Last Week in Event SPACE – Sushiro, NTT, Sprint, Alerian

This week, Sushiro Global (3563 JP) gets scaleable with Genki Sushi Co Ltd (9828 JP); the virtuous circle of NTT Docomo Inc (9437 JP)'s buybacks; the potential pushback on Sprint Corp (S US)'s 4-into-3 merger; and the disconnect between MLPs (Alerian MLP ETF (AMLP US) and oil prices.

(Market cap and liquidity noted below are in US$. Liquidity is assessed on a 3-month average)

M&A

Sushiro Global (3563 JP) (Mkt Cap: $849mn; Liquidity: $3.4mn)

Mio Kato, CFA casts his net on the sushi merger between number five player Genki Sushi Co Ltd (9828 JP) and number one Sushiro, spearheaded by Sushiro’s major shareholder Shinmei, Japan’s leading rice wholesaler.

• Briefly, European PE outfit Permira’s subsidiary CEIL will sell its entire 32.72% equity to Shimei, in two rounds, for ~¥38bn. With 40.5% of Genki, Shimei will initiate a management integration between Genki Sushi and Sushiro.
• Japan's conveyor sushi industry is relatively concentrated with the top five players accounting for roughly 80% (¥4,800bn) of the estimated ¥6,000bn revenue market.
• Mio expounds how this transaction marks the third attempt to restructure the sushi conveyor industry; and Sushiro’s second attempt to acquire Genki sushi. What goes around…

(link to insight: Background to The Sushiro-Genki Sushi Merger and Japan’s Conveyor Sushi Consolidation Path)

Gintech Energy Corp (3514 TT; "Gintech"), (Mkt Cap: $330mn; Liquidity: $5.8mn)
Solartech Energy Corp (3561 TT; "Solartech") (Mkt Cap: $197mn; Liquidity: $2mn)
Neo Solar Power Corp (3576 TT; "NSP") (Mkt Cap: $534mn; Liquidity: $5.4mn)

Pranav Rao discussed the anticipated merger between Gintech, Solartech and NSP announced on the 16 October 2017.

• The highly competitive solar industry has been in the doldrums, owing to a glut of Chinese panels, which almost lead to an EU/Chinese trade war in 2013 premised on alleged dumping.
• The merger ratios are not set in stone and may change after (or if ) a definitive agreement is signed, potentially in December. As it stands, the ratios appear fair.
• There may be some pushback from the TFTC in creating Taiwan's biggest solar cell producer, although the anti-trust body may sympathise with the sector’s ongoing plight. With an expected September 2018 completion, Pranav estimates a 60% completion probability.

(link to insight: Gintech, Solartech and Neo Solar Power: Taiwanese Solar Troika)

China National Materials Company Limited (1893 HK; "Sinoma") (Mkt Cap: $2.5bn; Liquidity: $6.3mn)
China National Building Material Co Ltd (3323 HK; "CNBM")(Mkt Cap: $4.6bn; Liquidity: $34.1mn)

Pranav sifted through the circulars for both Sinoma and CNBM as to their merger. Though not a cause for concern, the docs flagged the transaction requires the approval of South Korea's FTC prior to implementation, which was not originally highlighted in the initial transaction announcement.

• The EGMs for Sinoma and CNBM are tabled for 6-Dec-2017; however given the quirks associated with this share-absorption, wherein certain approvals and waivers are to be secured after the merger becomes effective - such as the CSRC waiver from the obligation for CNBM to make mandatory offers for subsidiaries listed on the Shanghai and Shenzhen Stock Exchanges - suggest actual implementation could take place mid to late January 2018.

(link to insight: China National Materials / China National Building Materials: Dispatch of Circulars)

Global Logistic Properties Ltd (GLP SP)(Mkt Cap: $11.4bn; Liquidity: $29.8mn)

GLP dispatched its Scheme Document late last week, which offered up minimal surprises.

• The IFA (Evercore) gave a fair and reasonable. Given GIC's irrevocable undertaking (which amounts to 36.84% of total shares) and the large premium offered, Pranav believes the scheme resolutions will pass at the meeting on 30-Nov-17.

(link to insight: Global Logistic Properties: Clear Timeline to Payment)

Sprint Corp (S US)(Mkt Cap: $27.9bn; Liquidity: $105mn)

Contrary to Pelham Smithers' insight last month, CTFN reckons the merging of the No. 3 and No. 4 US wireless carriers may face significant regulatory hurdles, based on antitrust sources.

• One former senior DoJ official believes the Government won’t allow a 4-to-3 deal, simply as it makes the No.3 or No.4 player more competitive. A similar viewpoint was expressed by a former deputy assistant AG in that the consumers will have fewer choices.
• On the technical front, the pro-deal argument is the introduction of 5G alters the landscape, where T-Mobile is at a disadvantage, and that a Sprint/T-Mobile combo will help to compete against Verison and AT&T, and the advent of non-traditional competitors such as Comcast & Dish Network.
• Politically, Softbank’s CEO Masayoshi Son has been getting chummy with Donald Trump, and promising serious US investments.
• Perhaps the technical aspects (GSM/CDMA-owned spectrum) won’t be the central discussion point. The merging parties need to argue this is not another “big merger in a concentrated industry that affects a lot of real Americans”.

(link to insight: A Sprint/T-Mobile Tie-Up Faces High Regulatory Hurdles)

Events

NTT Docomo Inc (9437 JP)(Mkt Cap: $94bn; Liquidity: $94mn)

On Thursday NTT Docomo announced a buyback of up to 120mn shares (3.24% of shares outstanding) for up to ¥300nb, in order to "improve shareholder returns and to increase capital efficiency." The buyback period commences October 27th and goes until the end of March.

• Travis Lundy expects NTT Docomo will buy back up to 80mn shares in a Tender Offer at “something like” ¥2,500/share, or ¥200bn, with the below market price aimed at repurchasing those shares directly held by NTT (Nippon Telegraph & Telephone) (9432 JP). A tender may be launched as soon as reports earnings on the 10th of November.
• Subsequently, NTT Docomo would commence buying shares in the market, spending the remaining ¥100bn by end-March. Assuming NTT was 10% of the volume at the current price, it would take 92 trading days.
• As Travis drolly puts it: “This virtuous circle of NTT Docomo buybacks leading to more NTT market buybacks leading to NTT buybacks from the government via ToSTNeT leading to more NTT buybacks on market requiring more NTT Docomo buybacks looks set to continue.”
• Travis sees every reason for NTT and Docomo to try and do this in the following fiscal year, and for NTT (flushed with cash from the Docomo sale) to buy back between ¥200-300bn from the Japanese government within the next 18 months.

(link to insight: NTT Docomo (9437) Buyback - A Virtuous Hula Hoop Gathers No Moss)

Fuji Kiko Co Ltd (7260 JP) (Mkt Cap: $355n; Liquidity: $1.4mn)

While the deal to sell the seat business is now complete, the deal to buy the remaining steering and powertrain business is not yet launched and is unlikely to be announced before October 31st, when the earnings are out for both buyer and seller.

• As per Travis’ earlier insight, the initial price offered by JTEKT was not overly generous. It would not surprise - or be terribly surprising - if Fuji Kiko's board asked for a (little) bump, and JTEKT yielded, given a basket of powertrain and steering comps is up 20% since the announcement 6 months ago.
• Travis would want to own shares at below the ¥740 terms on the possibility there is a bump.

(link to insight: Fuji Kiko Tender Offer Launch Likely Next Week. Hmmm....)

Lotte Shopping Co (023530 KS) (Mkt Cap: $6.8bn; Liquidity: $27.6mn)

Lotte Holdings submitted the merger completion report in a regulatory filing at DART (Repository of Korea’s Corporate Filings) and Sanghyun Park addressed its 6 circular shareholding links, which will need to be disposed within 6 months after the official merger date (Oct 1st).

• There is considerable jostling and re-choreographing to be had, most involving the expectations Shin Dong-bin will buy the bulk of these shareholdings. While Sanghyun delves into the gymnastics of each shareholding, the mechanics are best served viewing his insight.
• Of most interest is Shin Dong-bin's 13.5% stake in Shopping. He doesn’t need this direct holding and would be better off directly vested into Holdings. This could unfold via a merger/share-swap between Holdings and Shopping, or Shin selling his stake in Shopping and buying shares in Holdings. Sanghyun believes he could do both, but in any event, a strong share price in Shopping will benefit Shin, as previously flagged in his prior restructuring insights, which can be found on the right-hand side of the link below.

(link to insight: Lotte Group Restructuring Part 10 - Merger Completion Report Summary)

BayCurrent Consulting Inc (6532 JP) (Mkt Cap: $3.23n; Liquidity: $4.5mn)

BayC announced it would execute a Tachiaigai Bunbai Offering to sell 773,400 shares, increasing the float by about 7%. Travis believes BayC ticks all the TSE1 requirement boxes ... save one tiny issue. That application transfer may take place in December of 1Q, with an approval between February and April.

• Travis doesn’t see any obvious roadblock for approval, suggesting a TOPIX Index inclusion on the last day of the month following the transfer, or March to May next year.
• At the then current price of ~¥2160/share, the inclusion event equates to ~US$36-40mm, which depending on the time of year, works out to 5-6 days average daily volume, up to 20 days. Pretty decent.

• Is it a great trade? Optically, BayC looks solid with an ROE of 19% last year, and a forward PER of ~12-13x – not bad for a growth stock. Travis would rather be long this stock than short.

(link to insight: Baycurrent Consulting - Aiming at TOPIX Promotion)

Alerian MLP ETF (AMLP US) Alerian (Mkt Cap: $9.5bn; Liquidity: $106mn)

Charles De Trenck explored why (mainly) US energy MLPs are underperforming energy prices and plays in general. “The most likely #1 reason is tax-related selling, but perhaps also combined with tax policy change related reasons as well as cash raising for a new MLP IPO."

• BP Midstream Partners, a new MLP (Master Limited Partnership) was priced at US$18, below its indicated $19 – 21 range. That backs out a yield of 5.8% against 7.3% for JPMorgan Alerian MLP Index ETN (AMJ US), and 8.2% for Alerian MLP ETF (AMLP US),
• Many MLPs are around levels when oil traded around $35-40/bbl, as WTI scratched its way back from below $30 back in early 2016. “With WTI at $50/bbl levels, there appears to be a substantial discontinuity between the relationships.”
• At these price levels, Charles believes AMLP looks attractive mid-term.

(link to insight: Time to Look at MLPs Again)