants clearance in Phase I.
  • Phase II. If necessary, the Phase I period will be followed by an additional 90-calendar day review period
  • Phase III review period. The review period may then be extended for a further 60 calendar days if need be.

Additional information? One media source reckoned this was in regards to Blackstone providing more details  – such as GFA – on its property interests.

This is doubtful – SAMR would likely know Blackstone’s property exposure, right down to the last wastepaper basket.

More likely the “additional info” concerns the seller, although pertaining to what, it’s unclear. Cue all the rumours and the ensuing backlash from Pan Shiyi son’s comments last year (see here for more detail). 

The takeaways from all of this? At the very least, there is a modicum of dialogue between the parties and the regulator. Often the clock runs down on the review process with little to no information made public, before a deal is blocked/prohibited.

Perhaps there are alternative means to lock-up the proceeds to Pan in escrow – sort of like an elevated withholding tax applied in the Grand Baoxin Auto (1293 HK) case (see further details below) – so as to progress the deal.

The negatives, apart from the extended review process over property assets, which historically have not triggered similar treatment – SOHO sold Sky SOHO to Gaw Capital Partners in 2018 for RMB5bn, plus entered into an agreement to sell car parking spaces for RMB761mn, none of which attracted security concerns – is that the clock does indeed run down to the long-stop date (31 December 2021), and both parties agree to terminate negotiations.

But I’d be surprised to see Blackstone walk. The underlying assets on a stand-alone basis are worth considerably more, potentially >HK$8/share by some asset valuation models. 

The Trade? I still like SOHO here – a high probability of a break is already priced in. I just don’t see Beijing setting a precedent and outright blocking the deal on anti-trust grounds.

Milton – WHSP: Endgame

By Brian Freitas

With the Milton Corp Ltd (MLT AU) / Washington H. Soul Pattinson and Co. Ltd (SOL AU) Exchange Ratio all squared away and the Target Material Adverse Clause (MAC) unlikely to be triggered, the focus shifts to the Scheme Meeting on Monday where the shareholders are likely to vote in favour of the Scheme.

Next up will be the passive flow where MSCI has pre-announced an increase in Washington H. Soul Pattinson and Co. Ltd (SOL AU)‘s shares in issue and free float at the close of trading on 21 September.

We expect FTSE to make an announcement post the Scheme Meeting and implement changes at the close on 21/22 September.

S&P is the wild-card. Index inclusion could take place at the close on 17 September, 21/22 September or at the December rebalance (17 December). It is a toss-up between liquidity and representativeness – S&P looks at all M&A transactions on a case by case basis, so any of the possibilities could come about.

There will be a big impact on Washington H. Soul Pattinson and Co. Ltd (SOL AU) at the time of the MSCI implementation. That will get bigger if FTSE implements at the close on 21 September as well. The impact of a 22 September FTSE implementation will be much smaller since the new Washington H. Soul Pattinson and Co. Ltd (SOL AU) will start trading on 22 September on a deferred settlement basis.

Flash Webinar | SBI’s Hostile Tender to Control Shinsei Bank

By Smartkarma Research

In today’s flash webinar, Travis Lundy will discuss the hostile tender offer for Shinsei Bank (8303 JP) from SBI Holdings (8473 JP). Travis will go over the background and opportunities:

  • SBI has been building positions in regional banks with an apparent goal of creating a Super-Regional to compete with the big boys.
  • After creeping up to near 10% of Shinsei by end 2020 (having proposed an alliance the year before), and then from 10% to 20% in Q1 2021, SBI tried to oust 4 Shinsei directors in June. What started with guarded talks have become no talks, and SBI has launched a bid to own up to 48% of Shinsei.
  • Shinsei has options, but not great ones.
  • And this would change everything for shareholders.

The webinar will be hosted on Friday, 10/Sep/2021, 3.00pm SGT/HKT. It will be moderated by Lee Mitchell.

Shinsei Bank – Valuations

By Mio Kato

As SBI goes hostile on Shinsei Bank, Travis has covered the details on the tender here. In order to examine the potential resting place of Shinsei Bank shares after SBI Holdings’ tender concludes, we provide below a valuation comparison vs. a variety of peers.

Marvelous Milton Moves to Merger and Flows, Lots of Flows

By Travis Lundy

Today is the last day of trading of Milton Corp Ltd (MLT AU) and Washington H. Soul Pattinson and Co. Ltd (SOL AU) before the Scheme Meeting on Monday the 13th of September. 

After starting coverage on the situation on 22 June, there have been a number of follow-ups with deeper explanation, NAV tracking, excess volume tracking, etc. Using MLT as a proxy for WHSP in the chart below, one can see that things have gone relatively swimmingly so far. 

History of Insights on the Situation

22 Jun 21Milton Merger Is A Most Marvelous Arb
24 Jun 21Milton-WHSP Merger Index Implications and the Marvelous Arb
21 Jul 21Milton’s Marvelous Arb Meanders Along… Marvelously
5 Aug 21The STILL MARVELOUS Milton Arb Confirms Its Schedule – Much Marvelousness to Come
12 Aug 21The Magnality of the Marvelous Milton Merger Makes a Moribund March To Metaphysis (It’s Mirific!)
25 Aug 21 Marvelous Milton Making Its Move – New 30yr Highs On Both Stocks 
3 Sep 21 Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part 

On the 7th of September, MSCI pre-announced its treatment of the merger in its indices, and that caused a one-day jump in performance and volume, changing the pre-positioning situation. 

As I said in the last insight on 3 September, the ratio is done, and now for the “hard part.”

Things are moving strongly into “the hard part” and investors should keep a close watch on the KPIs which should help tell you when to take profits. 

Updates are below the fold.

Oil Search/Santos: PNG a Potential Party Pooper

By David Blennerhassett

After submitting a confidential, non-binding, indicative all-scrip merger proposal to Oil Search Ltd (OSH AU)‘s board on the 25 June, Santos Ltd (STO AU) bumped the scrip consideration on the 2 August by 6.5% to 0.6275 new Santos shares for every OSH share.  This would give OSH’s shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  – if using Santos price on the 24 June – is a 19.7% premium to the undisturbed price.  The OSH board recommended the Offer in the absence of superior proposal, and due diligence was afforded.

This morning, Santos and OSH entered into a definitive agreement to merge the two companies in an all-scrip transaction. The scrip ratio remains unchanged. 

The OSH board has unanimously recommended shareholders vote in favour of the merger in the absence of a superior proposal.

The merger would create a major regional player with a pro-forma market cap of ~A$21bn. Santos expects the merger to unlock pre-tax synergies of US$90-115mn per annum.

The merger is subject to OSH shareholder approval, regulatory approvals, and Papua New Guinea (PNG) court approval.

It’s that last approval that could prove to be a sticking point.  

Santos has a 13.5% interest in PNG LNG, behind Exxon Mobil (XOM US)‘s 33.2% and OSH’s 29%. OSH also holds a 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.

In a recently completed royal commission involving complex UBS loans, the bank maintained the fees it charged the PNG government to borrow $1.2bn in 2014 to purchase a 10.1% stake in OSH were appropriate. The PNG government was compelled to sell that stake in 2017 when OSH’s shares fell and it did not have the necessary funds to put up extra capital for the loan. Contrary to PNG’s former PM comments that it made A$39mn on the deal, the commission heard PNG lost US$432mn. 

In Santos/Oil Search: Getting Facts Straight, I wondered if this less-than-satisfactory situation might resurface in any government approval process for a Santos/OSH merger.

In various media articles, Deputy Prime Minister Samuel Basil said this week:

If the merger will result in the weakening of any Papua New Guinean shareholders or shareholder interests, reduction in market liquidity, potential for job losses, potential delisting from PNGX, and loss of local ownership of the company assets to a foreign interest, it is not in PNG’s national interest.

Such a statement raises the stakes after PNG’s PM James Marapoe’s earlier comments back in August that:

Oil Search Limited is a prominent PNG company whose activities comprise a significant percentage of PNG’s GDP and provides the livelihood to thousands of Papua New Guineans both directly and indirectly. Any proposed merger must satisfy the national interest test.

OSH (incorporated in PNG) is listed in both Australia and PNG, however, Santos is only listed in Australia. OSH has around 5,000 PNG shareholders according to Basil.

Should the merger complete, and OSH is delisted – taking with it almost one-third of PNG’s market cap – domestic shareholders will have no option but to acquire and trade their shares in Australia, an activity compounded by foreign exchange restrictions. Unless Santos plans to list the merged entity in PNG. 

Basil continues:

The Board of Oil Search and Santos must explicitly inform Papua New Guinea their plans for PNG capital market development in the context of this merger. Our concern derives from the possibility that PNG will incur significant detriment in the oil and gas sector to a foreign company. It is equal to losing our sovereignty in the oil and gas industry where PNG will have no control over it.

Put another way: should PNG investment funds re-domicile in Australia, PNG local investors will be cut off from investing (via Santos and OSH) in PNG’s large PNG projects.

More below the fold.

Privatization of Woori Financial by the End of 2021

By Douglas Kim

Woori Financial Group (316140 KS) announced that it plans a full privatization of the company by the end of 2021. Currently, Woori Financial’s largest shareholder is Korea Deposit Insurance Corporation (KDIC) which has a 15.1% in the company. Korean government backed KDIC plans to sell at least 10% stake in Woori Financial by the end of 2021.

One of the positives of Woori Financial after the privatization is completed is that the new controlling shareholder may try to improve various corporate governance policies in order to boost the total shareholder returns including paying higher dividends and completing higher share buyback with cancellations. 

With the announcement of the privatization of Woori Financial Holdings by the end of 2021, an attractive long-short trading idea in the Korean financial sector would be to go long Woori Financial Group (316140 KS) and go short KakaoBank (323410 KS).

Before it’s here, it’s on Smartkarma