Last Week in Event SPACE: Sembcorp Marine, AusNet, Shinsei Bank, MMC Corp

The Sembcorp Rights Offering is complete, and allocations are out as of Friday night. and it turns out, the MGO Option as discussed in One More Day To Trade Sembcorp Marine Rights, Harvest the Spread, or Buy The MGO Option as rights trading was coming to a close, was the right way to think about it. Only 84.2% of the Offering was covered by shareholders exercising their rights. Temasek took 42.6%, which means that only 72% of the other shareholders took up their rights. That meant that based on the Offering Circular and the Temasek Undertakings therein, Temasek was going to end up increasing its stake by more than 1%, thereby triggering an MGO Option (it required 98.33% minority takeup to avoid going over the MGO trigger).

This past Monday, Victorian electricity operator AusNet announced it would open its books to Brookfield after receiving a revised non-binding Offer of A$2.50/share in cash. It is understood Brookfield made a A$2.35/share Offer on the 30 August, followed by $2.45/share, before all parties settled on $2.50/share. As it turns out, according to APA Group (APA AU), APA had approached AusNet with a non-binding proposal of A$2.32 on the 1 September, and that APA had made AusNet aware last Thursday (16 September) it intended to make a revised proposal. APA sounded out AusNet’s major shareholders prior to its initial approach, and that APA understood Singapore Power was supportive of APA and AusNet engaging in discussions. APA had also discussed the initial proposal directly with State Grid. Not surprisingly, APA is miffed AusNet entered into a period of exclusivity with Brookfield.

• Under APA's proposal, AusNet shareholders would receive $1.820 in cash and 0.0878 stapled securities in the Australian Pipeline Trust and APT Investment Trust, with a mix and match facility enabling shareholders to elect more cash or more securities, subject to caps in each. Apart from the higher price, APA's Offer enables AusNet shareholders to participate in the back-end via APA scrip, plus there is no FIRB conditionality. In addition, APA would only require 4 weeks of due diligence, compared to seven to eight weeks for Brookfield.
• No word from China's State Grid. However, I doubt either Singapore Power or State Grid would publicly comment until either proposal passes due diligence and a firm Offer is made. AusNet has nine directors, with Singapore Power having two members, and State Grid one. Given AusNet's board "unanimously recommend shareholders vote in favour of (Brookfield's) proposal", in the absence of a superior offer, suggests both key shareholders are supportive of an Offer. Still, only recently was China's running a ruler over Aussie assets. At a time of heightened tensions between Australia and China, it is not clear whether China is ready and willing to cash in.
• FIRB is a non-negligible issue for Brookfield. The Critical Infrastructure Center, which facilitates FIRB's decision-making, designates electricity assets as critical assets. Yet AusNet is already majority-owned by foreign investors. But 100% of Victoria's electricity distribution and transmission could fall into foreign hands if both Brookfield prevails and KKR takes out Spark Infrastructure (SKI AU). If that is not a desirable outcome to FIRB, potentially Spark is more at risk of FIRB rejection.
• UPDATE: After AusNet rejected its Offer - deeming it "inferior in respect of price, form of consideration, structure and certainty" - APA has now made an application to the Takeovers Panel such that the circumstances (including the entry into the confidentiality deed with Brookfield) “hinder, or are likely to hinder, the acquisition of control of [AusNet] taking place in an efficient, competitive and informed market .. and deny, or are likely to deny, [AusNet] shareholders an opportunity to participate in the benefits of a proposal”. I'd be surprised if the TO backs APA's submission.

Link to my insights:
AusNet (AST AU): APA Elevates Tussle With Brookfield And Taps Takeover Panel
AusNet Services (AST AU): Spurned APA Trumps Brookfield's Proposal
AusNet Services (AST AU) Opens Its Books to Brookfield

Around 9.5 months after Tencent (700 HK) and Chinese search-engine Sogou Inc (SOGO US) entered into a definitive agreement for a Going-Private Transaction, the Offer was granted unconditional approval by the State Administration for Market Regulation (SAMR) on the 12 July. Apparently, that wasn't the final approval as the regulators continued to overhaul and tweak China's tech sector. On the 23 September, Sogou announced the completion of the merger and shares have been suspended. Payment will be made "as soon as practical". So that's done. This is a short-form merger - there was no vote. Dissension rights are now afforded for short-form mergers and I would expect some investors to take up those rights.

• Separately, Sohu pockets ~US$1.2bn from the merger via its 33.8% equity stake in Sogou - or net cash of ~US$1bn - versus its current market cap of US$857mn. This is before taking into account the US$579mn privatisation value of Changyou.com (CYOU US).
• Charles Zhang is Sohu's largest shareholder with a 26.09% equity stake. Unlike Sogou, Sohu only has one share class. If Zhang intends to take Sohu private, this would require a long-form merger, involving the approval by a special resolution of Sohu's shareholders, requiring two-thirds of the voting rights of the shares present and voting in person at an EGM.
• Also, keep in mind the Holding Foreign Companies Accountable Act, which was signed into law in December 2020, technically implies Chinese companies may be delisted as early as 2024 if they do not comply and share audits. That might seem a long way off, but the Tencent/Sogue merger took 15 months to complete. A secondary listing on the HKEx will also take time - especially if the vast majority of US-listed Chinese companies are thinking along the same lines.