Daily BriefsIndustrials

Industrials: Sembcorp Marine, Power Construction Jsc and more

In today’s briefing:

  • Last Week in Event SPACE: Sembcorp Marine, AusNet, Shinsei Bank, MMC Corp
  • Power Construction JSC No.1 (PC1 VN/Trading Buy)_Update_Momentum from wind power projects

Last Week in Event SPACE: Sembcorp Marine, AusNet, Shinsei Bank, MMC Corp

By David Blennerhassett

Last Week in Event SPACE …

  • There was still a potential risk of MGO non-completion for Sembcorp Marine (SMM SP), and the results of the Rights Issue seemed to suggest there was still a potential risk of MGO non-completion. But as expected, Temasek announced its MGO for SMM.   
  • It appears APA Group (APA AU) dawdled in its negotiations with Ausnet Services (AST AU), and now must bide its time as Brookfield’s exclusivity period expires. 
  • SBI Holdings (8473 JP) have a quite powerful position here. They have a bid for Shinsei Bank (8303 JP) at ¥2,000/share and nobody else does. The trade skew is, at this moment, to be long.
  • MMC Corp Bhd (MMC MK) continues to trade wide to terms ahead of next week’s shareholder vote due to a combination of timing, PNB (potentially but unlikely) blocking, and the large downside to the undisturbed price. 
  • Plus, other events, CCASS movements (flagging possible Offers and  IPO lock-ups), and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events – or SPACE – in the past week)

M&A – ASIA

Sembcorp Marine (SMM SP)  (Mkt Cap: $1bn; Liquidity: $11mn)

The Sembcorp Rights Offering is complete, and allocations are out as of Friday night.  and it turns out, the MGO Option as discussed in One More Day To Trade Sembcorp Marine Rights, Harvest the Spread, or Buy The MGO Option as rights trading was coming to a close, was the right way to think about it.  Only 84.2% of the Offering was covered by shareholders exercising their rights. Temasek took 42.6%, which means that only 72% of the other shareholders took up their rights. That meant that based on the Offering Circular and the Temasek Undertakings therein, Temasek was going to end up increasing its stake by more than 1%, thereby triggering an MGO Option (it required 98.33% minority takeup to avoid going over the MGO trigger).

  • Travis Lundy would wait for S$0.081 or S$0.08/share to buy. One could put a GTC order in at those prices or even S$0.079/share even now (just remember to take it out once the MGO completes). There could be a couple of very quiet days before settlement. If he were long SMM shares, Travis would probably sell a pop and wait for the overhang to clear a bit (or buy back in the selldown of excess rights overhang.
  • Fundamentally… VERY long term, the stock is probably cheap. But that could be years, and Travis expect if you follow the stock, it will be a better buy later at a higher price. It may even be cheap in a merger with Keppel, but that has to be the subject of a different tweet. Its main problem now is people don’t expect it to make money for a few years.  Tactically, Travis expects some overhang, and expects the presence of the Compliance Offer MGO to act as a place where those long might sell just above, and buy at or around terms, and we stay stuck in a muddle for a little while.  At S$0.081 it might be good to own. Once the Compliance MGO is over, it might be good to own at a higher price. 
  • As expected, on 22 September 2021, Temasek announced its Mandatory General Offer for shares of SMM. Temasek ended up at 46.6% which triggers an offer to remain in compliance with Rule 14.1 of the Takeover Code. For each Offer Share: S$0.08 in cash (the “Offer Price”).  The Offer Price is final and the Offeror will not revise the Offer Price or any other terms of the MGO. There will not be any extension of the Closing Date and Shareholders who do not accept the MGO by the Closing Date will not be able to do so after the Closing Date. Now is the time to put in the GTC bids at S$0.079, S$0.08 and possibly S$0.081/share.

Link to Travis’ insights:
Sembcorp Marine Rights Done – The MGO Option It Is
Sembcorp Marine MGO – The Implied Option Tells You About the Market, And It’s The Wrong Price

Ausnet Services (AST AU) (Mkt Cap: $6.6bn; Liquidity: $7mn)

This past Monday, Victorian electricity operator AusNet announced it would open its books to Brookfield after receiving a revised non-binding Offer of A$2.50/share in cash. It is understood Brookfield made a A$2.35/share Offer on the 30 August, followed by $2.45/share, before all parties settled on $2.50/share. As it turns out, according to APA Group (APA AU), APA had approached AusNet with a non-binding proposal of A$2.32 on the 1 September, and that APA had made AusNet aware last Thursday (16 September) it intended to make a revised proposal. APA sounded out AusNet’s major shareholders prior to its initial approach, and that APA understood Singapore Power was supportive of APA and AusNet engaging in discussions. APA had also discussed the initial proposal directly with State Grid. Not surprisingly, APA is miffed AusNet entered into a period of exclusivity with Brookfield.

  • Under APA’s proposal, AusNet shareholders would receive $1.820 in cash and 0.0878 stapled securities in the Australian Pipeline Trust and APT Investment Trust, with a mix and match facility enabling shareholders to elect more cash or more securities, subject to caps in each. Apart from the higher price, APA’s Offer enables AusNet shareholders to participate in the back-end via APA scrip, plus there is no FIRB conditionality. In addition, APA would only require 4 weeks of due diligence, compared to seven to eight weeks for Brookfield.
  • No word from China’s State Grid. However, I doubt either Singapore Power or State Grid would publicly comment until either proposal passes due diligence and a firm Offer is made. AusNet has nine directors, with Singapore Power having two members, and State Grid one. Given AusNet’s board “unanimously recommend shareholders vote in favour of (Brookfield’s) proposal”, in the absence of a superior offer, suggests both key shareholders are supportive of an Offer. Still, only recently was China’s running a ruler over Aussie assets. At a time of heightened tensions between Australia and China, it is not clear whether China is ready and willing to cash in.
  • FIRB is a non-negligible issue for Brookfield. The Critical Infrastructure Center, which facilitates FIRB’s decision-making, designates electricity assets as critical assets. Yet AusNet is already majority-owned by foreign investors. But 100% of Victoria’s electricity distribution and transmission could fall into foreign hands if both Brookfield prevails and KKR takes out Spark Infrastructure (SKI AU). If that is not a desirable outcome to FIRB, potentially Spark is more at risk of FIRB rejection.
  • UPDATE: After AusNet rejected its Offer – deeming it “inferior in respect of price, form of consideration, structure and certainty” –  APA has now made an application to the Takeovers Panel such that the circumstances (including the entry into the confidentiality deed with Brookfield) “hinder, or are likely to hinder, the acquisition of control of [AusNet] taking place in an efficient, competitive and informed market .. and deny, or are likely to deny, [AusNet] shareholders an opportunity to participate in the benefits of a proposal”. I’d be surprised if the TO backs APA’s submission. 

Link to my insights:
AusNet (AST AU): APA Elevates Tussle With Brookfield And Taps Takeover Panel
AusNet Services (AST AU): Spurned APA Trumps Brookfield’s Proposal
AusNet Services (AST AU) Opens Its Books to Brookfield

Shinsei Bank (8303 JP) (Mkt Cap: $bn; Liquidity: $17mn)

On 9 September, SBI Holdings (8473 JP) announced they would launch a Tender Offer at ¥2,000/share to acquire 27.68% of Shinsei to take them to 48.00%. This was discussed in SBI (8473) Launches a HOSTILE Tender Offer on Shinsei Bank (8303)! After the weekend had passed, there was news that Shinsei was looking for a white knight, and the Board would meet this past week to discuss a poison pill warrant issuance. On the 17th September, Shinsei announced that it “reserved” its Target Opinion on the SBI Tender Offer based on having sent SBI questions but having not received answers yet.  Shinsei also announced the introduction of Takeover Defense Measures via Poison Pill Shareholder Rights to be introduced at an EGM, also announcing that the Record Date would be 13 October (and an official announcement would be made 28 September.

  • SBI would have two other choices:  It could extend the Tender Offer and plead its case to shareholders, saying “if the EGM approves such a measure, SBI will withdraw its Tender Offer, and it might be forced to sell its shares in the market, and that might hurt the share price“, or … SBI could simply withdraw the Tender Offer.
  • Travis expects SBI to extend.  That may change, but I think SBI have a quite powerful position here. They have a bid at ¥2,000/share and nobody else does. Shinsei having more time may not get them a white knight overbid, and if it goes to EGM without an overbid in place, getting free shares but having the total be worth 30% less seems like a bad trade for Shinsei shareholders. If SBI withdraws before the EGM vote, it doesn’t get the optionality of having the shareholders reject the poison pill.
  • Separately, if Shinsei comes up with a white knight to buy 48% or buy up to 48% then get Shinsei to issue treasury shares to get them to 48%, as long as that Tender Offer closes after SBI’s and SBI’s fails, SBI could tender its shares into a tender offer by Sony or 7&i or someone else. If we think 67% is an appropriate effective minimum pro-ration for SBI’s Tender Offer, if someone needs to go from 0% to 48%, and SBI decides to participate with all 20.32%, the effective minimum pro-ration would be about 77.9%. This would still be a decent outcome for minorities. 

MMC Corp Bhd (MMC MK)  (Mkt Cap: $1.2bn; Liquidity: $3mn)

On the 3 June, Seaport Terminal (Johore) Sdn Bhd, a wholly-owned entity of Tan Sri Syed Mokhtar Albukhary, announced an Offer for port operator and utility play  MMC at RM2.00/share, a 70.94% premium to last close. Seaport Terminal owns 51.76% of MMC.  The Offer is being done via a selective capital reduction and repayment (SCR) exercise.  On the 4 August RHB announced, on behalf MMC’s board, the SCR will be tabled to shareholders at a forthcoming EGM. The circular was dispatched on the 8 September with the EGM scheduled for the 30 September. Payment under the offer is expected towards the end of December. The independent adviser, Alliance Investment Bank, deemed the Offer not fair, but reasonable.

  • This still looks done. But this is trading wide, with a largish downward move on decent volume earlier this week. The key risk is how PNB (with 20.9%) will vote.  Presumably, they were sounded out prior to the Offer announcement. 
  • The other risk is one of timing. Dec-end for payment is in line with SCR precedents. There may well be some High Court hearing disruption as Malaysia faces significant daily cases of Covid – >15k. 

(link to my insight: MMC Corp (MMC MK): This Is A Buy)

Ale Property (LEP AU) (Mkt Cap: $0.8bn; Liquidity: $1mn)

In July 2021, Australia’s largest freehold pub properties owner ALE received an “unsolicited, confidential, conditional, non-binding indicative proposal” from the Charter Hall Consortium (a consortium managed by Charter Hall (CHC AU). A couple of months later, on 20th September 2021, ALE announced they had entered into a Scheme Implementation Deed. Based on this agreement, ALE securityholders will have the default option of accepting 0.4080 CLW securities and cash of A$3.673 as consideration per ALE security or they can choose between an all-scrip consideration of 1.1546 CLW securities/ALE Security and an all-cash consideration of A$5.681 cash/ALE security. On top of that, ALE securityholders will also be entitled to receive ALE’s September quarter distribution of A$0.055/ALE security. 

  • The Deal is conditional on ALE security-holder approval. Top security-holder Caledonia who controls 33.6% of total votes has agreed to vote in favour of the transaction.  Woolworths’ spin-off Endeavour Group controls 8.9%. They are ALE’s sole tenant and they also rent some pubs that belong to the Charter Hall consortium. They should be friendly to this transaction too. Together with the above-mentioned security-holders, Janaghan Jeyakumar expects friendly security-holders to collectively hold around 47.7% including individuals and insiders. 
  • The acquisition of ALE will make the Charter Hall the largest owner of freehold pubs in Australia. This can be seen as a bet by Charter Hall on the post-lockdown rebound anticipated in the retail and hospitality sectors following the easing of COVID-19 lockdown measures. This is a friendly transaction. ALE Directors unanimously recommend that ALE security-holders vote in favour of the Schemes, in the absence of a superior proposal and subject to the Independent Expert concluding that the Schemes are in the best interests of ALE security-holders.
  • The gross/annualized spreads for the max-scrip and max-cash considerations were 3.5%/13.9% and 1.5%/6.1% respectively (not including CLW borrow costs in the scrip portions) as at the time of Janaghan’s insight. NOTE: The ex-date for the A$0.055/security distribution is 29th Sep 2021. The CLW distribution of (estimated (A$0.074/unit) for CLW should be the same time.

(link to Janaghan’s insight: ALE-Charter Hall: A Post-Lockdown Bet on Australian Pubs)


Roxy Pacific Holdings (ROXY SP), a small-sized property developer focusing on the Asia-Pacific region, has announced a pre-conditional Offer at S$0.485/share, a 19.8% premium to last close. The offer price will not be increased. No dividends are expected to be declared. The Offeror consortium is led by Teo Hong Lim, chairman, and CEO of Roxy-Pacific. The pre-condition pertains to all necessary consents under the Overseas Investment Act of New Zealand. Roxy holds an interest in two commercial properties in Auckland. The Offer, assuming it proceeds, is conditional on the Offeror holding not less than 90% of shares out.  Irrevocables total 76.44% of shares out. This is done. It is the Offeror’s intention to delist the company. Link to my insight: Roxy-Pacific (ROXY SP): Pre-Conditional Offer Led By Founder

India-based data management and analytics firm eClerx Services (ECLX IN) released their public announcement document for their latest buyback after market close on 20th September 2021. The buyback was initially proposed in a board meeting on 13th August 2021 and later approved by shareholders (postal ballot) on 16th September 2021.  The buyback price has been set at INR2,850/share and eClerx expects to buy up to 1,063,157 shares through a Tender Offer. The total size of the buyback will be approximately INR3bn (~US$41mn). Link to Janaghan’s insight: EClerx Buyback: Adding Fuel to Momentum

Back in June, Sanshin Electronics (8150 JP) announced a buyback for 28.8% of the company. It came after a long buying campaign by one specific investor. Normally this would be “good news.” Those who want to get out could sell a significant portion of their holding without friction and others could look at the situation and see significant improvement to capital allocation and huge accretion. Travis’ piece was called Sanshin Electronics (8150 JP) BIG Buyback Tender – Not Designed For You . Now Nishimatsu Construction Co (1820 JP) has announced a similar transaction in that it will buy up to 15,000,000 shares for up to ¥54.447bn. That is 26.98% of shares outstanding. The share buyback transaction will be undertaken as a Tender Offer, running from 22 September to 20 October, with the buyback price ¥3,626/share, which is a small premium to the close – Yay! And once again……it is not for you. Link to Travis’ insight: Nishimatsu Construction (1820) About to Do Its Last Buyback for a While, and You Can’t Participate!

Back on the 19 July, systems integrator Empired Ltd (EPD AU) entered into a Scheme with Capgemini SE (CGEMY US) at a price of A$1.35/share, a 64.6% premium to last close, and an all-time high. The Offer had the unanimous backing of Empired’s board. CEO Russell Baskerville, with 5.8% of Empired’s outstanding shares, intended to vote in favour of the Scheme. The Scheme Booklet is now out. The Scheme Meeting will take place on the 25 October, with expected implementation on the 16 November. The Independent Expert concluded that the Scheme is fair and reasonable. This looks done. Trading tight at a 1.5%/11.3% gross/annualised spread. That’s reasonable, but this is not a super liquid arb situation. Link to my insight: Empired (EPD AU): Scheme Booklet Out. Meeting On The 25 October

STUBS

First Pacific Co (142 HK) 

I see the discount to NAV at 61%, down from ~71% last year, but off its recent low of 52%.  From a long-term view, the current discount to NAV is around levels only exceeded in the wake of Covid. The implied stub has been lower. First Pac is essentially a passive holding company, with a chunk of net debt.

  • There are clear signs of reduced losses at the parent level. Buybacks continue and provide a degree of long-term support. The current NAV discount is around pre-Covid levels. Since the interim results, the market has assigned HK$2.34bn (~US$300mn) less for First Pac’s stub ops. That appears unjustified. However in the short term, absent a major catalyst, I’d like to see the share price settle a bit here before getting involved. Longer-term, this appears a decent entry point, with a long-term average discount to NAV of 50%. Shares, however, remain thinly traded. 
  • For the trade, keep it market neutral and hedge out the three largest NAV contributors  Indofood Sukses Makmur Tbk P (INDF IJ)PLDT (TEL PM), and Metro Pacific Investments Co (MPI PM), which together account for 121%/100% of NAV/GAV.

EVENTS

Bank Rakyat Indonesia Persero (BBRI IJ) (Mkt Cap: $30.8bn; Liquidity: $34mn)

13 days ago Travis wrote Bank Rakyat Indonesia (BBRI)’s Mega Rights Issue – Plenty of Opportunity Short-Term and Long-Term suggesting that the stock could fall as it entered its rights trading period. It has. At one point on 20 September the stock was down 7% from time of writing. The time for people to buy and exercise is done, except for professional investors who can turn around their corporate action in a day or less. 

  • The markets being upset about Evergrande will not likely roil Indonesia. Indonesia will be more in the news with upcoming IPOs.  BBRI is expected to regain the earnings it lost recently, and more, and the expansion of micro-lending is expected to pave the way for years of growth as micro-lending customers eventually move up the curve. Long-term, this looks like a decent long to own.
  • And short-term, selling pressure related to the rights offering will abate temporarily after Wednesday and will abate more generally after shares are delivered, especially after the Excess Rights Shares are delivered in a week or so. Big picture, Travis’d cover shorts here. 

(link to Travis’ insight: Bank Rakyat Indonesia (BBRI) Rights-Related Selldown Basically Done)

M&A – US

Sohu.com Inc (SOHU US)  (Mkt Cap: $0.9bn; Liquidity: $11mn)

Around 9.5 months after Tencent (700 HK) and Chinese search-engine Sogou Inc (SOGO US) entered into a definitive agreement for a Going-Private Transaction, the Offer was granted unconditional approval by the State Administration for Market Regulation (SAMR) on the 12 July.  Apparently, that wasn’t the final approval as the regulators continued to overhaul and tweak China’s tech sector. On the 23 September, Sogou announced the completion of the merger and shares have been suspended. Payment will be made “as soon as practical”. So that’s done. This is a short-form merger – there was no vote. Dissension rights are now afforded for short-form mergers and I would expect some investors to take up those rights. 

  • Separately, Sohu pockets ~US$1.2bn from the merger via its 33.8% equity stake in Sogou – or net cash of ~US$1bn – versus its current market cap of US$857mn. This is before taking into account the US$579mn privatisation value of Changyou.com (CYOU US).
  • Charles Zhang is Sohu’s largest shareholder with a 26.09% equity stake. Unlike Sogou, Sohu only has one share class.  If  Zhang intends to take Sohu private, this would require a long-form merger, involving the approval by a special resolution of Sohu’s shareholders, requiring two-thirds of the voting rights of the shares present and voting in person at an EGM.
  • Also, keep in mind the Holding Foreign Companies Accountable Act, which was signed into law in December 2020, technically implies Chinese companies may be delisted as early as 2024 if they do not comply and share audits. That might seem a long way off, but the Tencent/Sogue merger took 15 months to complete.  A secondary listing on the HKEx will also take time – especially if the vast majority of US-listed Chinese companies are thinking along the same lines. 

M&A – EUROPE

Grifols SA (GRF SM) entered into a share purchase agreement to acquire a 45.48% stake in Biotest AG (BIO GR) from Tiancheng International Investment Limited for €1.1 bn on 17 September 2021. In a related transaction, Grifols will launch a voluntary tender offer to acquire the remaining ordinary and preference shares in Biotest at same terms (€43/ordinary share and €37/preference share). Both will be paid in cash and represents a premium of 23% and 4% over the closing price of 16 September for each type of share. The deal values the equity of Biotest at €1.6 bn (13% of Grifols’s market cap pre-announcement) and EV of €2 bn. Link to Jesus Rodriguez Aguilar‘s insight: Grifols/Biotest: Preference Shareholders at Disadvantage & Grifols’s Leverage.
Regulatory changes would suggest holding shares in Naturgy Energy Group SA (NTGY SM) until the end of the acceptance period is not desirable. Link to Jesus’ insight: IFM/Naturgy: Board Opinion And Bid Scenarios.
Asterion bumps its Offer for Retelit SpA (LIT IM) from €2.85/share to €3/share, and a reduction in the threshold from 66.67% to 50% of the share capital. Link to Jesus’ insight: Asterion/Retelit: Sweetened Offer Means Transaction Will Go Ahead.

Entain (ENT LN) confirmed that it had received a proposal from DraftKings Inc (DKNG US). On 22 September, the Board said that following an earlier approach at 2,500p/share (mix of DraftKings shares and cash) which was rejected, a further proposal was received on 19 September 2021. DraftKings Inc. revised the offer price to 2,800p/share (630p in cash and the balance payable in new DraftKings Class A common shares). The consideration represents a premium of 46.2% to Entain’s closing share price on 20 September 2021, 4.5x EV/NTM Sales, 19.2x EV/NTM EBITDA and 39.2x Fwd P/E (source: Capital IQ consensus). The PUSU deadline is 19 October. Link to Jesus’ insight: DraftKings/Entain: Cash and Shares Approach.

M&A RISK ARB WEEKLY ROUND-UP

  • This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks. I number 38, mostly firm, deals around the region.

INDEX REBALS

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

China Lng (931 HK) 17.72%UBSHang Seng
Amuse (8545 HK)10.16%St ChartNumerous
Jinshang Bank Co Ltd (2558 HK) 16.55%SinopacCiti
Source: HKEx
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Helen’s International Holdings (9869 HK) 79.55%CICCOutside CCASS
Source: HKEx

I listen to a bunch of music when writing insights. Here are a handful of tunes, old & new, that piqued my interest during the week: Chambers Brothers’ Uptown, Brendan Benson’s House In Virginia, Little Simz’ Point & Kill, Portico Quartet’s Terrain: II.

What are you listening to? 

Enjoy your Sunday!


Power Construction JSC No.1 (PC1 VN/Trading Buy)_Update_Momentum from wind power projects

By Mirae Asset Securities

Valuation and recommendation We raise our target price for Power Construction JSC No.1 (PC1) to VND41,600 (from VND29,900) and maintain our Trading Buy recommendation (+18% upside).

Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

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