Korea / Special Situations, Clepsydra Capital

Sanghyun Park

I investigate special situations in Korea.

Korea / Special Situations

GS Merger Arb: Let's Capitalize on a Potential Arb Yield Spike on KOSDAQ 150 Rebalancing (June 28)

Green Cross Merger Swap Summary & Arb Spread Status

GS Retail/Home Shopping Merger Swap: Currently at 3.4% Div-Adj. Spread

GS Retail Merger Swap Arb Yield Currently at 4.27%: Trade It Now Rather than Later

GS Retail Merger Swap Arb Trade Begins This Monday

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<h2>Merger arbitrage yield at +6% now.</h2><p>GS Retail merger swap's arb trade yield is now back to +6%. To be exact, it is 6.31% at the current prices as I am writing this post (1:10 PM in Korea local time).</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/206/668/original/GS+Retail+%26+GS+Home+Shopping+merger+swap+arb+yield.png?1621224773" class="editor-image img-responsive" data-smartkarma-image-id="206668"></figure></section><h2>Here is a quick recap of the stock swap.</h2><p>The swap prices of both GS Retail (the acquiring company) and GS Home Shopping (the target company) were already fixed as follows:</p><p><strong>GS Retail</strong></p><ul>
<li>A: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩34,903</li>
<li>B: 1-week VWAP (Nov 3~9, 2020) = ₩33,098</li>
<li>C: 1-day close (Nov 9, 2020) = ₩33,400</li>
<li><strong>Swap price: (A+B+C)/3 = ₩33,800</strong></li>
</ul><p><strong>GS Home Shopping</strong></p><ul>
<li>A: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩140,216</li>
<li>B: 1-week VWAP (Nov 3~9, 2020) = ₩141,969</li>
<li>C: 1-day close (Nov 9, 2020) = ₩146,100</li>
<li><strong>Swap price: (A+B+C)/3 = ₩142,762</strong></li>
</ul><p>These swap prices give a swap ratio of 4.22368 for 1. <strong>GS Home Shopping shareholders will get 4.22368 GS Retail shares for each GS Home Shopping share.</strong></p><p>So, the swap yield calculation is straightforward. You buy a GS Home Shopping share for the current price of <strong>₩146,400</strong>. Then, you short <strong>4.22368</strong> GS Retail shares for the current price of <strong>₩155,643 </strong>(₩36,850 x 4.22368). Your one GS Home Shopping share will be converted into 4.22368 GS Retail shares. So, it is basically like you instantly gain <strong>₩9,843</strong>, giving a <strong>6.31%</strong> trade yield, excluding transaction costs.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Spread - swap"}'>Spread - swap</td>
<td style="text-align: center;" data-sheets-value='{"1":2,"2":"Acquirer"}'>Acquirer</td>
<td style="text-align: center;" data-sheets-value='{"1":2,"2":"Target company"}'>Target company</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Current price"}'>Current price</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":36850}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]'>₩36,850</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":146400}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula='=googlefinance(Terms!R[5]C[-1], "price")'>₩146,400</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Swap price"}'>Swap price</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":33800}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=Terms!R[7]C[0]">₩33,800</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":142762}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=Terms!R[13]C[-1]">₩142,762</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - x Swap ratio"}'><strong>- Current price x Swap ratio</strong></td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":155642.73328999997}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-2]C[0]*Terms!R[15]C[0]"><strong>₩155,643</strong></td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":146400}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-2]C[0]"><strong>₩146,400</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Spread"}'><strong>Arb trade yield</strong></td>
<td colspan="2" rowspan="1" style="text-align: center;" data-sheets-value='{"1":3,"3":0.06313342411202169}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-1]C[1])/R[-1]C[1]"><strong>+6.31%</strong></td>
</tr>
<tr><td colspan="3" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table><h2><strong>Cancellation risk</strong></h2><p>Of course, there is a cancellation risk. Two potential factors may lead to cancellation.</p><p><strong>The first one is shareholder approval.</strong> The shareholder approval ratio is two-thirds of attending votes and one-thirds of all voting votes. Both companies require shareholder approval. A small-scale merger only requires shareholder approval from an acquiring company. But this didn't qualify as a small-scale merger.</p><p>The shareholder meeting is scheduled for May 28 for both companies, less than 10 days from now.</p><div id="ember3040" data-message-id="386959"><div id="ember3041">
<ul>
<li>
<a href="https://kind.krx.co.kr/common/disclsviewer.do?method=search&amp;acptno=20210325001449&amp;docno=&amp;viewerhost=&amp;viewerport=" target="_blank" rel="noopener">This is the regulatory filing by GS Retail for the EGM.</a><a href="https://kind.krx.co.kr/common/disclsviewer.do?method=search&amp;acptno=20210325001449&amp;docno=&amp;viewerhost=&amp;viewerport=" target="_blank" rel="noopener"></a>
</li>
<li><a href="https://kind.krx.co.kr/common/disclsviewer.do?method=search&amp;acptno=20210325001266&amp;docno=&amp;viewerhost=&amp;viewerport=" target="_blank" rel="noopener">This is the regulatory filing by GS Home Shopping for the EGM.</a></li>
</ul>
<p><strong>The second one is appraisal right exercise cost</strong>. Both companies' appraisal rights exercise prices are already fixed as follows:</p>
<p><strong>GS Retail </strong></p>
<ul>
<li>A: 2-month VWAP (Sep 10~Nov 9, 2020) = ₩34,373</li>
<li>B: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩33,903</li>
<li>C: 1-week VWAP (Nov 3~9, 2020) = ₩33,098</li>
<li>Appraisal rights exercise price: (A+B+C)/3 = ₩34,125</li>
</ul>
<p><strong>GS Home Shopping</strong></p>
<ul>
<li>A: 2-month VWAP (Sep 10~Nov 9, 2020) = ₩134,380</li>
<li>B: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩140,216</li>
<li>C: 1-week VWAP (Nov 3~9, 2020) = ₩141,969</li>
<li>Appraisal rights exercise price: (A+B+C)/3 = ₩138,855</li>
</ul>
<p>The dissident shareholders opposing the merger can request the companies to purchase their shares at the appraisal rights exercise price. GS Retail and GS Home Shopping set the ceiling of the total cost for stock repurchase at <strong>a combined ₩350bil</strong>. If<strong> the total cost for both companies reaches ₩350bil, they will consider canceling the merger. </strong>But that doesn't mean that they will automatically cancel the merger. Some cases in the past had a merger go through despite the total stock repurchase cost exceeded the ceiling set by a company.</p>
<p>Only those shareholders who held onto the shares until November 11 last year and then gave a dissenting opinion between May 13~27 this year are eligible to exercise the appraisal rights from May 28 to June 17.</p>
</div></div>

Merger arbitrage yield at +6% now.GS Retail merger swap's arb trade yield is now back to +6%. To be exact, it is 6.31% at the current prices as I am writing this post (1:10 PM in Korea local time).Here is a quick recap of the stock swap.The swap prices of both GS Retail (the acquiring company) and GS Home Shopping (the target company) were already fixed as follows:GS Retail
A: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩34,903
B: 1-week VWAP (Nov 3~9, 2020) = ₩33,098
C: 1-day close (Nov 9, 2020) = ₩33,400
Swap price: (A+B+C)/3 = ₩33,800
GS Home Shopping
A: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩140,216
B: 1-week VWAP (Nov 3~9, 2020) = ₩141,969
C: 1-day close (Nov 9, 2020) = ₩146,100
Swap price: (A+B+C)/3 = ₩142,762
These swap prices give a swap ratio of 4.22368 for 1. GS Home Shopping shareholders will get 4.22368 GS Retail shares for each GS Home Shopping share.So, the swap yield calculation is straightforward. You buy a GS Home Shopping share for the current price of ₩146,400. Then, you short 4.22368 GS Retail shares for the current price of ₩155,643 (₩36,850 x 4.22368). Your one GS Home Shopping share will be converted into 4.22368 GS Retail shares. So, it is basically like you instantly gain ₩9,843, giving a 6.31% trade yield, excluding transaction costs.







Spread - swap
Acquirer
Target company


Current price
₩36,850
₩146,400


Swap price
₩33,800
₩142,762


- Current price x Swap ratio
₩155,643
₩146,400


Arb trade yield
+6.31%

Source: DART &amp; KRX

Cancellation riskOf course, there is a cancellation risk. Two potential factors may lead to cancellation.The first one is shareholder approval. The shareholder approval ratio is two-thirds of attending votes and one-thirds of all voting votes. Both companies require shareholder approval. A small-scale merger only requires shareholder approval from an acquiring company. But this didn't qualify as a small-scale merger.The shareholder meeting is scheduled for May 28 for both companies, less than 10 days from now.


This is the regulatory filing by GS Retail for the EGM.

This is the regulatory filing by GS Home Shopping for the EGM.

The second one is appraisal right exercise cost. Both companies' appraisal rights exercise prices are already fixed as follows:
GS Retail 

A: 2-month VWAP (Sep 10~Nov 9, 2020) = ₩34,373
B: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩33,903
C: 1-week VWAP (Nov 3~9, 2020) = ₩33,098
Appraisal rights exercise price: (A+B+C)/3 = ₩34,125

GS Home Shopping

A: 2-month VWAP (Sep 10~Nov 9, 2020) = ₩134,380
B: 1-month VWAP (Oct 12~Nov 9, 2020) = ₩140,216
C: 1-week VWAP (Nov 3~9, 2020) = ₩141,969
Appraisal rights exercise price: (A+B+C)/3 = ₩138,855

The dissident shareholders opposing the merger can request the companies to purchase their shares at the appraisal rights exercise price. GS Retail and GS Home Shopping set the ceiling of the total cost for stock repurchase at a combined ₩350bil. If the total cost for both companies reaches ₩350bil, they will consider canceling the merger. But that doesn't mean that they will automatically cancel the merger. Some cases in the past had a merger go through despite the total stock repurchase cost exceeded the ceiling set by a company.
Only those shareholders who held onto the shares until November 11 last year and then gave a dissenting opinion between May 13~27 this year are eligible to exercise the appraisal rights from May 28 to June 17.


GS Retail Merger Arbitrage: Yield Back at +6% & Local Arb Traders in Action