Last Week in Event SPACE: Line Corp, Haier, Keppel, China Longyuan, Nichii Gakkan, Cromwell, PCCW

LINE Corp (3938 JP)(Mkt Cap: $12.2bn; Liquidity: $17mn)

(link to Travis Lundy's insight: The End of the LINE (3938))

Haier Electronics Group Co (1169 HK) (HEG) (Mkt Cap: $10.7bn; Liquidity: $14mn)

(link to my insight: Haier (1169 HK): Avatar Scrip Offer From Parent)

Keppel Corp (KEP SP) (Mkt Cap: $6.9bn; Liquidity: $15mn)

(link to Travis' insights:
after earnings: It's a MACastrophe!!! Keppel Surprises Bigly and Badly in O&M)
one week later: What Triggers A Temasek Decision on Keppel?)

• CHN Energy holds no H shares, just domestic shares. No matter which option CHN Energy chooses to take CLPG private, a Scheme-like vote (≥ 75% for, ≤10% against) will be involved for disinterested shareholders. Wellington holds 434mn shares or 13% of the Hs. They need to be on board with any Offer otherwise the vote won't fly. My analysis of Wellington's holdings - in which it became a substantial shareholder on the 2 August 2017 - indicates an average in-price of HK$5.90/share.
• What Price? CLPG was up 31% in the past week, and 68% from its 2020 low in March. YTD, shares are up 19% against 12%, 14% and 14% for wind/solar/clean energy plays, listed in Hong Kong. IF an offer was forthcoming, it will be pitched (much) higher than here - Wellington simply won't back an offer around these levels. North of HK$7 (~1x P/B & 7.7x EV/EBITDA - similar to Huaneng Renewables Corp H (958 HK)) might get key players to the negotiation table.

Cromwell Property (CMW AU) (Mkt Cap: $1.7bn; Liquidity: $5mn)

Back on the 23 June, Singapore's ARA Asset Management announced a proportional off-market takeover bid to acquire 29% of shares out in Aussie real-estate play Cromwell, not already owned, at A$0.90/stapled security (reduced to A$0.882125 following a distribution), a 3.4% premium to last close. Should it be successful, ARA would hold ~46% of shares out. ARA has now announced it intends to acquire 67.5mn Cromwell shares on-market at a price up to A$0.92/share, via the Creep Exception. In addition, ARA intends to declare the proportional Offer price Final at A$0.92/share - in the absence of a competing Offer. Should ARA be successful in both the on-market and proportional Offer, its holding in Cromwell would increase to an estimated 47.95%. The on-market portion (67.5mn shares) appears to have been fulfilled, lifting ARA's stake to 26.69%.

• Following the (successful) completion of the partial, ARA's stake will increase to 47.95%, by my estimates. This number assumes the 29% proportional offer is based on shares now owned after today's on-market buy-in, not the % held as at the initial announcement on the 23 June. Assuming this is correct, then under the creeper provisions, ARA can theoretically go above 50% six months after the completion of the Proportional offer. If ARA gets to >50%, it will likely vote down the remuneration report, potentially leading to a board spill. This would enable ARA to appoint "friendly" directors, such as the nomination of Gary Weiss to the board
• Currently trading at a tight 2.2% spread to terms. The initial trade was to get hit at the opening print under the on-market portion. Now this is a short-dated proportional put at $0.92/security from the largest shareholder, in what is optically an opportunistic Offer. Buying here or a spread or two below, the downside is limited.
• If you are long 1mn shares of the stock and intend to remain long 1mn shares after this is done, you can buy an additional 408,000 shares below terms (which will be A$0.92) and tender your 1.408mm shares, and you will have 1mn shares afterwards, and you will pick up a small profit on the 408,000 shares you incrementally purchased. If you are an arbitrageur, note that unlike a Partial Offer, your pro-ration is fixed. This should give you ideas about stock borrow. I like this arb trade at A$0.90-0.905. Longer-term I think this trades higher so I don't mind the residual. This is an opportunistic deal. Cromwell has rejected the revised Offer.

(link to my insight: Cromwell/​ARA: Hit & Run)

FamilyMart Co Ltd (8028 JP) (Mkt Cap: $11.1bn; Liquidity: $41mn)

The language in the statement made by Itochu CFO Hachimura-san is clear that Itochu sees the maximum amount they can pay for the shares - at this time - to be ¥2300/share. There are parts where one might make the case that they might reluctantly give a little bump and pay more than they should, but Travis is not hopeful in that regard. Interestingly, the statement provides clear evidence that Itochu does not understand what a "fair" Tender Offer Price is, or it is totally willing to gaslight FamilyMart investors.

• Medium-term to long-term, Travis likes a post-restructuring (with synergies) FM at the current price. Travis thinks the future of PPIH is pretty decent. He expects Itochu does too, and expects they may want PPIH managers in to help run parts of FM. Travis expects Yasuda-san is a seller in the not-too-distant-future.
• If Travis were a long-only active fund, he would be hesitant to tender my FM. If he were an arb, he'd think that IF ITOCHU IS TELLING THE TRUTH, it could be a couple of years before Itochu comes back and pays up, and in the meantime, while he entertains the possibility, he would be hard-pressed to think of FM trying to be much more efficient with their balance sheet. They aren't Itochu. Which is why Itochu wants them and wants to delist them.
• If Travis were prepared to be aggressive in Appraisal Rights, especially if he could swing a very big balance sheet for a short period, he thinks this is a VERY interesting case. The Target Board has said that the process is fair (though it is not clear that it is), but very specifically that the price is not fair. This knocks down a central thesis of the JCOM precedent. And if this gets to 67% in the Tender, that means there is $3bn of stock which would need to be squeezed out. That is a lot of leverage on legal costs. And you can't do an appraisal rights trade without being squeezed out.
• The single best trade for aggressive funds at this point is probably to let this deal get done, and then take the back end trade. Better bang for the buck even if it is more of a PITA. But it doesn't necessarily get done completely easily.

(link to Travis' insight: Itochu Haz Opinionz About FamilyMart)

Fujitsu Frontech (6945 JP) (Mkt Cap: $0.3bn; Liquidity: $2mn)

In December we discussed prospects for Fujitsu buying out investors in its various listed subsidiaries. At the time we highlighted Fujitsu Frontech and FDK as candidates to be bought out and Fujitsu General and Shinko Electric as candidates to be sold. We also felt Fujitsu Frontech was more attractive than FDK due to its large discount to book and strategic fit with Fujitsu that could open up the path to further acquisitions. On July 30th Fujitsu announced a tender offer for Fujitsu Frontech at ¥1,540. This is about 15% above the levels the stock was trading at when we wrote on it but we nevertheless feel the premium is light.

• Even using rather conservative valuations, we believe this offer is 20-50% too light. Trying to value Fujitsu Frontech fully would probably require a bump closer to 50-60%.
• Do we think the offer will get bumped? Unfortunately, the probability of that looks relatively low and the market certainly doesn’t seem to be pricing it in.
• We are not experts on appraisal rights and would refer readers to Travis Lundy on such matters but we feel the valuation here is opportunistic and probably egregious.

(link to Mio's insight: Fujitsu Frontech – Why Steal an ATM When You Can Steal the ATM Maker)
Travis' earlier insight: Fujitsu TOB For Fujitsu Frontech At a Discount?

Sanyo Chemical Industries (4471 JP) / Nippon Shokubai (4114 JP)

In May 2019, longtime sometime partners and cross-holders Sanyo Chem and Nippon Shokubai announced that they would commence business integration talks. Sanyo Chem had been outperforming Nippon Shokubai, and indeed had stronger forecasts for the year ahead than Nippon Shokubai, but because Sanyo Chem had outperformed Shokubai of recent, the 1-month, 3-month, and 6-month averages at the time of the initial announcement were below the spot price ratio. At that announcement, the companies simply said they would come up with a ratio later. As the fiscal year went on, Nippon Shokubai had to lower their forecast sharply. Sanyo Chem lowered its forecast slightly. They came out with a ratio at 0.8163265 NS shares per SanyoChem share, which was ever so slightly below the ratio at the time of the announcement.

• Nippon Shokubai lowered its full-year forecast further later in early February (after Q3 but pre-covid), then reportedly the Sanyo Chem CEO visited the Sanyo Shokubai CEO and asked how he could explain the merger ratio to his shareholders, suggesting the companies needed to re-verify the ratio. CEO of Sanyo Chem explains in his portion of the interview found a Nikkei article , "the immediate reason for postponing the integration is a major downward revision of Nippon Shokubai's earnings forecast. It should be revisited when the environment changes dramatically. Only the schedule and the integration ratio will change." It is pretty clear the Sanyo Chem boss thinks the ratio should change.
• The Trade? Buy the SC/NS ratio at 0.86 or better. Keep on buying it. The ratio could spike on a weak Nippon Shokubai forecast, but bear in mind that through the cycle, the two companies are not terribly expensive outright, see potential for a lot of synergies in combination, and will see cross-held shares cancelled. As Stephen Fry would say, "This is a Good Deal" (youtube link).
• Assuming it does pop, if you feel you are slightly outsized in the trade, you could take some off in the low 0.90s and then look to put back on a little lower. The current 0.86 ratio would - in Travis' mind - still be a bit low given expectations for March 2021 similar to the results in March 2020, but the ratio will be much better for Sanyo Chem this year according to the two companies' respective forecasts.

(link to Travis' insight: SanyoChem/NipponShokubai Forecasts Out - Stay Long the SC/NS Ratio for Merger Rerate)

Mio has previously expressed some scepticism about the longevity of Warframe, and therefore the overall valuation of Leyou. While he has not abandoned that view, in Leyou – You Need to Be Tracking Warframe This Month if You Own This, some recent developments do have him questioning whether there could be a change in Warframe’s momentum, at least in the short-term, increasing its appeal to Tencent Holdings (700 HK).

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

PCCW announced 1H20 results (net loss to shareholders was HK$547mn against HK$263mn in 1H19); a special dividend involving the in-specie distribution of 657mn Pacific Century Premium Developments (432 HK) shares; the sale of NOW TV to HKT for HK$1.95bn; and a voluntary partial Offer by Richard Li for 2% of shares out at HK$5.20/share, a 15.8% premium to last close. Shares closed up 9.1% on Friday.

• PCPD accounts for just 1% of NAV. What happens regarding this holding is largely immaterial (although, I would expect a lot of selling in PCPD after the distribution). The Now TV transaction is marginally more material, but not by a lot. Now is worth around 5% of my NAV. PCCW is getting around 80% of that value in cash. But cash is also assigned a nominal discount in a holding company structure - say 10-15%. That would place the net effect roughly in line with the current value, if not, perhaps fractionally below. The difference is largely inconsequential.

• The Partial Offer is small - around 2% of shares out. But Richard Li seeking to go above 30% is potentially two-fold. Anyone looking to take out Richard Li's stake (after the partial is successful) in PCCW would trigger an MGO for the remaining shares in PCCW. Or Li creeps his stake in PCCW, which potentially could be become a large cash entity should PCCW's stake in HKT be acquired. The creeper provision is mentioned on page 7 of the announcement. This could suggest PCCW can (will?) undertake future buybacks, such that Richard Li will not be forced to undertake an MGO - assuming his stake does not increase by 2% under each buyback.
• THE TRADE: I think a privatisaton of HKT is inevitable. And reconfiguring a way to get the cash out of PCCW to the Li family would be the logical progression. Or at a minimum, elevating Li's stake in PCCW via him creeping, or PCCW buying back and canceling shares. Timing is everything. Right now, PCCW appears to be fully priced, and then some. I would look to unwind here.

(link to my insight: PCCW: Partial Offer To Lift Li Above 30%)

Haier Smart Home (600690 CH) (HSH) / Haier Electronics Group Co (1169 HK) (HEG)

HSH had been limit up (at the time of the insight) the past two trading sessions (ahead of, and) in response to the privatisation of 45.68%-held HEG. I estimate HSH's premium to NAV at 32% against a 12-month average of 20%. It has only briefly exceeded these levels in the last year after HEG announced on the 19 December 2019, that HSH was contemplating taking HEG private with newly issued Hong Kong shares. Bear in mind, the EPS for the enlarged HSH - page 104 of the announcement - declines to RMB1.01/share on a proforma basis from RMB1.05 in FY19.

• What's in the Stub? The independent report from Platinum Securities (beginning on page 74) loosely breaks down the stub ops. The simple diagram below provides the briefest of snapshots. Ex-HEG (of which 96% of its revenue is sourced from China), HSH's stub business units comprise refrigerators, air-cons, kitchen appliances, and the "Smart Home Business Overseas". I've multiplied that deconsolidated EBITDA figure of RMB8.247bn by the peers flagged in the valuer's report, which have an average trailing EV/EBITDA of 9.7x as viewed below.
• The market is assigning a PER, EV/EBITDA and P/B of 17.5x, 12x & 2.5x respectively for the stub ops. Though punchy, those figures aren't too out of whack - some of HSH's local peers trade in excess of these metrics. But it is interesting to note that while almost the entire revenue for HEG is sourced from the PRC, only 21% of the stub ops revenue is sourced from China. Are international peers a better yardstick to value the stub ops? These peers trade at a premium to Chinese peers on a PE basis, but slightly below on EV/EBITDA and P/B.
• Assuming HSH's Hs trade at a 20% discount to the As then the H-share value is HKD 17.60. HK$17.60 * 1.60 + 1.95 = HK$30.11, the implied price under the proposed Scheme. Shares closed at HK$28.85 so a 4.4% spread - if assuming a 20% discount to the A share. Short the As? There is borrow out there. But it's not a clear-cut trade. If HSH pops again and the HEG largely follows, I'd exit HEG. Even at yesterday's close, it looks full. I think the implied discount is too narrow between the As and the (yet to be listed) Hs.

On 2nd August 2020, Germany-based medtech company Siemens Healthineers AG (SHL GR) announced they would acquire US-based medical-devices maker Varian in an all-cash deal that valued the company at ~US$16.4bn. The Deal is conditional on the receipt of Varian shareholder approval and regulatory approvals. The Offer Price is $177.50 per share and the transaction is expected to close in the first half of calendar year 2021. The Target's board has agreed to the Transaction and has recommended the shareholders to vote in favour. The Offer translates to a premium of 24.4% to the pre-announcement closing price and is 42.0%, 45.5%, and 50.6% higher than the stock's 1-month, 3-month, and 6-month VWAPs. On both LTM and NTM bases, the offer price translates to EV/EBITDA and PER multiples that are higher than the estimated mean and median for peers.

• On the other hand, the Acquirer shareholders did not respond very well to the Deal announcement. At the time of writing, SHL shares have dipped more than 10% since the Deal was announced. The Deal will be financed through a combination of debt and equity. As part of this, Siemens Healthineers will be issuing new shares later this year. The NTM EV/EBITDA multiple of 24.5x for Varian is almost 90% higher than that for Siemens Healthineers (12.9x).
• However, this Deal is a long term bet on cancer therapeutics. Siemens Healthineers currently does not have much exposure to this area and the Deal will give them a substantial market share in the field of cancer treatment which is expected to face greater demand in the future. According to the Deal presentation, the Acquirer is expecting EBIT synergies of more than EUR300mn by FY2025. This is quite significant when compared to the FY2021 CapIQ consensus projection for Varian's EBIT of ~EUR390mn and might somewhat justify the high multiple offered for Varian which already has strong growth and cash generation.
• Varian closed (at the time of the insight) at US$174.50 which translates to a gross spread of ~1.7% with 5-11 months to completion. Janaghan Jeyakumar expects regulatory approvals will be no problem. This would be a slightly-long-dated rate-of-return Trade. At 5 months to completion, this seems like a reasonable risk arb spread to carry. At 11 months it would seem long and low return. Janaghan believes the only way this sees a higher price is if a competitor with some cancer therapeutic business in a complementary area looks to join them to increase coverage. At the moment, I do not have a list of preferred possibilities.

Virtual healthcare powerhouse Teladoc Health, Inc. (TDOC US) announced they will be acquiring chronic-illness health-tech company Livongo in a cash and scrip deal that values the company at a market cap of US$15.5bn (going by cash-equivalent numbers based on pre-announcement closing price for Teladoc). With the COVID-19 pandemic forcing consumers to look for substitutes for conventional in-person health care, virtual health care providers have seen demand for their services rise significantly in the last few months, and both stocks have rallied sharply. The Deal has been unanimously approved by the Board of Directors of each company. Livongo's second-largest shareholder Kinnevik - who holds ~13% of Livongo's shares - has agreed to support the deal.

• This Deal will give Teladoc access to the lucrative Chronic-healthcare segment which will give them more repeat-users as opposed to their current areas of coverage which mostly deal with one-off healthcare visits. Furthermore, Teladoc will be able to attract more clients with a wider range of services as consumers will find it more convenient to access multiple healthcare solutions through a single platform. On the other hand, Livongo's monitoring devices will be able to tap into Teladoc's large client base. These cross-selling opportunities, improved member churn, and larger scale are expected to result in run-rate revenue synergies of approximately US$500mn by FY2025.
• The Offer seems to favour Livongo shareholders more. Teladoc shareholders might not be happy with the price. Teladoc shares fell sharply (~19%) on the day following the announcement and in reaction to that, Livongo shares also declined given the large scrip component of the Deal. The Terms of the Offer (at the time of writing) translate to a total consideration of US$137.13 per Livongo share which values the company at an EV/Revenue (LTM) multiple of ~50x and EV/Revenue (NTM) multiple of ~30x. These are much higher than Teladoc's multiples of ~24x and ~14x respectively. The Offer multiples are also well above the estimated means for health-tech peers and some other disruptive/popular SaaS businesses.
• At the time of writing, Livongo's shares were at US$134.35 and Teladoc's share price translates to an Offer consideration of US$137.13. This translates to a gross spread of ~2.1% with roughly 5 months to completion. Although Janaghan expects the Deal to complete as-is, he expects this to trade with some noise. There may be some range-trading opportunities. At the moment, multiples are so high and price moves have been so dramatic, that spread volatility may be higher than for normal deals. For this reason, he might wait a little bit to understand how volatility in share prices affects the risk arb spread, however, he expects this deal to complete.

(link to Janaghan's insight: Livongo-Teladoc: Virtual Healthcare Giants to Combine)

The FTSE Russell is scheduled to announce the results of the September 2020 Semi-Annual Index Review on 21 August. The changes will be implemented as the close on 18 September and will be effective from the start of trading on 21 September.

• For emerging ASEAN markets, Brain expects (in FTSE GEIS Index Rebalance Preview September 2020 - Emerging ASEAN Edition) 4 inclusions into the FTSE All-World index: Sarana Menara Nusantara (TOWR IJ), Puregold Price Club (PGOLD PM), Carabao Group (CBG TB) and Central Retail (CRC TB), and 2 exclusions: Uem Sunrise Bhd (UEMS MK) and Matahari Department Store (LPPF IJ).