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Last Week in Event SPACE: SOHO China, Evergrande, Kerry Logistics, Milton, CBA, NTT

333 Views15 Aug 2021 07:21
SUMMARY

Last Week in Event SPACE ...

  • Formal SAMR acceptance should be viewed as a major positive for Soho China Ltd (410 HK). Less positive is that the application does not appear to a "simple procedure" review.
  • It would appear that Evergrande Real Estate Group (3333 HK) has decreasing room for manoeuvre. And that room for manoeuvre depends on others' confidence in the stability of outcome. The equity remains un-investable.
  • The key risk to Kerry Logistics Network (636 HK)'s partial Offer is that the Irrevocable Agreement signors will tender more. One would think it makes sense to tender at a high price rather than place out shares at a lower one. This could imply the Proposed Minimum Pro-Ration of 76.3% is optimistic.
  • There is a stubborn stickiness to Milton Corp Ltd (MLT AU) pricing which is surprising, especially given the inputs to the trade.
  • NTT (Nippon Telegraph & Telephone) (9432 JP) is cheap, and NTT is about to go on a multi-month buying spree to buy 15-25% of eligible volume every day.
  • Commonwealth Bank of Australia (CBA AU) should be expected to be able to raise its dividend AND buy back shares. A buyback of A$5.0-6.0bn or about half the distance between its end-June CET1 and the "Unquestionably Strong" level was expected. And that's what transpired.
  • Plus, other events, CCASS movements, and Mood Spins.

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

M&A - ASIA

Soho China Ltd (410 HK) (Mkt Cap: $2.2bn; Liquidity: $8mn)

Has there ever been so much disinformation, speculation, and conjecture for a takeover of, ostensibly, a straightforward asset? From the onset, the SOHO deal traded wide on concerns the transaction could turn political on account of the company's founder's son allegedly making salacious political comments. A vacuum of any positive news and continued speculation reached a helm on the 29 July, following a vague media article suggesting the deal faced regulatory "obstacles." Shares cratered, before "recovering" to $3.02/share, around the undisturbed price and ~40% adrift of the $5.00/share offer price. Five days later a sister publication of the one behind the "obstacle" article, issued a note that several banks had obtained internal approvals for underwriting some of Blackstone Group’s loans to fund the Offer. Shares consequently popped.

  • But it appears there was considerably more substance behind that pop in price. Last Friday afternoon, after the close of market, SOHO announced that on 3 August 2021, Blackstone received a notice from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law had been formally accepted by SAMR for review. The issue though is that the application doesn't appear to be classified as a simplified procedure. If it was simple, it would be online already. It is difficult to understand why this has been accepted for review, but it isn't "simple".
  • SAMR reviewed 458 cases in 2020, 372 (81%) were under the simplified process, and another 82 (~18%) as normal cases - which means SAMR unconditionally approved more than 99% of the deals. Simple cases took on average 14 days to process. The review of "normal" case filings can take four to six months (or longer). I'm not aware of a SAMR property precedent. SOHO sold Sky SOHO to Gaw Capital Partners in 2018 for RMB5bn, plus entered into an agreement to sell car parking spaces for RMB761mn. None of these transactions attracted security concerns. It is not at all clear why this Blackstone transaction should be any different.
  • Formal acceptance for review is a big positive development. Yes, the review period may exceed that seen for simplified reviews; yet most deals in China are simply not accepted for review if they are a no-go - and the overwhelming majority of SAMR vases are unconditionally approved.

(link to my insight: SOHO China (410 HK): Time To Buy)

Milton Corp Ltd (MLT AU) (Mkt Cap: $3.1bn; Liquidity: $4mn)

In case it is not clear, Travis Lundy is (virtually) jumping up and down on this trade. He think it is VERY attractive. He sees a current spread of just over 4% on the "static" spread, with another 1.25-1.75% of fair value from the options. The options are complex to price, but he actually believe the contingent option is worth more. That is for two months of holding.

  • The 4% spread is improved because of the lopsidedness of the return profile. It is further improved by the convexity to the upside if both MLT NAV and WHSP go up. Both are supported by large bank buybacks, rising consensus earnings at Brickworks, and 60-100 days of volume to buy on WHSP into the index treatment of the merger. Travis thinks the data suggests that if there is some pre-positioning on WHSP for the index event, that pre-positioning remains negligible.
  • The simple trade is long MLT, short the appropriate quantity of S&P/ASX200 ETFs. To fully hedge the arb, one should also be short about 75% of the final delta on WHSP. That will hedge the optionality portion.
  • Travis' preferred way to set it up is with long MLT, short MLT NAV in a cash basket, and don't hedge the WHSP. Let that ride - that's the index upweight trade. Then buy the MLT NAV back half in the morning of 2 Sep, and half at the close.

(link to Travis' insight: The Magnality of the Marvelous Milton Merger Makes a Moribund March To Metaphysis (It's Mirific!))

Kerry Logistics Network (636 HK) (Mkt Cap: $5.5bn; Liquidity: $8mn)

Exactly on the Long Stop date, KLN has announced all of the pre-cons have been met - or waived (the Thai waiver in particular) - and that the Composite Document is expected to be dispatched, on or before, the 16 August. The timing of that Record Date (for the special dividend) and the Close of the Offer suggests the FY21 Interim Dividend will likely be added to terms.

  • At HK$23.70 - at the time of the insight, assuming the Controlling Shareholders and Executive Directors, etc tender only the Irrevocable Quantities, and assuming the back end should trade at Undisturbed of HK$16.92 less the Special Dividend of HK$7.28, and assuming the options are not exercised and do not participate, the fair value back end is HK$9.64, Implied Public Shareholder Participation Rate is 100%. IF assuming that the Controlling Shareholders, Directors, etc intend to tender only what they put in their Irrevocable Agreement and will not tender excess, then the right place to own the stock is below HK$24.00.
  • IF you think there is a risk that the Controlling Shareholders, Directors, etc will look at the situation and decide they'd rather sell more shares at HK$18.80 than place shares at $HK10.00 to re-establish the minimum float level, then pro-ration could be in the low 50%s and the buy price is more like HK$22.00.
  • As it is, and taking the view the Controlling Shareholders will not tender more than the Irrevocable Quantity, buying around here looks reasonable.
  • UPDATE: The composite doc is out. The first close is the 2 Sept. The record date for the special dividend the 1 Sept

(link to my insight: Kerry Logistics (636 HK): Pre-Cons Done. Partial Offer To Commence Next Week)

Iress Ltd (IRE AU) (Mkt Cap: $2.1bn; Liquidity: $7mn)

Back on the 29 July, trading and wealth management software provider Iress announced it had received a confidential, unsolicited, non-binding, and indicative proposal from Swedish PE outfit EQT Fund Management via a Scheme of Arrangement at a price range of between A$15.30 and A$15.50 cash per share. EQT had previously fielded an Offer of A$14.80/share on the 18 June. Iress' board unanimously concluded that the 4% bump - if using the mid-price of the price range - attached to the latest Proposal was "conditional and did not represent compelling value for Iress shareholders". Iress' board has now backed a revised Offer from EQT - but at $15.91/share, just 3.3% above the previous proposal.

  • Trading at a 5.4%/13.4% gross/annualised spread - at the time of the insight - assuming five months from hereon to complete. That looks like a reasonable price level to enter.
  • This remains a non-binding Offer - and there is no guarantee a firm Offer will unfold. Due diligence, on an exclusive basis, has been granted. Yet EQT is well engaged here.

Huon Aquaculture (HUO AU) (Mkt Cap: $0.3bn; Liquidity: $1mn)

Huon is in need of cash in the face of burgeoning debt amid falling salmon prices and rising freight expenses. A possible placement has been floated, although it would need to be substantial, which would reduce the Bender family's major shareholding. A more likely outcome was a take-private transaction, yet an ongoing auction process, one that was (allegedly) repeatedly extended, appeared to be losing traction. As of about a week ago, reportedly only Brazil's JBS SA (JBSS3 BZ) was still in the running. Huon has now announced a firm Offer with JBS.

  • Under the terms of the Offer, by way of Scheme, Huon shareholders will receive A$3.85/share in cash. A fully-franked dividend of $0.0125/share - if paid - will be netted. The cash price is a 61% premium to the last close, before the strategic review was announced on the 26 February. The founding family (the Benders) with 53% intend to vote all of their shares in support of the Scheme, in the absence of a superior offer.

  • The company is on the back foot in the face of increasing debt amid falling salmon prices and skyrocketing freight prices. Given the spread, I'd be inclined to avoid this transaction for now. And although I expect FIRB approval to be forthcoming, I think there is a non-negligible risk here.

  • Then Twiggy upped his stake. As rumoured, hs family fund Tattarang has taken its stake up to 18.51% from 7.33%. Reportedly Forrest reckons the SID does not mention animal husbandry or the environment - basically higher standard. He doesn't want a bump - he wants clarification. This is gearing up to be blocked unless JBS makes clear its forward intention.

(link to my insight: JBS Nets Huon Agriculture (ASX: HUO))

Golden Throat Holdings (6896 HK), a leading manufacturer of lozenges in China, has announced an Offer from PE outfit Affirma, by way of a Scheme, at HK$2.80/share, a 55.6% premium to the undisturbed price. The Offer Price will not be increased. Golden Throat does not intend to declare any dividends during the Offer period. Both the Founder Group and Rollover Shareholders have given Affirma irrevocables. The Founder Group collectively holds 457,076,300 shares or 61.33% of shares out. These shares form part of the Scheme shares. The Rollover Shareholders collectively hold 92,956,400 shares or 12.57% of shares out. None of the Founder Shareholders nor the Rollover Shareholders will attend or vote at the Court Meeting to approve the Scheme, nor vote at the General Meeting on the ordinary resolution to approve the Rollover Arrangement. This Offer looks done. Link to my insight: Golden Throat (6896 HK): Affirma and Founder Group Cough Up.

The Composite Doc for Kerry Logistics Network (636 HK)'s Partial Offer is now out and the Offer is open for acceptances. Irrevocables are expected to be tendered by the 16 August. The special dividend is expected to be declared the following day. The first close is the 2 September. It is quite possible this will also be the last closing date. At HK$23.80, assuming the Controlling Shareholders and Executive Directors, etc tender only the Irrevocable Quantities, and assuming the back end trades at Undisturbed of HK$16.92 less the Special Dividend of HK$7.28, the fair value back end is HK$9.64, Implied Public Shareholder Participation Rate is 100%. The main risk here is that the Irrevocable Agreement signors will tender more, implying the Proposed Minimum Pro-Ration of 76.02% is optimistic. But if assuming that the Irrevocable Agreement signors intend to tender only what they put in their Irrevocable Agreement, then owning the stock around here looks the right place. Link to my insight: Kerry Logistics (636 HK): Doc Out Early - Offer Now Open.

STUBS

Naspers (NPN SJ) / Prosus (PRX NA) / Tencent Holdings (700 HK)

On the last day of trading for the Naspers Exchange Offer before it goes ex- tomorrow. A number of investors and traders will find it impossible to buy and offer their shares through normal settlement mechanisms and could only do so on swap as normal corporate action windows would have closed.

  • Travis is sticking to my 54-64% range. If he had to tighten it, I would probably tighten it around the middle of that range, perhaps tilting it a bit lower than mid-range. That appears to be slightly lower than the average estimate. Travis expects that the pattern for index managers will be to tender a large chunk, lend out a large chunk, and keep a small chunk both un-tendered and un-lent. Borrow appears to be difficult to obtain at the last minute so I expect that means that pro-ration tilts "lower", but because of the point above, some Naspers shares will be "wasted." He expects very few institutional managers to "stand pat" (do nothing).
  • As the shares go ex- on August 11, expect that the spread will widen. Travis expects this could drive some who were on the fence to decide to tender, and could encourage slightly higher rates of participation among those who had thought to not tender everything. For those who plan on short-tendering, if there is very significant short-term price break, it may be worth buying that dip rather than the index dip. But he do not expect significant volume. Significant volume traded in the market 11-13 August would be bullish pro-ration. He still expects the index trade in mid-August to be smaller in price impact than many seem to expect, and expects the September rebalance on Naspers to be larger than people expect.

(link to my insight: Naspers/Prosus - Now We Go Ex-Offer)

Evergrande Real Estate Group (3333 HK) (Mkt Cap: $10.8bn; Liquidity: $456mn)

The previous Friday, it became known that S&P Global ratings had lowered the ratings on Evergrande by two full notches, from B- to CCC, which is now four notches above Default. USD bonds issued by Scenery Journey were lowered from CCC+ to CCC-. Right now, with Evergrande's market cap at US$9bn against total consolidated liabilities which could stretch to US$300bn+, there is tremendous leverage in the outcome. Helpfully, Evergrande is still the holder of stakes in FCB, Evergrande Property Services (6666 HK), and Evergrande Auto (708 HK). The latter two are well-known, the former may be worth a fair bit of money.

  • The CNY bonds are now getting cheap enough to warrant looking at them as long as all obligations are pari passu. Travis expects that the government would not want to see China's most indebted corporate pay out its lenders and trade payables at 60cts on the dollar. It would also not want to see trade payables get 90cts and lenders get 50cts. For this, he has assumed that Evergrande parent would be required by a "settlement" to push assets down.
  • If push comes to shove, Travis would expect someone (or a consortium) would be asked to inject some equity to take over the residual through a restructuring which would haircut the debt and payables by a smaller amount (say 20%), the equity would get zeroed, and then life would go on for the company though it and its new owners would have smaller aspirations. But all that could be done at the Hengda level or one level above - the Guangzhou Kailong Real Estate Company level which is Evergrande's ownership of Hengda. If done that way, it might keep the minority investors in Hengda "alive" but it would zero out Hui Ka Yan.
  • Any trade in the capital structure remains speculative at best. The big question CNY bond buyers should think about is whether all the unsecured liabilities will be treated equally or whether trade payables and deliverables to customers will be senior. Travis expects they will be, which means the unsecured CNY bonds are not very secure.

Links to:
Travis' insights: Evergrande's Room for Manoeuvre - A Question of Confidence & Evergrande as a Study of Quantum Mechanics Theory
my insight: StubWorld: What To Do With Evergrande?

In Kirin: An End to Troubles in Myanmar JV Could Unwind the Multi-Year Low Holdco Discount, Oshadhi Kumarasiri highlights Kirin Holdings (2503 JP) is trading at a NAV discount of 25% compared to the past five-year average NAV premium of 10%.

EVENTS

NTT (Nippon Telegraph & Telephone) (9432 JP)(Mkt Cap: $93bn; Liquidity: $116mn)

NTT has announced earnings. They were not that exciting, but as Kirk Boodry has suggested in NTT (Buy) - Q1 21 Results Reaction: Buyback Confirmed, operational performance is improving and things look better in the details than they do at the headline. NTT also announced a ¥250bn buyback, and assuming it happens at JPY 3000/share, the government would be at a 35.6% position terms of voting rights. With a share cancellation, NTT could then execute a JPY 300bn ToSTNeT-3 buyback from the government. As time goes on, the reduction in float shares outstanding due to the buybacks will mean ongoing reduction in share count held by passive shareholders. This buyback represents a considerably high impact. At 12-13% of 3-month ADV every day for the rest of the fiscal year, investors should count on this having a price-cushioning or price-lifting effect.

  • NTT is cheap to Softbank Corp. Over time, the price ratios bump around a bit, but telephone companies are basically pretty stable. They grow or do not grow in syncopation as regulatory or corporate impacts hit at different times. NTT is now at its lowest price to Softbank Corp since the announcement of its takeover of NTT Docomo which upped NTT's forward EPS by 20%. Softbank Corp's 2023e EPS is up about 1% since then. Travis expects that the "dream" that is Softbank Corp will warrant a higher PER for a while. He expect the reality is that NTT will grow almost as fast after considering shareholder returns and accretion.
  • For a long-only investors, Travis would want to be invested in NTT vs Softbank Corp at current prices. For an arbitrageur, he would want to be long NTT short Softbank Corp at the current ratio. It is cheap, and NTT is about to go on a multi-month buying spree to buy 15-25% of eligible volume every day. If it gets done quickly, it will be the end of December. If slowly, it will still take until end of March.

(link to Travis' insight: NTT Buybacks Continue - Bigger, Better, Faster, Stronger)

Commonwealth Bank of Australia (CBA AU) (Mkt Cap: $142bn; Liquidity: $178mn)

In Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows Travis wrote that he expected CBA to announce an off-market buyback A$5.0-6.0bn when it announced earnings on 11 August. Sure enough, CBA announced the final dividend was hiked - A$2.00/share for Record Date 18 August - and a large off-market buyback was announced of A$6.0bn. Also with a Record Date of 18 August.

  • Generally speaking, Travis would not want to be short an off-market buyback stock vs its peers in the second half of the off-market buyback period. Foreign shareholders gain nothing by participating. FOREIGNERS SHOULD NOT PARTICIPATE. ADRs usually cannot participate. Fully taxable shareholders in Australia gain nothing by participating. For those who are at a low tax-bracket - 0-15% (retirees, superannuation funds, or self-managed superannuation funds (SMSFs), it is a windfall.
  • This off-market buyback goes ex- on 17 August. Expect some buying before that, then expect a drop off as the dividend and the buyback go ex- and retail can no longer buy to own. Expect a "soft spot" between the fourth week of August and the end of September. Expect buying in the market from October 1-10 as those who will sell shares into the buyback pre-buy and post-buy the results of what they sold. For investors looking to match funds, they can start to buy shares in the market on 3 October.
  • After the impact of this buyback ends, one might expect a relative soft-spot. CBA is a bit rich vs the other banks.

(link to Travis' insight: CBA Announces a BIG Off-Market Buyback - Timing and Past Cases)

We basically knew Mcdonald's Holdings Co Japan (2702 JP)'s 1Q results were going to be strong, because of the comments made in the analyst call on 28 July after parent Mcdonald's Corp (MCD US)'s earnings were released. What we do not have yet is any indication of the company's intent with regard to the TSE's market structure changes come April 2022. But we should have another block to be sold by MCDs. I would expect 3.8mm shares to close out the sale of shares. Travis would expect it imminently. That will be the end of MCD's selldown of MCDs Japan shares... but not quite. Link to Travis' insight: McDs Japan (2702) Update: Q1 Strong As Expected, No TSE1 News.

M&A - EUROPE

Wm Morrison Supermarkets (MRW LN) has agreed to an improved offer from the Fortress consortium of 272p/share, representing a 7% premium to the original Fortress offer. Morrison's EGM will now be held on 27 August. On 9 August, shares closed at 278.8p. The Gross spread was -3%. At the current market price, Jesus Rodriguez Aguilar reckons in Fortress/Morrisons: 272p Pre-Emptive Strike he would not wait for an increased offer price, which could come at 285p, just 2% higher than the last closing price.

Philip Morris International (PM US) raised its bid for Vectura (VEC LN) to 165p/share, c. 6.5% higher than the last recommended 155p/share bid on 6 August by Murano Bidco (Carlyle). Link to Jesus' insight: Race for Vectura Continues.

On 28 July, a consortium led by Volkswagen (Pref) (VOW3 GY), together with Attestor fund and Pon Holdings transport group, entered a tender offer support agreement setting T&Cs for the acquisition of Europcar Mobility Group (EUCAR FP). The offer is €0.50/share (vs. € 0.44/share on the offer discussed in June, c. 14% higher). Link to Jesus' insight: VW Consortium/Europcar: Spread.

M&A - US

INDEX REBALS

OTHER M&A & EVENT UPDATES

  • China National Building Material (3323 HK) announced it has completed its H share full circulation programme. This is captured under CCASS ID A00005.
  • And it's a deal break for China Traditional Chinese Medicine (570 HK) - Sinopharm has decided not "to proceed with the Possible Privatisation this time". I don’t think this is a "hard" walk away. Sinopharm, given it is an SOE, must have received some preliminary go-ahead. But for whatever reason, all necessary approvals have been held up. The SFC has guidelines for making a firm Offer, and doesn’t want things to drag on. And it’s been 6+ months. Better for Sinopharm to terminate now and reload later. As per Rule 31.1(c) of the Takeovers Code, Sinopharm cannot reload for six months.

CCASS

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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.

Name

% chg

Into

Out of

China Zhengtong Auto Services Hldg (1728 HK) 12.32%JPMHSBC
Zhongyu Gas Holdings (3633 HK) 22.70%HaitongHSBC
JW Therapeutics (2126 HK) 10.81%CitiOutside CCASS
Sciclone Pharmaceuticals (6600 HK) 26.22%CICCOutside CCASS
Polyard Petroleum International Grup (8011 HK) 11.57%CMBOutside CCASS
Intron Technology Holdings L (1760 HK) 62.27%BNPOutside CCASS
Sciclone Pharmaceuticals (6600 HK) 15.72%MSOutside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Li Auto (2015 HK) 48.95%DBOutside CCASS
Source: HKEx

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