Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, announced a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of year three.
Xenith’s board unanimously recommended the merger to its shareholders.
IPH did not blink and on the same day as the Xenith/QANTM announcement, lobbed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.
QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH countered those claims, spurring QANTM to counter those countered claims.
On the 13 February 2019, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith’s shares increased 20.3% to close at A$1.69/share.
The provisional date for ACCC s clearance of the QANTM/Xenith merger is the 21 March. The provisional date for IPH/Xenith is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH’s proposal has an indicative implementation date of mid-July.
IPH’s proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM’s all-scrip offer.
The key risk to IPH’s proposal is ACCC’s consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With IPH’s blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.
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Indofood Agri Resources (IFAR SP) has announced PT Indofood Sukses Makmur Tbk, its controlling shareholder with 74.52%, has made a voluntary conditional cash offer of $0.28/share for all IFAR shares it does not own. The offer price, which is a 7.7% premium to last close, is not final. Any dividend declared will reduce the consideration under the proposal.
The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.
IFAR’s share price has increased 27% this month – evidently, there was some news leakage ahead of the announcement – positioning its discount to NAV at ~50%, around its narrowest inside a year, but on a look-through basis, the Offer price backs out just 0.4x P/B.
The Offer price represents a premium of approximately 21.5%, 26.3%, 29.0% and 23.1% over the VWAP for 1M, 3M, 6M and 12M. IFAR traded above the Offer price as recent as May last year. One wonders if the consideration is sufficient to achieve the 90% condition.
Post market close on 9th of April, as per media reports, the Japanese government said that it plans to sell another 1.06bn share of Japan Post Holdings (6178 JP) (JPH). The government aims to do so as soon as Sep 2019. The sale, at around US$12bn, would amount to 23.5% of the company and nearly 41% of the government’s current shareholding. It would mark the second sell down by the government since JPH listed in 2015. Post the news release, JPH shares closed down 3% on 10th of April. They are now trading below the IPO price, below the last placement price and just off their all-time lows.
The postal service privatization act seems to be in full swing, with JPH about to enter its third round of selling and Japan Post Insurance (7181 JP) (JPI) in the midst of its first post IPO sell down. However, Japan Post Bank (7182 JP) (JPB) has yet to see a sell down even though the recent deposit ceiling revision required JPH to reduce its holding in JPB. Were JPH to sell some of its JPB stake ahead of the government sale of JPH, it could mitigate a large part of its own placement using the cash that it generates from JPI and possible JPB stake sale to buyback some stock. Thus, there is a possibility that JPB placement might come before JPH’s next placement.
For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:
At AlphaSituations, we look for unusual spreads in announced US M&A deals of >$400MN in size with the intention of identifying and highlighting misunderstood and/or under the radar risk arb opportunities. In our current list of unusual spreads, the most compelling relates to the China Oceanwide/Genworth Financial (GNW US) transaction which was announced more than two years ago. The merger spread currently stands at 40%. Below, we explain why we are confident that this deal will move to completion giving the arbs an opportunity to profit substantially.
Unusual Merger Spreads (As at April 9, 2019)
M&A Situation
Spread
Expected Close
Comment
CO/GNW
40%
Apr-19
Still waiting Canada, China SAFE, FINRA approvals/Skepticism prevails over deal completion
TMUS/S
27%
Jul-19
Potential antitrust complications/Extended review period
FMF/STC
14%
Jun-19
Regulatory/Pricing Adjustment Risk
4Q 2016-1Q 2019 Live US M&A Announced Deals (>$400 MN) & Spreads
Preceding my comments on Amorepacific, Kingboard and other stubs, are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
This post examines the current price pushing factors being laid on Hanjin Group holdco Hanjin Kal after the second generation owner’s sudden death. It then discusses the limitations of these price pushing factors.
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Post market close on 9th of April, as per media reports, the Japanese government said that it plans to sell another 1.06bn share of Japan Post Holdings (6178 JP) (JPH). The government aims to do so as soon as Sep 2019. The sale, at around US$12bn, would amount to 23.5% of the company and nearly 41% of the government’s current shareholding. It would mark the second sell down by the government since JPH listed in 2015. Post the news release, JPH shares closed down 3% on 10th of April. They are now trading below the IPO price, below the last placement price and just off their all-time lows.
The postal service privatization act seems to be in full swing, with JPH about to enter its third round of selling and Japan Post Insurance (7181 JP) (JPI) in the midst of its first post IPO sell down. However, Japan Post Bank (7182 JP) (JPB) has yet to see a sell down even though the recent deposit ceiling revision required JPH to reduce its holding in JPB. Were JPH to sell some of its JPB stake ahead of the government sale of JPH, it could mitigate a large part of its own placement using the cash that it generates from JPI and possible JPB stake sale to buyback some stock. Thus, there is a possibility that JPB placement might come before JPH’s next placement.
For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:
At AlphaSituations, we look for unusual spreads in announced US M&A deals of >$400MN in size with the intention of identifying and highlighting misunderstood and/or under the radar risk arb opportunities. In our current list of unusual spreads, the most compelling relates to the China Oceanwide/Genworth Financial (GNW US) transaction which was announced more than two years ago. The merger spread currently stands at 40%. Below, we explain why we are confident that this deal will move to completion giving the arbs an opportunity to profit substantially.
Unusual Merger Spreads (As at April 9, 2019)
M&A Situation
Spread
Expected Close
Comment
CO/GNW
40%
Apr-19
Still waiting Canada, China SAFE, FINRA approvals/Skepticism prevails over deal completion
TMUS/S
27%
Jul-19
Potential antitrust complications/Extended review period
FMF/STC
14%
Jun-19
Regulatory/Pricing Adjustment Risk
4Q 2016-1Q 2019 Live US M&A Announced Deals (>$400 MN) & Spreads
Preceding my comments on Amorepacific, Kingboard and other stubs, are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
This post examines the current price pushing factors being laid on Hanjin Group holdco Hanjin Kal after the second generation owner’s sudden death. It then discusses the limitations of these price pushing factors.
After a brief pause in trading yesterday morning, Crown Resorts (CWN AU) announced it is in confidential discussions with Wynn Resorts (WYNN US) concerning an acquisition of Crown by way of a Scheme. The announcement states that Wynn has approached Crown on more than one occasion.
That was in the morning.
WYNN confirmed it and released an 8K in the early hours of the 9th saying they would not comment further.
Several hours later, WYNN apparently said it was terminating deal talks with Crown because of the “premature disclosure of preliminary discussions”.
Oops.
This will surely knock Crown shares back down after their 19.7% gain on Tuesday.
But it does not remove the reason for a deal. The Crown commentary clearly indicated that they were not averse to doing a deal. That would suggest James Packer is not either.
The proposal arrived at a unique time for both companies after the CEOs and major shareholders of both companies relinquished their roles in 2018: Packer for health reasons, and Steve Wynn after allegations of sexual harassment.
If Wynn wants to expand its footprint into the hemisphere and James Packer wants to arrange his affairs, a deal somewhere should be in the offing. This deal may just get pushed to the back burner before coming back to the fore. Several years ago, ADM launched a proposal at Graincorp. Months later there had been no apparent communication and the shares drifted off and then, all of a sudden, there was an agreed deal.
Or perhaps this opens up Crown to other suitors.
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In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp.
In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below.
Excellent dividends
Corporate activism related stock
Strong financial results
Timing of the increased insider ownerships/Completion of tender offers
Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors:
Decline in raw material prices
Aggressive spandex investment in India
Stabilization of spandex prices in 2H19
Consolidation of the global spandex industry
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We write this note to provide P G & E Corp (PCG US) current state of affairs. First and foremost, we believe that the equity value is zero as the company restructures under chapter 11 bankruptcy code. Most companies that enter chapter 11 bankruptcy either face operational or financial headwinds. PG&E problems are compounded by complications of litigation and regulatory risk along with operational and financial risks.
Delta Electronics Thai (DELTA TB) (Delta) released its opinion (Form 250-2) and the opinion of the Independent Financial Advisor (IFA) on the tender offer. Delta Electronics (2308 TT) (DEI) launched the conditional voluntary tender offer for Delta, an electronics contract manufacturer, on 26 February 2019. The tender offer of THB71.00 cash per share values Delta at an EV of THB72 billion ($2.2 billion).
The IFA valued Delta at THB62.33-67.80 per share. Unsurprisingly, both the Delta Board and the IFA concluded that the shareholders should accept the tender offer. While the tender offer’s premium to underlying value is unlikely to set the pulse racing for minority shareholders, we continue to recommend minority shareholders to accept the tender offer.
Something of a slower week on Smartkarma this week (I contributed to that slowness by being away and under the weather when back) with about 120 insights published. A list of the insights to do with Japan and Korea this week are listed below.
Since early November, when Chiyoda incurred substantial losses, scant details regarding the structure of the likely capital raise have emerged, except that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).
LightStream Research‘s conversations with the company suggest a high likelihood a deal would not be in place by the end of Mar, though in a one-on-one meeting they said they were in the final stages of discussions. Lightstream believes a deal is almost certain to be in place by the time of the company’s fiscal year earnings announcement which should be in mid May.
Getting injections of debt capital from banks (likely Mitsubishi Ufj Financial (8306 JP)) and equity capital from Mitsubishi are unlikely to be stumbling blocks. It is plausible that Mitsubishi would be keen to retain its current 33.39% stake in the company, so if the capital is in the form of prefs, Lightstream would expect them to be convertible.
As for the industrial partner, Chiyoda noted that there was significant interest due to their long track record as the leading LNG EPC player in the world, and that it was not so much a matter of being able to secure the financing, as it was a matter of finding a partner where there would be mutual benefits without constraining Chiyoda in terms of its business operations. But that implies the stake would be so large as to imply a controlling or heavily influential stake.
In terms of numbers, Lightstream speculates about ¥30bn in debt from banks with MUFG a likely lead candidate given the keiretsu ties. Perhaps ¥75bn in equity (prefs and common) split between Mitsubishi and an industrial partner. More likely, if Mitsubishi opted for pref shares, the industrial partner would end up with a stake of around 20% in Chiyoda, which could mean a ¥25bn injection, with Mitsubishi buying ¥50bn in prefs.
Shin Etsu announced a share buyback program to buy up to 14mn shares for up to ¥100bn. If it were to have bought all 14mn shares, that would be 3.3% of shares outstanding. Simultaneously, it announced a ToSTNeT-3 buyback of 11,001,100 shares at today’s closing price of ¥9,090/share which if all bought would complete the buyback program.
There was some speculation across the Street there would be a buyback because of slowing earnings expectations and a surfeit of capital, which was itself important because of the company’s lack of recent history of buybacks (the last and only time the company has bought back shares (to date) was a repurchase of 3 million shares for ¥13.6 billion in late October 2008 when things were hairy (and cheap))
It was a decent-sized buyback. That by itself is worthwhile. But it is not enormous. And with ¥1tn in net cash, buying back ¥100bn is not huge enough. It reduces the dividend out a little, and lifts EPS a little. But…
The BIG trade here is to identify the seller as quickly as possible – if it is a corporate seller. If it is Hachijuni Bank, buy Hachijuni Bank. If it is another small listed financial for whom the position is meaningful portion of market cap, Travis Lundy would be inclined to buy that one.
As a follow-up…
the result of the ToSTNeT-3 transaction was that the company bought back 9.84mm shares using 89.5% of the funds. The remaining ¥10.5bn to buy will likely be bought on market. It represents less than one day of volume.
Travis notes that there have been no announcements on TDNET which indicate who the seller might have been. If it had been a life insurer, it would not have made the news because it was portfolio gains, not corporate gains. It is also possible that corporate or bank holders in question would have other sales to offset the gains. We may not know until the yuho.
The previous Friday, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP) had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron will replace Pioneer in the Nikkei 225, with a deemed par value of ¥50 per share. The date for this index deletion and inclusion event was the 15th of March.
The Pioneer exclusion has been known/certain since the deal was approved. The Omron inclusion was less well-flagged. There is a lot of Pioneer stock to come out this week. Because it is so much, and because many people will not want to hold more than 5% of the company, Travis expects there is room for several people to increase their stake for an OK size.
Because of the path of Omron over the past year, Travis expected there would be many foreign holders unwilling to sell their shares at the current price. And they would be ill-prepared to sell large quantities in the market on Friday just because there was a Nikkei 225 inclusion. Travis expected the shares to squeeze. It is not easy to dislodge 25% of the float.
THE HINDSIGHT: As Travis notes in a discussion point appended to his piece, it appears every single buyer post-announcement was down-money by the inclusion, which happened at the lowest price of any traded post-announcement. This indicates substantially more pre-positioning than he thought, and the low volume on the print itself suggests substantially more shorting than might be healthy.
The Daewoo Shipbuilding & Marine Engineering (042660 KS) deal between HHI and KDB is now officially finalised, and it will take the following four-step process: the HHI (to be renamed Korea Shipbuilding & Offshore Engineering, or KSOE) spin-off of the opco (HHI opco); the KDB PIK into HHI; the KSOE rights issue; followed by the DSME rights issue. These details were further elaborated upon in Sanghyun Park‘s prior insight: Hyundai Heavy/DSME Event – Comprehensive Summary.
HHI declined 4% when the deal was finalized while DSME stayed flat. Apparently HHI and Korea Eximbank agreed that the ₩2.3tril CBs wouldn’t be converted into DSME shares and disposed any time soon. Plus, there will be a downward interest adjustment to help ease DSME’s financial burden.
This sparked a speculation that HHI must have pledged Korea Eximbank with some sort of DSME expected valuation. Sanghyun would close the current HHI long/DSME short position. Short-term, he expects DSME will outperform HHI. Longer term, he’d rather stay away from both.
The revision – the divestment on the SPP1 co-generation plant – was a remedial requirement by the ERC regulator. The sale of SPP1 to B Grimm Power (BGRIM TB) for Bt3.3bn was announced on the 22 February and was completed mid-week.
Subsequent to the SPP1 sale, the purchase price under the SPA was adjusted to Bt91.9906/share, a ~3% decline from the initial Bt94.892/share price under the original SPA.
My discussions with GLOW indicate that the 247-4 Tender Offer form may be submitted to the SEC & SEC by GPSC as early as next week, with the Offer open to acceptances shortly after. The ERC signed off on the SPA the previous Friday. Assuming mid-May payment, this is currently trading at a gross/annualised spread of 1.6%/10.8%.
HKICIM announced HNA Finance had entered into a SPA in which Times Holdings, a Blackstone-controlled vehicle, had conditionally agreed to buy 69.54% of HKICIM’s issued shares for HK$3/share in an HK$7bn transaction. Should the SPA complete, Times will make a mandatory unconditional offer – also at $3.00/share (14.5% premium to last close) – for the remaining 30.46% of shares out. This proposal arrives nearly three years after HNA bought a 66% in Tysan Holdings – as HKICIM was previously known – from Blackstone for HK$4.53 per share, triggering an MGO.
After a rapid-fire acquisition spree – at record prices, oddly motivated to “snatch land and pricing power from the city’s real estate cartel” – and similar disposal pace of Kai Tak properties, HNA is presumably recycling these sales proceeds to offset its debt obligations.
This will continue to trade tight to, if not through terms, with an anticipated completion late April. There will be no bump to the Offer. Times does not intend to avail itself to compulsory acquisition and intends to maintain HKICIM’s listing; while both Times and HKICIM will take appropriate steps to maintain a sufficient public float after the close of the Offer.
Iph Ltd (IPH AU) has gate crashed Xenith/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a proposal (by way of a Scheme) for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, 23.3% above the implied QANTM all-scrip merger consideration, based on QANTM’s 26 Nov 2016 closing price.
On the same day as the Xenith/QANTM announcement, IPH lobbed a non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a A$0.05 dividend) by way of a scheme, or a 42% premium to last close. QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. So, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support QANTM’s merger and intends to vote against it at the forthcoming scheme meeting on the 3 April.
The key risk to IPH’s proposal is ACCC’s consent – the provisional clearance date for the QANTM/Xenith merger is the 21 March; while IPH/Xenith‘s is the 2 May. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies, and IPH is the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With a 19.9% blocking stake, the QANTM/Xenith scheme is toast. 19.9% of institutional investors have already cashed out at $1.85/share. Xenith should engage with IPH.
In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. Corp’s share price has surged in the past six months on account of excellent dividends, strong financial results and the timing of the increased insider ownerships/completion of tender offers. Douglas Kim believes the market has already factored into Corp’s share price many of these positive factors.
Both TNC and Corp have underperformed the market. However, TNC appears to be a turnaround story driven by a decline in raw material prices, aggressive spandex investment in India, the stabilization of spandex prices in 2H19 and the consolidation of the global spandex industry
Douglas would be long TNC and short Corp on a dollar-for-dollar basis. His base case strategy is to achieve gains of 7-9% on this pair trade. Plugging in Douglas’s numbers results in the discount to NAV at extreme levels. One pushback is that TNC accounts for just 16% of Corps’ NAV. Five other listco holdings total 40% of NAV.
Curtis Lehnert flags this simple holdco structure wherein the bifurcation between the two counters is in excess of 2 STDs. I also touched on this pair last month (StubWorld: Hang Lung’s Implied Stub At Extreme Levels) and this unreasonably wide discount which is made more than unreasonable by the fact that there is very little to distinguish between the two stocks.
Curtis proposes one avenue for narrowing the discount – by HLG divesting its stake in HLP. Maybe. Over a decade ago, HLG’s stake dipped below 50% in HLP, but it still consolidated the accounts.
However the last few years has seen HLG gradually increasing its stake in HLP; and in one instance selling property to HLP (at book), then buying shares in HLP at 0.6x P/B. HLG is cheap, but a catalyst for narrowing the discount remains elusive.
Inputting the latest of Wheelock’s, Wharf’s and WREIC’s FY18’s numbers backs out a discount to NAV of 37.5%, bang in line with its 12-month average. Wheelock is coming up “expensive” vs. Wharf, but Wharf accounts for only 25% and 22% of NAV & GAV respectively.
Wharf’s net profit decreased by 11% in FY18. While the company said cooling measures in China have had minimal impact on demand, it added “the timing of sales launch continued to be dictated by local government approval to sell at full or close to full market price“.
Chairman & MD Stephen Ng said it will sell/reduce its mainland property investments, ruling out any possibility of returning. This suggests the momentum is with non-PRC asset portfolio companies under the Wheelock group, favouring both Wheelock and WREIC.
First Pacific Co (142 HK)exits from the Goodman Fielder JV for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. Shares closed marginally up suggesting this announcement was largely expected.
MYOB Group Ltd (MYO AU)‘s scheme doc is out. The Scheme meeting is scheduled for 17 April, with an expected implementation date of the 8 May. The independent expert, Grant Samuels, considers the Scheme consideration to be fair & reasonable, with an assessed value range of $3.19-$3.69 vs KKR’s Offer of $3.40.
Trade Me (TME NZ)‘s scheme book is out. The vote will take place on the 3 April. The Independent Adviser concluded that the Scheme consideration of NZ$6.45 is above its valuation range for the shares of NZ$5.93 – NZ$6.39. OIO consent has also been received.
The IFA believesDelta Electronics Thai (DELTA TB)shareholders should accept the Tender Offer of Bt71/share as it is above its fair value range of Bt62.33-Bt67.80/share.
Mastercard’s offer has now lapsed, leaving Visa as the sole bidder for Earthport plc (EPO LN). Visa’s 37 pence offer has been extended for two weeks until the 25 March.
The IFA (UOB) considers the $3.10/share Offer for Kian Joo Can Factory (KJC MK) is “not fair” but “reasonable”. (Best to open the link in Chrome not Edge). UOB considers the Offer price represents a 25 sen or 7.46% discount to the estimated fair value of RM3.35/share. The Offer will be open for acceptances until the 22 March – unless extended.
Australian property developer, Villa World Ltd (VLW AU)announced that it had received an unsolicited proposal from AVID Property Group Australia to acquire all of the company’s shares for A$231/share (a 12% premium to last close) by way of a scheme of arrangement.
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, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
BGF Holdco/Sub have been oscillating within ±1σ since early Feb. Last Friday, Sub again made a move. This time it diverted a little further. They are now close to -2σ. Holdco is now at a 46% discount to NAV.
Overall sector outlook is still unpromising. Local street sentiments are still divided. BGF Retail is showing interest in Korea’s third internet bank. This may become a price divergence factor. But this issue is still too early to have real impact.
Shorting is still going pretty heavy on Sub. Sub price divergence shouldn’t last any further from this point. I’d make my trade here.
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Wheelock & (20 HK) is coming up “expensive”, but it’s Wharf Holdings (4 HK) which is under-performing after PRC property sales targets are lowered amid Beijing’s cooling measures.
Preceding my comments on Wheelock and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
On 12 March 2019 after the close, Shin Etsu Chemical (4063 JP)announced a share buyback program to buy up to 14 million shares for up to ¥100 billion. If it bought all 14 million shares, that would be 3.3% of shares outstanding. Simultaneously, it announced a ToSTNeT-3 buyback of 11,001,100 shares at today’s closing price of ¥9,090/share which if all bought would complete the buyback program.
As I write, the shares are up 4-6% in thin trading in the ADRs.
There was some speculation across the Street there would be a buyback because of slowing earnings expectations and a surfeit of capital, which was itself important because of the company’s lack of recent history of buybacks (the last and only time the company has bought back shares (to date) was a repurchase of 3 million shares for ¥13.6 billion in late October 2008 when things were hairy (and cheap)).
The shares are down over the past year, but the price in the past few days is not dramatically at the low end of the range of the past six months or so.
There may be some information in the context and structure of this buyback which tells you something different than people’s first reaction.
The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).
We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.
Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, announced a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of year three.
Xenith’s board unanimously recommended the merger to its shareholders.
IPH did not blink and on the same day as the Xenith/QANTM announcement, lobbed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.
QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH countered those claims, spurring QANTM to counter those countered claims.
On the 13 February 2019, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith’s shares increased 20.3% to close at A$1.69/share.
The provisional date for ACCC s clearance of the QANTM/Xenith merger is the 21 March. The provisional date for IPH/Xenith is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH’s proposal has an indicative implementation date of mid-July.
IPH’s proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM’s all-scrip offer.
The key risk to IPH’s proposal is ACCC’s consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With IPH’s blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.
In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp.
In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below.
Excellent dividends
Corporate activism related stock
Strong financial results
Timing of the increased insider ownerships/Completion of tender offers
Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors:
Decline in raw material prices
Aggressive spandex investment in India
Stabilization of spandex prices in 2H19
Consolidation of the global spandex industry
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I should have seen this coming. The asset is juicy enough, and they have a large enough stake, and the company is small enough, that this is an easy trade to do if you can get the funding. It makes eminent sense to be able to put the money down and go for it.
I have covered this minor disaster of an MBO (Management BuyOut) of Kosaido Co Ltd (7868 JP) since it was launched, with the original question of what one could do (other than refuse). Famed/notorious Japanese activist Yoshiaki Murakami and his associated companies started buying in and then the stock quickly cleared the Bain Capital Japan vehicle’s bid price. The deal was extended, then the Bain bid was raised to ¥700/share last week with the minimum threshold set at 50.01% not 66.67% but still the shares had not traded that low, and did not following the news. But Bain played chicken with Murakami and the market in its amended filing, including the words 「公開買付者は、本開買付条件の変更後の本公開買付価格を最終的なものとし、今後、本公開買付価格を一切変更しないことの決定をしております。」which roughly translates to “The Offeror, having changed the terms, has made This Tender Offer Price final, and from this point onward, has decided to absolutely not raise the Tender Offer Price.”
So now Murakami-san has launched a Tender Offer of his own. Murakami-affiliated entities Minami Aoyama Fudosan KK and Reno KK have launched a Tender Offer at ¥750/share to buy a minimum of 9,100,900 shares and a maximum of all remaining shares. The entities currently own 3,355,900 shares (13.47%) between them – up from 11.71% reported up through yesterday [as noted in yesterday’s insight, it looked likely from the volume and trading patterns prior to yesterday’s Large Shareholder Report that they had continued buying].
Buying a minimum of 9,100,900 shares at ¥750/share should be easier for Murakami-san’s bidding entity than buying a minimum of 12,456,800 shares (Bain Capital’s minimum threshold) at ¥700/share, but the Murakami TOB Tender Agent is Mita Securities, which is a lesser-known agent and it is possible that the main agent for the Bain tender (SMBC Securities) could make life difficult for its account holders.
The likelihood that Murakami-san doesn’t have his bid funded or won’t follow through is, in my eyes, effectively zero. Tender Offer announcements are vetted by both the Kanto Local Finance Bureau and the Stock Exchange. You know this has been in the works for a couple of weeks simply because of that aspect. But one of the two documents released today includes an explanation of the process Murakami-san’s companies have gone through to arrive at this bid, and that tells you it may have gone on longer.
So what next? The easy answer is there is now a put at ¥750/share. Unless there is not. Weirder things have happened.
Read on…
For Recent Insights on the Kosaido Situation Published on Smartkarma…
After issuing the prospectus back in late January, CEVA’s board of directors recommended shareholders to not tender shares in the belief that shareholders could realise a higher value with their continuing investment.
Investors thought otherwise and have cashed out at CHF 30/share, a 62.8% premium to the undisturbed price. The massive share price under performance of CEVA subsequent to its listing on the 4 May 2018 – down 33% five months out from the IPO – would have crystallized that decision to tender.
CEVA’s board now recommend shareholders tender into the upcoming additional offer period. If delisting occurs, it is expected concurrently occur with a squeeze-out, which would be expected to take place in the third quarter of 2019 once all stock exchange and other legal conditions are fulfilled.
Harbin Electric Co Ltd H (1133 HK)‘s (“HE”) composite doc for its merger by absorption has been dispatched. HE’s major shareholder Harbin Electric Corporation (HEC), an SOE, is seeking to delist the company by way of a merger by absorption at HK$4.56/share, an 82.4% premium to last close. The offer has been declared final. The IFA (Somerley) considers the offer fair & reasonable.
As HE is PRC-incorporated with unlisted domestic shares, the transaction is executed as a hybrid scheme/tender offer. The proposal requires ≥ 75% for, ≤10% against, in a scheme-like vote from independent H-shareholders. HEC holds no H shares. A 10% blocking stake is equal to 67.5mn shares. Should the resolution pass, the tendering acceptance condition in this two-step Offer is 90% of H shares out. Those who do not tender will be left holding unlisted scrip.
Indicative Timetable
Date
Data in the Date
27-Dec-18
Announcement
20-Mar-19
Composite doc
7-May-19
H Share Class meeting/EGM
20-May-19
Close of acceptances, Last date to be declared unconditional.
27-May-19
Last day of trading on HKEx
29-May-19
Payment. Assuming unconditional on the 20 May.
17-Jun-19
Last day for Offer remaining open for acceptance, assuming unconditional on 20 May
Source: Composite doc, CapIQ, Bloomberg. *Eikon’s number is at 30 June
In my prior insight, I discussed how the offer was below Harbin’s net cash, using CapIQ 1H18 numbers. That conclusion was not correct. While CapIQ’s net cash exceeds the consideration, its number excludes notes payable, a material number.
Using FY18 figures provided in the composite document, I estimate net cash/share of $3.18, ~70% of the consideration payment. Bloomberg’s number is higher again, while my understanding is Eikon’s $1.73/share (as at 30 June 2018) net cash figure includes (I have not verified, nor drawn a conclusion whether this would indeed be correct) deposits from customers and banks.
What to Do?
The significant offer premium to last close, the material drop in FY18 profit and the zero possibility of a competitive bidder emerging, suggests this Offer falls over the line.
The blocking stake at the H-share meeting is a risk. Although no single shareholder has the requisite stake to block the deal, collectively it is achievable.
The 90% tendering also, prima facie, appears a risk; yet such an acceptance threshold is not uncommon (Shanghai Forte (2337 HK) also required a 90% acceptance condition in 2011; while Hunan Nonferrous Metals H (2626 HK)‘s 2015 merger by absorption required 85%) and once the EGM resolution has been approved, there is little incentive to hold onto shares as Harbin will be delisted. Shares cannot be compulsory acquired.
However, I still consider “fair” to be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers.
Dissension rights are available, although I am not aware of any precedents, nor the calculation methodology of a “fair price” under such a dissension, nor the timing of payment.
Trading at a wide gross/annualised spread of 9.6%/61.4%, implying a >80% chance of completion. The current downside should this break is 40%. I don’t see an attractive risk/reward here.
Itochu planned on buying 7.21 million shares out of the 75.37mm shares which bear voting rights (as of the commencement of the Tender), and 15,115,148mm shares were tendered, which led to a pro-ration rate of 47.7% which was 0.3% below my the middle of my “wide range” expected pro-ration rate of 42-54% and 0.7% beyond the 44-47% tighter range discussed in Descente Descended and Itochu Angle Is More Hostile of 28 February.
Two more central ideas were discussed in that piece:
The hostility shown by Descente management during the Tender Offer had led Itochu to abandon discussions about post-tender management until after the Tender Offer was completed. Both sides indicated a willingness to pick up where things had left off – at Descente’s request – but Descente needed to stew a bit.
The revelation by ANTA Sports in an interview with the CEO in the Nikkei in late February that ANTA supported Itochu meant that the likelihood of Itochu NOT having enough votes to put through its own slate of directors was almost zero. At a combined 47.0% of post-Tender voting rights, if 94% or less of shares were to vote, it would mean Itochu could get the majority of over 50% and determine the entire slate of directors themselves. If there was another shareholder holding a couple of percent which supported Itochu, it would be a done deal even if everyone voted. And that 2-3% existed.
So… the threat that Itochu would hold an EGM to seat new directors to oblige a stronger course for management was a very strong probability. Management who was rabidly opposed to Itochu owning the stake could not very well bow down in front of Itochu post-tender just to save its own hide – not after the employee union and the OB group came out against. President Ishimoto had effectively put himself in an untenable position unless a miracle occurred because Itochu could not legally walk away from its offer, and Ishimoto-san was bad-mouthing Itochu even as they were negotiating during the Tender Offer Period.
It was not, therefore, any surprise that President Ishimoto would step down. The surprise for me was that the news he would go came out as talks commenced over the weekend (but did not “bridge the gap” as the Nikkei reported), before we got to the first business day post-results.
Talks apparently continue with no resolution, and the media reports offer no hint as to what the issues might be.
Recent Insights on the Descente/Wacoal and Itochu/Descente Situations on Smartkarma
On November 13th last year, Linkbal Inc (6046 JP) announced it was looking to move from MOTHERS to the TSE First Section. The stock rallied. At the same time the company said that it was preparing to file an application for the move.
On March 5th, the company announced a forthcoming tachiaigai bunbai offering designed to increase the float. That tachiaigai bunbai offering (designed for retail investors only) takes place this morning after an announcement the company would oversee the offer of 970,000 shares (about 5% of the company but about 180% of the float currently held by public retail investors) at a price of ¥905/share (1,000 shares max per buyer), which is a 3% discount to yesterday’s close of ¥933 yen.
This will get it most of the way towards meeting the requirements, but likely not all the way. An inclusion is still months off. And there would likely be another sale to increase shareholder count by 800-1000 before then, whether in the form of a Public Offering/Uridashi or in the form of another tachiaigai bunbai.
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SamE Common/1P reached a +2σ level. On a 120D horizon, price ratio is currently at the peak. Pref discount is at 21.04%. This of course is a 120D high. We are now right at the AGM phase (Mar 20). Common gets boosted around this time. It seems true that the recent M&A stories also helped Common move over 1P.
I don’t expect to see a continued upwardly divergence in favor of Common from this point. AGM factor should be gone this week. We still have M&A factor. This will likely be offset by shorter-term fundamentals factors such as further falling profits and DRAM design flaws.
Div yield difference on FY19e is 0.87%p. This is even higher than last year which was a record high in 3 years. I expect SamE 1P to make a move over Common from this point.
On Thursday, MYOB Group Ltd (MYO AU) released its Scheme Booklet in which the Independent Expert, Grant Samuel, valued MYOB between A$3.19 and A$3.69 per share. Consequently, Grant Samuel concluded that KKR & Co Inc (KKR US)‘s revised proposal of A$3.40 cash per share is fair and reasonable. However, Manikay Partners continues to voice concerns about the KKR proposal as it believes MYOB is worth well in excess of A$4.00 per share.
With the shares 4 cents below KKR’s revised proposal, we continue to believe shareholders should cash out as Manikay’s valuation is only justifiable if MYOB’s delivers flawless execution.
The revision was a remedial requirement (announced on the 27 Dec) after the Office of the Energy Regulatory Commission (ERC) resolved to approve, in principle, the proposed merger of GSPC and GLOW, provided GLOW sells Glow SPP1 before or at the same time as the merger. The ERC had previously rejected the merger on the 11 October.
Subsequent to the SPP1 sale, the purchase price under the SPA was adjusted to Bt91.9906/share, a ~3% decline from the initial Bt94.892/share price under the original SPA.
My discussions with GLOW indicate the SPA is expected to complete this week – i.e. Engie crosses its 69.11% holding in GLOW to GPSC – and that the 247-3 and 247-4 forms will be submitted by GPSC in “around” 1-2 weeks after the close of the main transaction. The ERC signed off on the SPA last Friday.
Assuming late-May payment, this is currently trading at a gross/annualised spread of 1.6%/8.8%.
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
On Wednesday, Sigma Healthcare (SIG AU) rejected an indicative takeover offer from rival Australian Pharma Industries (API AU). Shareholders were disappointed with the news, with Sigma’s shares closing 12.3% lower at A$0.54 per share. API shares fared better and fell 3.6% to A$1.35 each.
We believe Sigma’s board were left with the tough choice of accepting a lowball offer or improving the existing business and riding out the inevitable share price fall. By rejecting the API bid, the Sigma board made the difficult but right choice, in our view. While further downside risk to the share price is limited, we caution that shareholders require patience as the road to share price recovery will be long.
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On the 14th March 2019, Australian property developer, Villa World Ltd (VLW AU)announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close.
The offer is conditional on due diligence, unanimous approval of VLW’s board of directors and the receipt of FIRB and other regulatory approvals.
AVID’s indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.
During 2018, VLW’s share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.
Ho Bee Land Ltd (HOBEE SP), VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share – and a high of A$2.18/share – lifting its stake to 9.41%. Its stake in VLW accounts for only 1.5% of its market cap. I would not be surprised if Ho Bee is still buying in the market.
VLW announced a 1H19 NPAT of A$17.6mn ($17.3mn) last month – slightly above its $16mn to $17mn guidance – and declared a A$0.08/share franked dividend. Assuming FY19E profit of $27mn, VLW is trading at a not unreasonable 10x PER and an attractive 7.3% yield, one of the highest yields among its peer group, assuming the high-end of the 50-75% payout ratio policy.
Late Monday evening, Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector. L&T is seeking to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN) through a three-step transaction. Mindtree’s founders/promoters together have a 13.3% stake and staunchly oppose the takeover. L&T’s open offer presents an opportunity for longstanding large shareholders to partially or fully exit their stakes at a reasonable price.
L&T’s open offer is less enticing for minority shareholders due to the small premium. Minority shareholders hope that a bidding battle will drive up bid premiums. However, we believe that minority shareholders should stick with their holdings as Mindtree’s fundamentals remain solid, but a chance of a material bump to L&T’s open offer is low.
Originally scheduled to close March 1st, near the end of February 2019, Bain Capital Japan’s acquisition vehicle (BCJ-34) extended the ¥610/share Tender Offer MBO deadline by 11 days from March 1st to March 11th. Of course, that was something of a moot point – by that time, the shares hadn’t traded at less than a 15% premium to terms for a week after well-known local activist Yoshiaki Murakami’s vehicle Reno KK and affiliates had taken a stake of just below 10%.
On the 8th of March, BCJ-34 raised its Tender Offer Price by 14.8% to ¥700/share and extended the Tender Offer by almost two weeks to the 25th of March. It also lowered the amount which needs to be bought to 50.1% from 66.67%. In that amended filing the buyer included words 「公開買付者は、本開買付条件の変更後の本公開買付価格を最終的なものとし、今後、本公開買付価格を一切変更しないことの決定をしております。」which roughly translates to “The Offeror, having changed the terms, has made This Tender Offer Price final, and from this point onward, has decided to absolutely not raise the Tender Offer Price.”
That’s that, but since then, the shares have not traded as low as the newly raised Tender Offer Price.
With one week to go, Aoyama Fudosan yesterdat announced it had lifted its stake to 747,800 shares or 3.00% of shares out, which brings the combined Reno KK/Aoyama Fudosan stake to 11.71%.
Given the 1.1mm shares traded since the 11th (i.e. shares which if Murakami-san had bought he would not have to report until the 19th (today)) and that the share price was up sharply in decent volume this afternoon, it would not be difficult to imagine a higher stake being reported in the days ahead.
Murakami-san is not going away. This is starting to look a bit like another Murakami situation of recent. And that one turned out well.
Back in August, I argued a case for the privatisation of Aveo Group (AOG AU), which at the time was trading at a P/B of 0.6x versus ~2x for peers. Also in late August, Aveo announced a strategic review to examine all options to close the gap between Aveo’s market capitalisation and the value of the underlying retirement properties.
Aveo’s steep discount to peers was/is ostensibly due to the presence of Mulpha International (MIT MK)‘s large stake (22.5%), crowding out institutional ownership; Mulpha and Aveo sharing the same chairman, inferring (yet categorically denied) Aveo’s absence of independence; and the ongoing class action lawsuit.
That was a brutal recommendation, and lacking a hard catalyst, shares declined to $1.55 in January, recovering to $2.05 today, still ~12% shy of the price at the time of my last note.
This time is different.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with AFR reporting (paywalled) that Lone Star had joined the fray. Other interested parties are believed to include Blackstone and Cerberus Capital Management.
Aveo’s share price is up ~20% since announcing the receipt of the indicative bids, having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
Further afield, Mulpha trades at a P/B of 0.25x, while the stake in Aveo accounts for 104% of its market cap, and around 25% of NAV. It’s discount to NAV has significantly narrowed since February, but Mulpha continues to trade at a discount to 76%.
Timeline of Events
Date
Data in the Date
End-2005
Mulpha’s stake in Aveo (then called FKP) was acquired after a share swap with Mulpha Norwest
On March 6th, a day before the Hitachi Ltd (6501 JP) Taiwan elevator business Tender Offer for just over a third of Yungtay Engineering (1507 TT) was expected to close, the closing date was extended to 22 April, notably because the acquiring entity had not yet received Taiwan Ministry of Economy Investment Commission approval for the foreign investment, and the Fair Trading Commission had not yet given the green light, so there was no hope of getting it done by the next day in accordance with Taiwan’s Public Acquisition of Public Company Shares Administrative Law Article 18 Para 2. The proposed purchase price was unchanged at NT$60.
While there have been noises in the market that both Otis and Schindler, which are reported to hold roughly 5-6% each (last year’s shareholder list included UT Park View which United Technologies (UTX US)‘s 10-K showed was a wholly-owned sub) were willing to offer more than Hitachi’s offered NT$60 (and MOPS filings indicate the board approval meeting in end-January referenced a NT$63 potential bid), there was no competitive bid made public and to the authorities by five business days prior to the first bid close (which would have been 26 Feb) as per the same law Article 7 Para 2.
Since then, there have also been other ructions. While terms remain unchanged, it is worthwhile looking into what has been going on. This is still interesting and because of its various inputs, slightly disconcerting to some, and the modalities continue to surprise me.
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Navitas Ltd (NVT AU), an Australian-listed education company, entered into a binding agreement to be acquired by the BGH Consortium. As a reminder on 15 January 2019, the BGH Consortium bid against itself by offering a revised proposal of A$5.825 cash per share, 6% higher than its previous rejected offer.
Navitas’ board have unanimously recommended the scheme. We believe that BGH Consortium’s proposal is attractive and shareholders should accept the offer.
All other details of the scheme remain unchanged. The court meeting is to take place on the 25 March, while the long stop is the 20 June – unless both companies agree to an extension.
On Petrus
Petrus has yet to respond to the Offer increase; however, it would be surprising if its stance against the takeover has altered.
In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco – excluding the Tanzanian and Mexican investments – with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis.
Shortly before the increase, Petrus was quoted (paywalled) it would vote its 3.95% against the takeover, while adding “Our satisfaction with the value our board deems as satisfactory has decreased further“, with reference to the release of Ophir’s full-year results on the 12 March.
On Sand Grove/Coro
Subsequent to the bump, Coro Energy PLC (CORO LN), which had previously submitted a non-binding cash/scrip reverse takeover offer on the 8 March, declared it has no intention to bid.
Sand Grove has also announced it has given an irrevocable undertaking to vote its 18.73% in favour of the scheme. Coro held discussions with Sand Grove before abandoning its bid.
Trading Tight – Upside Less Assured
Medco’s Offer is conditional on 75%+ approval from Ophir’s shareholders, which appears less tenuous following the 4.5% bump and Sand Grove’s irrevocable undertaking. While I consider the offer for Ophir sub-optimal – and shares have closed above terms on 30% of the trading days since Medco’s initial offer – Petrus alone cannot disrupt the vote. Of note, the next three largest shareholders behind Sand Grove have reduced their holdings since end-December 2018.
The gross/annualised spread is tight at 0.7%/2.6%, assuming early-July payment. The risk/reward in punting at or just below terms is now less attractive following this Offer Price increase and the irrevocable undertaking.
The return on this pair trade was 8.2%. (Thisassumes no commission costs, pricing spreads, taxes, or borrowing cost) using closing share price as of March 12th to March 21st, 2019. This trade was made over a period of 9 days so the annualized returns would be 332%.
We believe that Hyosung TNC is up so much in the past 9 days mainly because it appears that a few investors saw this stock as an undervalued stock that was being ignored by the market. In our report, Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC, we mentioned that Hyosung TNC appears to be a turnaround story driven by the following four key factors:
In this report, we provide an analysis of our pair trade idea between Ecopro Co Ltd (086520 KS) and Ecopro BM Co Ltd (247540 KS). Our strategy will be to go long Ecopro Co and to go short on Ecopro BM. Our base case strategy is to achieve gains of 7-9% on this pair trade.
Our SoTP valuation suggests a value per share of 52,004 won for Ecopro Co Ltd (086520 KS), representing 65% higher than current share price. Ecopro Co. currently has a market cap of 691 billion won. Ecopro Co’s 56% stake in Ecopro BM is worth 819 billion won, representing 119% of its market cap. Ecopro BM’s share price has jumped nearly 50% since its IPO on March 5th. We believe Ecopro Co has a much higher upside right now versus Ecopro BM over the next one to six months.
Established in 1998, Ecopro Co started its business focusing on air pollution control related products. It also has major investments in companies such as Ecopro BM Co Ltd (247540 KS) and Ecopro Innovation (unlisted). Ecopro Co’s major customers include Samsung Electronics, SK Hynix, and Hyundai Heavy Industries.
In my original insight on January 15, 2019 TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity, I proposed setting up a stub trade to profit from the mis-priced stub business of Amorepacific that was trading at its widest discount to NAV in at least three years. During the 65 calendar days that followed, Amorepacific Group (002790 KS) has gained 7.3% and the outperformed Amorepacific Corp (090430 KS) by 2.84%. The trade has reverted to average levels in a period of about two months and in this insight I will outline why I think the trade is over.
In this insight I will discuss:
Performance of ALL my recommended stub trades
a post-trade analysis on the Amorepacific stub
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