Last Week in Event SPACE: ING Life, Nikkei 400 Rebal, Raysum, FamilyMart, Investa, Swire

Last Week in Event SPACE ...

• Reportedly Shinhan Financial (055550 KS) is in the final stages of negotiations with MBK to acquire a 59.15% stake in Ing Life Insurance Korea Ltd (079440 KS)
• It's an awful index, but the JPX Nikkei 400 is an index, it rebalances, so we look at it
• Raysum Co Ltd (8890 JP)'s bigly buyback raises EPS, eventually enables offer leading to TOPIX inclusion
• The more interesting trade is what happens in the aftermath of the Familymart Uny Holdings (8028 JP) tender offer
• There's a decent chance the offer for Investa Office Fund (IOF AU) gets bumped after ICPF gets the nod to vote its ~20% stake
• Swire Pacific Ltd Cl A (19 HK)'s premium to Swire Pacific Ltd-Cl B (87 HK) of 25%, compares to the 10-year average of 8%

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

JPX Nikkei 400 Rebalance

Travis Lundy went deep on the JPX Nikkei 400 Rebalance, which was announced after the August 7th close and takes effect on 30th August. The index has an inherent ability to sell low and buy high, which is hardly endearing. But still, it's an index, it rebalances, and it needs to be looked at.

• This year the inclusions average 2.0 days of ADV and the big one, Recruit Holdings (6098 JP), is 4.7x ADV. Topre Corp (5975 JP) is next at 3.9x ADV. Another 8 names are between 2.5-3.1x ADV.
• There is also a sell of about ¥20+bn of Sony Corp (6758 JP), a sell of ¥9.6bn of Toyota Motor (7203 JP), a sell of ¥8.5bn of Softbank Group (9984 JP), of ¥7.5bn of Keyence Corp (6861 JP) and ¥4.4bn of Honda Motor (7267 JP) on inclusion day.
• Travis is nominally bullish on Recruit in any event, but not necessarily bullish the Adds vs the Deletes for this JPNK400 rebalance.

(link to Travis' insight: JPX Nikkei 400 Rebalance - 2018 Edition)

Raysum Co Ltd (8890 JP) (Mkt Cap: $643mn; Liquidity: $3.4mn)

Smallcap property developer/re-developer/manager Raysum announced a significant buyback (~14.7% of outstanding shares), complimenting Q1 earnings which look pretty spectacular in terms of year-on-year growth of revenue, but indicate a troubling higher SG&A cost for Q1.

• It is a big buyback and effectively represents the entire net profit expected in the year to March 2019. However, the main shareholder will still own a super-majority and is not going anywhere. This is an effort to make sure ROE is high, and a way for the owner to cash out a bit.
• There is a possibility that this will allow the company to get a bit closer to a TSE1 listing. Travis would not dismiss this action as an explicit goal of the buyback.

(link to Travis' Raysum (8890 JP) Own Share Tender - Big Accretive Buyback)

Ing Life Insurance Korea Ltd (079440 KS) (Mkt Cap: $2.7bn; Liquidity: $3.7mn)

Reportedly Shinhan Financial (055550 KS) is in the final stages of negotiation to buy a controlling stake in Korea's No. 6 life insurance firm ING Life from MBK. Numbers being circulated indicate MBK is asking ₩2.4tn (~₩49,484/share) for its 59.15% stake. This is substantially lower than the initial asking price of ₩3tn but still a 36% management premium on the Aug 14 closing price. However, Shinhan wants to pay ₩2.1tn, around a 20% premium. Following this announcement, ING Life Insurance Korea's stock price fell 13% and Shinhan Financial's share price rose slightly by 0.7%.

• The acquisition of ING Life Insurance Korea by Shinhan Financial Group would sharply lift Shinhan's ranking in the Korean life insurance market from 10th place to 4th or 5th place.
• ING Life generated net profit of ₩340bn in 2017. Its ROA was 9% in 2017 and 11% in 1H18. Considering the acquisition stake of 59.15%, Douglas Kim believes an appropriate acquisition price (prior to management premium) would be about ₩2.1tn (₩340bn/9.5% x 0.5915). MBK's asking price is 14% higher.
• According to Korean regulations, if Shinhan Financial (unlikely) opts to acquire a 100% stake through a full merger, it would need to provide appraisal rights to the minority shareholders - there is no legal requirement to provide appraisal rights to the minority shareholders if Shinhan Financial acquires only the controlling stake in ING Life Insurance Korea.

links to:
Sanghyun Park 's insight: 4 Key Issues of Shinhan Financial Group Taking Over ING Life Korea.
Douglas' insight: Sale of ING Life Insurance to Shinhan Financial Group?

Briefly ...

LG Uplus Corp (032640 KS) will be included in the MSCI Korea Index at the close of trading on the 31 Aug. Sanghyun estimates an inclusion event of US$274.1mil, ~7.09% of current float-adjusted market cap, and around 10 trading days of volume. A non-negligible amount. LG Uplus is up 3.1% since the inclusion announcement. Valuation-wise, the price is a bit inflated, but not terribly bad compared with its historic levels.
(link to Sanghyun's insight: LG Uplus MSCI EM Index Re-Inclusion: Price Rally Is Expected Ahead of Aug 31)

A possible overhang on Samsung C&T (028260 KS)? KCC Corp (002380 KS) is kicking the tyres on US-based Momentive Performance Materials, which has a price tag of ~US$3bn - call it ~₩3tn. KCC has ₩900bn worth of cash on hand and has formed a consortium with Wonik Ips (240810 KS) and Wonik Materials (104830 KS), so it probably won't need to stump up the full ~₩2tn shortfall itself. Its 8.97% stake in Samsung C&T is worth ₩2.1tn, which would more than cover the cost of this acquisition.
(link to Sanghyun's insight: KCC's Samsung C&T Equity Block Deals May Happen Soon: It Worsens C&T Overhang Concern)

Investa Office Fund (IOF AU)(Mkt Cap: $2.2bn; Liquidity: $12.4mn)

In a complex, technical move, Investa Commercial Property Fund (ICPF) is now permitted to vote its ~20% at the (adjourned) 29 August shareholder meeting, after selling 50% of the management platform to Macquarie.

• One plausible outcome is that ICPF uses its stake as a bargaining chip, such that it will support the transaction provided it continues in its role as the platform manager. That support may necessitate a bump in the offer.
• Blackstone's offer is still a decent price, and IOF's management concluded this is the best offer after numerous approaches. However, the Independent Expert's assessed value range for IOF units is $5.38 to $5.41. Shares closed Friday at A$5.10.
• IOF is probably worth a few more cents above Blackstone's proposal and this latest development enabling ICPF to vote does advance the potential for an increase in the Offer terms. The deal has NOT been declared final. I think there is a decent chance this deal gets bumped.

links to my insights:
Investa Office's Offer Looks Set to Get Bumped
Investa Office's Shareholder Vote: It's Complex & Technical

Familymart Uny Holdings (8028 JP) (Mkt Cap: $13.2bn; Liquidity: $68mn)

Shares went ex-tender on Tuesday, rising 2% to close at ¥10,840/share, with a lot of that trading at the close. Since the beginning, this has been a difficult deal because of the VERY tight float both before and after the tender event. Travis would have thought that the arb spread combined with the availability of borrow and the risk of not knowing how many others would tender has made owning a residual risk of any size an unattractive one.

• All in all, it has been an interesting trade. But the MUCH more interesting trade is the pro-ration of just 38.1%. That is at the low end of the expected range but it is within the expected range, which was, admittedly, very wide. This suggests to Travis cross-holders were prevailed upon to sell, most active holders sold, some arbs were in, and some may have bought above ¥11k pre-tender and tried to use the tender as a put option. It also suggests to Travis some people ‘shorted’ into the tender. All of this has ramifications near-term.
• Travis has been bearish the Tender Event (i.e. not seeing it as that attractive on a reward/risk basis despite its size) and is generically bearish FamilyMart on valuations compared to its peers. He is also bearish the stock because he thinks the Nikkei could rejigger the Nikkei 225, just that the timing is unclear.

(link to Travis' insight: ITOCHU Tender for FamilyMart - Tender ProRation Estimate Considerations)

Capilano Honey (CZZ AU) (Mkt Cap: $136mn; Liquidity: $.2mn)

Capilano announced a Scheme entitling CZZ's shareholders to $20.06/share (cash), a 28.2% premium to last close and an implied FY18 PER and EV/EBITDA of 19.3x and 12.5x, respectively. A scrip alternative is also available on a 1:1 basis (& an option to subscribe for more) in an unlisted entity. The scheme is subject to at least 15% of shareholders electing to receive scrip. Wroxby P/L, a 20.6% shareholder, has given an irrevocable to vote in favour of the scheme and elect for the scrip alternative, taking care of the minimum.

• Pricing looks fair, at a two-year high and a reasonable premium to last close, while shareholders are provided with an opportunity to remain invested - albeit on an unlisted basis - should they so choose.
• Capilano has recently faced some social media pushback on branding of certain products, and recently one of its main customers stopped stocking one its products, in order to support local producers. An argument could be made the Scheme has a slight opportunistic tilt.
• I would not rule out a competing offer and any such bidder has until 15 November to bid. Expect CZZ to trade tight to terms. Currently trading at a 1.6%/5.4% gross/annualised spread.

(link to my insight: All the Buzz on Capilano's Scheme Offer)

Briefly ...

Sanghyun revisits HDC Holdings (012630 KS)'s tender offer (30% of total shares) for Hyundai Dev Co (294870 KS). HDC Holdings is down 10.15% since the July 31 offer announcement vs. 3.13% for Hyundai Dev Co. HDC is likely highly incentivized to make this tender appealing by pulling down Holdings' price relative to Hyundai Dev Co price until the Aug 23-27 swap price determination period relative to Hyundai Dev Co price. After which, they will try to push up Holdings price. Sanghyun advocates a Short HDC Holdings and Long and tender Hyundai Dev Co to repay HDC Holdings.
(link to Sanghyun's insight: HDC Tender Event: Short-Term Payoff Vs. Optionality Value)

PCCW Ltd (8 HK)/ HKT Ltd (6823 HK)

PCCW's discount to NAV has widened out to 33.5%, a 12-month low, and compares with the one-year average of ~29%. Though trading cheap, there are mitigating factors underpinning PCCW's recent underperformance. The recent set of financials indicate the stub operations are not (yet) coming to fore. Especially the disappointing numbers for the Solutions business.

• At best, I'd recommend a short-term reversal. The improving dividend payout is positive, however, a mean reversion on the back of these results appears unlikely.

Wheelock & Co (20 HK)/ Wharf Holdings (4 HK) / Wharf Real Estate Investment (1997 HK)

Wheelock' discount to NAV is around the lowest level inside a year; however, for context, the average NAV is 36% since WREIC's listing/spin-off last November, so the current 38% level is not extreme - although arguably we have limited data in which to make that assessment.

• Wheelock Properties (S) (WP SP) has traded through terms since the Voluntary Unconditional General Offer announcement, with around 88mn shares changing hands or 7.4% of issued shares. Even taking the view an activist has been aggressively buying above terms, it is unlikely they would have bought more than 70-80% of those shares traded, or 5-6% of issued shares.
• The deal has not been declared final. Travis believes the buying through terms looks like a Capitamalls situation from a few years back, where an activist bought 5% and Capitaland bumped its offer to S$2.35/share from S$2.22.
• This continues to look like a situation where there is a decent chance the deal gets bumped.

(link to my insight: StubWorld: PCCW Plumbs New Lows & Wheelock Props' Privatisation)

Swire Pacific Ltd Cl A (19 HK) / Swire Properties (1972 HK)

Given there is little in terms of a trade idea for the stub at the current level - or to be extrapolated from the recent release of the 2018 interims announced - my interest in Swire centers on its dual-class structure and the continuing outperformance of the A-shares (now at a 14-year high premium) over the B-shares (Swire Pacific Ltd-Cl B (87 HK)).

• John Swire & Sons currently hold 412.6mn A-shares and 2.074bn B-shares, having last increased positions in both classes in the 4Q16 and first achieved >50% equity, by my calcs, in September 2015. Since that time, the argument to unify the two classes of shares has persisted.

• However, that unify argument would appear to have lost some traction when dual-class shares, or weighted voting right structures, were sanctioned (again) by the HKEx in April this year. This regime change - the first of its kind since 1987 - was ostensibly to list Xiaomi Corp (1810 HK) and discussed in my insight Xiaomi the Money!, which arguably hasn't panned out as well as anticipated.

• The long-term average (from Jan 1992) is an 18% premium (A over B) and the 10-year average (arguably a better reference point) is 8%. This would suggest an argument to go long the B-share versus the A-share here. The pushback is that there is no near-term catalyst to reverse the trend.

(link to my insight: Swire's Interims and Bifurcating Dual Class)