Last Week in Event SPACE: Nintendo, Panalpina, Versum, Hanergy, Descente, Hopewell

Last Week in Event SPACE ...

• Nintendo Co Ltd (7974 JP)'s offering and the buyback are strong symbols and practical examples of what the Corporate Governance Code wants to accomplish.
• Calling an EGM by the Ernst Göhner Foundation is both "sneaky" AND interesting (and bullish) news for the Panalpina Welttransport Holding (PWTN SW) offer by DSV A/S (DSV DC).

• Merck KGaA (MRK GY) gatecrashes Versum Materials (VSM US)/Entegris Inc (ENTG US) friendly merger.

• Shareholders in Hanergy Thin Film Power (566 HK) face a "Hobson's Choice" ahead of its forced delisting.

• With the combination of increased hostility leading to a greater likelihood of eventual private takeout, shorts will cover and foreigners may buy, squeezing existing Descente Ltd (8114 JP) minorities up and out.

• The IFA conclusion is flawed on Hopewell Holdings (54 HK)'s low-ball Offer.

• Plus other events, CCASS movements and expected upcoming events for key M&A transactions.

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

Nintendo Co Ltd (7974 JP) (Mkt Cap: $33.3bn; Liquidity: $615mn)
Bank Of Kyoto (8369 JP) (Mkt Cap: $3.4bn; Liquidity: $7mn)

Nintendo announced (J) a Secondary Share Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the then-last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33bn worth (whichever is reached first) to be commenced the day after settlement of the Offering.

• These banks (such as Bank of Kyoto) which have long-held policy cross-holdings in a Kyoto company with a diehard Kyoto cultural heritage (which can often include a diehard cross-holding culture) may have all succumbed to the new Corporate Governance Code. This is really important.
• This deal is going to retail investors, quite specifically because Nintendo management and board view retail investors as both "sticky" investors and likely to largely follow management's agenda in AGMs. Management might have misjudged how much this will get flipped.
  
• The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains. Given the size, it looks like the former though it will be difficult to get confirmation. Travis Lundy would want to be long Bank of Kyoto both outright and against the cross-holding portfolio.

link to Travis' insight:
Nintendo Offering & Buyback: The Import & The Dynamics
Bank of Kyoto - Nintendo Sale A Portent of Changes To Come?

NTT Docomo Inc (9437 JP) (Mkt Cap: $72.4bn; Liquidity: $92mn)

NTT Docomo announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February. The buyback has already occurred. However, by the vagaries of TSE-calculated indices, they lead to index down-weightings (unless otherwise offset).

• This is a very large cancellation for a very large company, so it means a selldown of - by Travis' estimate - 21.5-22.8mm shares at the close of trading March 28th. Traders looking to tilt short NTT Docomo or tilt long NTT short NTT Docomo will have that as a tailwind.

(link to Travis' insight: NTT Docomo Share Cancellation)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $3.7bn; Liquidity: $21mn)

Panalpina's largest shareholder with 45.9% of shares out, the Ernst Göhner Foundation (EGF), made a formal request to hold an EGM prior to the Annual General Meeting scheduled for early May 2019 so that the Articles of Association be changed - specifically Article 5 - such that the limit on transfer rights and voting rights be abolished and a "One Share One Vote" structure be adopted. The situation has been that Shareholders have their votes capped at 5% of shares outstanding EXCEPT FOR the votes of the EGF which were deemed "grandfathered" prior to the change.

• EGF wants to pass this giving everyone their capital share percentage vote because the alternative is worse. Getting this passed would slightly change the outlook for a Panalpina/Agility deal or any deal which required significant issuance but it would mean that the EGF could continue to block any deal it did not like. The thing is, there is nothing in the Articles of Association which grants EGF that "grandfathered" exemption.
• Cevian wants to block such this from going through, and to have the EGF capped at 5% like the Articles of Association suggest all should be. Cevian says that Panalpina has unlawfully maintained a grandfathering exemption from the 5% cap for the EGF. IF the EGF is capped, it means that effectively the EGF loses the ability to block deals they don't like.
• The situation is weird. It is possible that Panalpina is asking a convoluted and possibly unlawful voting structure with non-best-practice registration deadlines to vote on changing the vote structure. To Travis, this actually probably deserves a court challenge.

links to Travis' insight:
Panalpina To Have EGM to Approve One Share One Vote.
The Mechanics of the Panalpina Vote

Versum Materials (VSM US) (Mkt Cap: $5.4bn; Liquidity: $60mn)

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum with the announcement of a $48/share (51.7% premium to the undisturbed) acquisition proposal. Late last month Versum and Entegris announced a $9bn (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the remaining 52.5%.

• It's now in VSM's court. Should it opt to ditch Entegris' merger-of-equals proposal and side with Merck, it would incur a US$140mn termination fee or $1.28/share.
• John DeMasi reckons Merck's proposal is superior, however a pure cash offer vs. stock swap are not directly comparable. The prospect of Entegris substantially increasing the exchange ratio or adding a chunk of cash to the merger consideration seems remote. John expects we will see a bump in Merck's offer to make it friendly, and a recommended deal, in short order.

(link to John's insight: Versum Materials – Entegris Beaten to the Punch by Merck KGaA)

Wabco Holdings (WBC US) (Mkt Cap: $7.1bn; Liquidity: $56mn)

Brake supplier, Wabco confirmed that it is in takeover talks with ZF Friedrichshafen, one of the leading auto parts suppliers in Germany. ZF and Wabco jointly develop the Evasive Manoeuvre Assist system for trucks, combining Wabco’s braking and vehicle dynamics control systems alongside ZF’s active steering technology.

• The pushback is the Zeppelin Foundation, ZF's controlling shareholder, and its aversion to taking on excess debt. Management and the foundation previously clashed over the €13.5bn TRW transaction in 2015.

(link to Lightstream's insight: WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF)

Hanergy Thin Film Power (566 HK) (Mkt Cap/Liquidity: n.a)

Back in October last year, Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)'s majority shareholder, announced an intention to privatise the company at "no less than HK$5/share" via cash or scrip. Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy's business in China. The key issue, putting aside the fact Hanergy has been suspended for near-on four years, is that the scrip consideration has no assigned value.

• Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV shares (with an as yet undermined jurisdiction), which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, they will hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as would be the case per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to potentially squeeze out minorities at a bargain price.
• It is not clear why the SFC is okay with this takeover proposal, apart from simply being open to any idea to remove Hanergy from the Exchange. At a guess, the SPV consideration structure (as opposed to a straightforward cash offer) is possibly geared to reduce shareholder rights compared to those available under Bermuda Companies Act, Bermuda being where Hanergy is incorporated.
• The Scheme doc, due out later this month, or early next, requires sign-off from the SFC. Presumably the SPV jurisdiction should at least be known by then. It is hard to believe an official takeover document would be dispatched boasting no determinate offer value in addition to unknown shareholder protection rights attached to the unlisted scrip.

(link to my insight: Hanergy's Hobson's Choice)

Descente Ltd (8114 JP) (Mkt Cap: $1.7bn; Liquidity: $5mn)

Descente said will release its Mid-Term Plan early in an effort to encourage shareholders to not tender. For its part, Itochu has released an amendment to its original doc, saying Descente has been naughty (bad-mouthing Itochu to the press while in negotiations), and that it will wait until after the Tender Offer is completed to re-engage. Itochu effectively reserves the right to go full hostile.

• ANTA's CEO was quoted in an interview saying ANTA supports Itochu's tender offer and management restructuring and governance initiatives because they say they believe it will lift corporate value. That means Itochu+ANTA have a functional majority if not absolute.
• This should raise back end values. Descente management is quite stuck here. To Travis, there is likely some upside optionality. Some may decide to stick with the company, raising pro-ration rates.

(link to Travis' insight: Descente Descended and Itochu Angle Is More Hostile)

Hopewell Holdings (54 HK) (Mkt Cap: $4bn; Liquidity: $11mn)

The Scheme Document for the privatisation of Hopewell Holdings (54 HK) has been dispatched. The court meeting will be held on the 21 March. The consideration will be paid (on or before) the 14 May.

• The Offer Price representing a 43% discount to NAV, wider than the largest discount precedent in past nine years - the Glorious Property (845 HK) offer, which incidentally was voted down. The widest successful discount to NAV privatisation was 29.4% for New World China Land (917 HK) in 2016. And all precedent transactions (successful or otherwise) are PRC (mainly) property development related; except for Wheelock which operated property in Hong Kong (like Hopewell) and in Singapore, which was privatised at a 12.1% discount to NAV.
• Therein lies the dilemma - what is a fair and reasonable discount to NAV for a Hong Kong investment property play? With limited precedents, it is challenging to categorically reach an opinion. Therefore, the IFA concluded the Offer is reasonable by referencing the premium to last close and historical pricing. I would argue the Wu family has made a low-ball offer for what is essentially an investment property play with quantifiable asset value.
• A blocking sake is 5.9% or 51.6mn shares. First Eagle, which recently voted down the Guoco Group Ltd (53 HK) privatisation that was pitched at a ~25% discount to NAV, holds 2.7% (according to CapIQ). Trading at a wide gross/annualised return of 7.8%/45.4%, reflecting the risk to completion, and the significant downside should the scheme be voted down.

(link to my insight: Hopewell's Egregiously Bad Offer, But What Can You Do?)

DHG Pharmaceutical Jsc (DHG VN) (Mkt Cap: $668mn; Liquidity: $1.5mn)

Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer at VND 120,000 (3.5% premium to the previous close when the doc was prepared), this time to purchase up to 21.7% of the Vietnam-listed DHG, lifting its stake to 56.69%.

• The State Capital Investment Corporation (SCIC) owns 43.31%. IF the SCIC tenders, the minimum proration is 33.38%. IF the SCIC does NOT tender their shares, this is effectively a full tender. All of your shares would be purchased.
• The very recent performance has been most curious. The last 11 days - before the announcement - have seen the stock move 37.6% on 9x average volume, with little to no news to drive it as far as Travis can tell. Looks some leakage ahead of the partial offer announcement.

• Travis thinks there is a non-negligible possibility that Taisho will have to bump their Tender Offer Price. And a non-negligible chance that SCIC tenders.

(link to Travis' insight: Taisho To Launch Another DHG Pharma Tender)

Yahoo Japan (4689 JP) (Mkt Cap: $13.5bn; Liquidity: $53mn)

OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan to expand its co-living rental service, "OYO Living", to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”.

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model.

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture en masse.

(link to LightStream Research 's insight: Yahoo Japan's JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”)

Ruralco Holdings (RHL AU) (Mkt Cap: $335mn; Liquidity: $0.5mn)

Ruralco has announced it has entered into a Scheme Implementation Deed in which Nutrien Ltd (NTR CN) has agreed to take Ruralco private at $4.40/share - a 44% premium to last close and the one-month VWAP. A fully franked special dividend of A$0.90 will reduce the Scheme consideration. An interim dividend of A$0.10 will be added.

• Nutrien has first mover advantage, however a counter from Elders Ltd (ELD AU) is possible. The two companies have a history after Ruralco attempted to buy out Elders in 2012, but failed over a disagreement in pricing.
• ACCC should not be issue to this transaction. A 2013 ruling did not oppose a Ruralco/Elders tie-up, and a similar conclusion is expected for Nutrien.
• The gross/annualised spread of 0.2%/0.7% is unattractive. But at this deal price, Elders could still come over the top. Trading itself at 11.4x EV/EBITDA (according to CapIQ), upping the price by 10% would still be accretive to Elders.

(link to my insight: Nutrien's Move On Ruralco Makes Agronomic Sense)

Yungtay Engineering (1507 TT) (Mkt Cap: $792mn; Liquidity: $1mn)

Revealed in the release of notes about the Board approval of the Independent Review Committee's review in late January was the news that Otis offered to buy the company for NT$63/share but it didn't go anywhere. In addition, some directors - most likely the partisan ones installed in the failed board proxy fight last summer - objected to the lower minimum threshold, which is a sign they don't want the deal to go through (because the lowering of that threshold is otherwise an unmitigated positive for minority investors).

• Despite stories of a suit of breach of trust against six directors for not entertaining or pursuing offers at NT$63 by Otis and/or Schindler, the company had not received any notification from judicial authorities and has not updated the market about Tender-related matters in the last two weeks.
• Travis thinks there is the small possibility of a bump to NT$63; but it is not a difficult deal to get done at the minimum threshold at NT$60.

(link to Travis' insight: Yungtay Noises Haven't Produced a Result Yet)

Golden Land Prop Dvlp (GOLD TB) (Mkt Cap: $611mn; Liquidity: $1mn)

Frasers Property (Thailand) Pcl (FPT TB) has announced a conditional voluntary tender offer for GOLD at Bt8.50/share, ~2.4% premium to last close. Frasers Property Ltd (FPL SP) owns 40.95% in FPT and also 39.92% in GOLD. FPT's director Panote Sirivadhanabhakdi (the son of Charoen Sirivadhanabhakdi), via his majority-controlled vehicle Univentures Public (UV TB), holds 39.28% in GOLD. Panote is also the vice-chairman of GOLD.

• This tender offer therefore has been initiated to consolidate the Sirivadhanabhakdi family's holding into GOLD. Presumably, both FPL and Univentures will tender into the Offer giving FPT a minimum holding of 80.2%. The tender offer will be unconditional.
• The intention to delist GOLD is evident although it will be challenging for FPT to secure 90%+ in the tender offer process, given the single-digit premium to last close, and the fact GOLD traded above the current terms as recently as early December. Getting to 90% requires almost 50% of the minority to submit their shares.
• Currently trading at a gross/annualized spread of 2.4%/5.9% assuming early August payment. Very tight, suggesting investors are more likely angling for the back-end.

(link to my insight: Golden Land: Less An Offer, More A Consolidation Of Interests)

Sichuan Swellfun Co Ltd A (600779 CH)(Mkt Cap: $3.1bn; Liquidity: $28mn)

Diageo announced it had approached the board of directors of Sichuan Swellfun with a proposal to increase its stake from 60% to 70% at RMB 45.00/share. This was a 19.33% premium to the last close and a 40.05% premium to the 30-day average.

• On a trading basis, this is somewhat interesting. If you are quite bullish the stock, you have a partial put (and you own it already). If you are tentatively bullish A-shares, this offers you a partial put, but there is a possibility that the RMB 45.00 price creates a kind of short-term cap just because it is a sticky price in peoples' minds.
• Travis is not particularly bearish the stock despite the fact that the earnings forecasts have dropped a fair bit since he looked at this six months ago. The consensus EPS forecasts for Dec 2020 today are roughly the same as they were for Dec 2019 six months ago.

(link to Travis' insight: Diageo Proposes Another Partial Tender for Sichuan Swellfun)

Briefly ...

• Douglas Kim reported that Amazon.com Inc (AMZN US) and Comcast Corp Class A (CMCSA US) may enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. (link to Douglas's insight: Nexon M&A: Amazon & Comcast Enter the Race - It Ain't Over Till Its Over!)
• The new news on Kosaido Co Ltd (7868 JP) is that the independent statutory auditor Nakatsuji-san has officially expressed his opposition to the Tender Offer. With the shares 19% through terms despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share looks low, and this seems a situation where the deal may fail unless there is a bump. (link to Travis' insight: Kosaido (7868 JP) TOB Extended)
• On the 28 Feb, Bank Danamon Indonesia (BDMN IJ)'s shares went ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected, but Travis thinks they could fall further: there is no compelling reason to own the bank after it goes ex-rights to receive cash. (link to Travis' insight: Bank Danamon Goes Ex-Rights)

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

FY18 results for PCCW, HKT, and PCPD are out. Plugging in the de-consolidated numbers, I estimate PCCW's discount to NAV at ~37%, right on the 2 STD line. On a simple ratio (PCCW/HKT), it is again approaching an all-time low.

• Still select media ops (Free TV and OTT), together with substantial losses booked to other businesses and eliminations, continue to weigh heavily on PCCW's stub ops, recording negative EBITDA in FY18, reversing the positive figure recorded in FY17. FY16's stub EBITDA was also negative.
• One positive takeaway is that the dividend pass through is holding at around 90%.

(link to my insight: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating)

Korean Stubs Spotlight

Douglas provided the one-year share price comparisons of 30 Korean holdcos and the opcos as well as changes to the foreign ownership stakes of these companies YTD. Significant changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades.

• Among these 30 pair, five recorded significant share prices divergence in the past year (by 30% or more): Hyosung Corporation (004800 KS) vs. Hyosung Advanced Materials C (298050 KS), BGF Retail (282330 KS) vs. BGF Co Ltd (027410 KS), Doosan Corp (000150 KS) vs. Doosan Heavy Industries (034020 KS), Cuckoo Holdings (192400 KS) vs. Cuckoo Homesys (284740 KS) and Orion Holdings (001800 KS) vs. Orion Corp (271560 KS).
• Among these 30 pairs, five experienced 2.0% or more changes in the difference of the holdco and opco's foreign shareholding percentages: Doosan Corp (000150 KS) vs.Doosan Heavy Industries (034020 KS), Halla Corp (014790 KS) vs.Mando Corp (204320 KS), Lotte Holdings (004990 KS) vs. Lotte Shopping Co (023530 KS), LS Corp (006260 KS) vs. Ls Industrial Systems (010120 KS) and SK Telecom (017670 KS) vs. SK Hynix Inc (000660 KS).

(link to Douglas insight: Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership)

• Sanghyun Park points out that Hyundai Motor Co (005380 KS)'s Common vs. pref ratio is getting out of whack, possibly because of Elliott's ₩4.5tn dividend demand. Both 1P and 2PB are sufficiently undervalued relative to the Common. The div yield difference to Common is also at the highest levels for both pref types. Sanghyun suggests shorting the Common and being long 1P or 2PB now. 1P is probably a safer bet, but 2PB is more liquid. (link to Sanghyun's insight: Hyundai Motor Share Class: Time to Short Common & Long Pref)
• Sanghyun also points out Samsung Electronics (005930 KS) Common/1P price ratio gap is again above +100% of σ on a 20D MA in favour of Common. He recommends going long 1P and short Common for now. (link to Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices)

For the month of February, thirteen new deals were discussed on Smartkarma with a cumulative deal size of US$12.3bn. This overall number includes the "offer" for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component. A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal. The average premium to last close for the new deals was 27.5%.

(link to my insight: M&A: A Round-Up of Deals in February 2019)

• Pioneer Corp (6773 JP) announced that the deal had received all relevant anti-trust approvals, and payment for shares by the Acquirer (BPAE) of the Third Party Placement was now expected to take place on March 8th.

• Glow Energy Pcl (GLOW TB) announced it has entered an S&P to sell Glow SPP1 to B. Grimm Power Service for Bt3.3bn. The P/B was not provided. This is equivalent to ~2.5% of Glow's market cap.

• Propertylink Group (PLG AU)'s Offer has been extended to 8th March as they look to get to 90% and move to compulsory.

• Delta Electronics Thai (DELTA TB) has now clarified that the dividend will be added to the offer.

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.