Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Sanyo Chem - Nippon Shokubai Merger Ratio Is a BUY

SanyoChem Vs NipponShokubai: An Even Better Trade Now

Sanyo Chem & Nippon Shokubai - Fundamentals Still Favor SanyoChem

Quiddity Advisors

Event-Driven

Today after the close, <a href="https://www.smartkarma.com/entities/19373" target="_blank" data-smartkarma-citation="entities:19373:1">Nippon Shokubai (4114 JP)</a> and <a href="https://www.smartkarma.com/entities/16624" target="_blank" data-smartkarma-citation="entities:16624:1">Sanyo Chemical Industries (4471 JP)</a> together <a href="https://www.shokubai.co.jp/en/news/file.cgi?file=file1_0199.pdf" target="_blank">announced</a> that the two companies had reached a Basic Agreement to move ahead with the consideration toward the integration of their businesses (the “Business Integration”) based on an equal footing.That means they have a basic agreement to talk about the possibility of merging, but it also means they have not decided whether to merge, how to merge, and at what exchange ratio or valuation to merge.  This is the Japanese equivalent of two companies signing a non-binding scheme proposal with each other, and it is a peculiarly Japanese way of doing things. The timeline is that there will be negotiations between the two companies' management teams between now and December, with the goal being to announce a "Final Agreement" by end-December 2019 which will cover all basic issues regarding integration, including the design of business teams and delegation of executives into a holding company structure, with the holding company absorbing the two companies 1 October 2020 after a shareholder vote in June 2020. Upon the business integration, the Companies’ corporate planning, finance and accounting, legal, general affairs, HR, IR/PR, internal audit, corporate research, RC (responsible care) and other back-office sections will be integrated into the Integrated Holding Company, and it is likely that the two companies under the Holdco umbrella would merge within the following year.These two companies specialise in slightly different areas (with a sub-specialization in super-absorbent polymers which is a growing market), with Nippon Shokubai being a specialized producer of basic and functional chemicals, and Sanyo Chemical having a business of manufacturing and marketing an extremely broad range of performance chemicals. The base business is low-enough tech that emerging market players are starting to become more competitive, therefore cost cuts, scale, and combining R&amp;D efforts have merit. This idea of a business integration was spurred, if one believes the document, when...<blockquote>in the course of discussing the respective management challenges between the Companies, which had a business relationship of trading chemical raw materials from the past, Nippon Shokubai, which holds a group mission, “TechnoAmenity - Providing affluence and comfort to people and society, with our unique technology,” and Sanyo Chemical, which holds a company motto, “Let us contribute to building a better society through our corporate activities,” came to recognize not only the affinity level of their group mission and management motto, which is to contribute to society through corporate activities, is high, but the strengths and business challenges of the respective Companies are in a mutual complementary relationship.</blockquote>The rest of the MOU document is full of platitudes regarding negotiation in a "fair and equitable" manner "based on the spirit of mutual trust and equality" to get to a fair and equitable result.The fundamentals here are not terribly lopsided. Similar GPMs and OPMs over time and not too dissimilar Net Income growth over the past ten years. A difference in volatility and 2020 forecast growth may tip the scales (compared to current ratio) towards Sanyo Chemical. Analysis and discussion ensue.<hr>For other insights on Japanese M&amp;A please check the list of Japan-related Event-Driven insights <a href="https://www.smartkarma.com/insights?collection=all-insights&amp;filters=countries%3AJapan%7Cverticals%3A29" target="_blank">here</a>. As a reference to Japan M&amp;A rules and practices, please see the <a href="https://www.smartkarma.com/insights/quiddity-japan-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:28911">Quiddity Japan M&amp;A Guide 2019</a>.

Today after the close, Nippon Shokubai (4114 JP) and Sanyo Chemical Industries (4471 JP) together announced that the two companies had reached a Basic Agreement to move ahead with the consideration toward the integration of their businesses (the “Business Integration”) based on an equal footing.That means they have a basic agreement to talk about the possibility of merging, but it also means they have not decided whether to merge, how to merge, and at what exchange ratio or valuation to merge.  This is the Japanese equivalent of two companies signing a non-binding scheme proposal with each other, and it is a peculiarly Japanese way of doing things. The timeline is that there will be negotiations between the two companies' management teams between now and December, with the goal being to announce a "Final Agreement" by end-December 2019 which will cover all basic issues regarding integration, including the design of business teams and delegation of executives into a holding company structure, with the holding company absorbing the two companies 1 October 2020 after a shareholder vote in June 2020. Upon the business integration, the Companies’ corporate planning, finance and accounting, legal, general affairs, HR, IR/PR, internal audit, corporate research, RC (responsible care) and other back-office sections will be integrated into the Integrated Holding Company, and it is likely that the two companies under the Holdco umbrella would merge within the following year.These two companies specialise in slightly different areas (with a sub-specialization in super-absorbent polymers which is a growing market), with Nippon Shokubai being a specialized producer of basic and functional chemicals, and Sanyo Chemical having a business of manufacturing and marketing an extremely broad range of performance chemicals. The base business is low-enough tech that emerging market players are starting to become more competitive, therefore cost cuts, scale, and combining R&amp;D efforts have merit. This idea of a business integration was spurred, if one believes the document, when...in the course of discussing the respective management challenges between the Companies, which had a business relationship of trading chemical raw materials from the past, Nippon Shokubai, which holds a group mission, “TechnoAmenity - Providing affluence and comfort to people and society, with our unique technology,” and Sanyo Chemical, which holds a company motto, “Let us contribute to building a better society through our corporate activities,” came to recognize not only the affinity level of their group mission and management motto, which is to contribute to society through corporate activities, is high, but the strengths and business challenges of the respective Companies are in a mutual complementary relationship.The rest of the MOU document is full of platitudes regarding negotiation in a "fair and equitable" manner "based on the spirit of mutual trust and equality" to get to a fair and equitable result.The fundamentals here are not terribly lopsided. Similar GPMs and OPMs over time and not too dissimilar Net Income growth over the past ten years. A difference in volatility and 2020 forecast growth may tip the scales (compared to current ratio) towards Sanyo Chemical. Analysis and discussion ensue.For other insights on Japanese M&amp;A please check the list of Japan-related Event-Driven insights here. As a reference to Japan M&amp;A rules and practices, please see the Quiddity Japan M&amp;A Guide 2019. 

Sanyo Chemical - Nippon Shokubai Merger - Another "Guess the Ratio" Trade