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

Shinsei TOB: A Complicated Game of 🐓 Nobody Has Thought About?

Aggressive Commentary by SBI About Shinsei at Earnings

Further Shinsei Complications: Glass Lewis Endorses the Poison Pill. Will the FSA Vote?

Shinsei Looks To A Poison Pill, But Probably Not Really

Shinsei To Launch a Poison Pill; SBI Plays Coy, So We Wait

Quiddity Advisors

Event-Driven

<p><a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">SBI Holdings (8473 JP)</a> launched a surprise <em>hostile</em>-<em>ish</em> Tender Offer on <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> about 6 weeks ago, and that has now officially become HOSTILE.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/236/716/original/Screenshot+2021-10-21+at+11.40.17+PM.png?1634830918" class="editor-image img-responsive" data-smartkarma-image-id="236716"></figure></section><p></p><p>Shares traded up originally, then down below ¥1,900/share, then near ¥1,900/share, and today, after a delay, which followed an extension, or vice versa, <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> finally came out with their <strong>Target Opinion</strong> of the <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">SBI Holdings (8473 JP)</a> Tender Offer to purchase an additional 27.68% of Shinsei Bank at ¥2,000/share which would get them to 48% ownership. </p><p>The Contents of the <a href="https://sp.shinseibank.com/corporate/en/news/pdf/pdf2021/211021_announcement1_e.pdf" target="_blank" rel="noopener">The Opinion</a> were leaked by the Nikkei overnight, and indeed, the Opinion is AGAINST. This bit is not at all surprising. The arguments presented are indeed almost exactly what one would expect. </p><p>It is, however, a nuanced CONDITIONAL AGAINST. And that is where it is gets interesting.</p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/236/664/original/Screenshot+2021-10-21+at+4.57.07+PM.png?1634806642" class="editor-image img-responsive" data-smartkarma-image-id="236664"></figure></section></section><div class="content-highlight">
<p>The main two complaints are that..</p>
<ol>
<li>it does not offer minorities a way out of their shares because it is only a partial tender, but it effectively gives control to SBI. </li>
<li>the price is not sufficiently high, and the premium is not high when applied to the whole minority share base (a 37% premium applied to only 27.68% shares which is about one-third of the shares SBI doesn't own suggests a 13% effective premium for all the minority shares - which is inadequate.</li>
</ol>
</div><p>Shinsei Bank is, of course, right on both counts. </p><ol>
<li>SBI, by getting to 48%, can effectively control the Board because to block a full SBI slate would require that more than 96% of shareholders show up to a shareholder meeting and that is unlikely (no meeting in five years has gotten measurably above 91%), and because they cannot act in contravention of the Rehabilitation/Revitalisation Plan, and the government owns 20%, the combination of the government and SBI would own a super-majority, and even if the government were to abstain from such a vote, SBI would have 60%  of the other shares, at a minimum. And if 10% of the non-government holders were to not show up for a vote and the govt were to abstain, SBI's 48% would be more than two-thirds. <ul><li>The objection is to the idea of a "Coercive Tender" which is called that because it has few enough limits and while possibly short-term beneficial to shareholders prior to the announcement, even shareholders who do not want to tender may feel obliged to do so because their "minority" interest may lose value after the Tender Offer because of the control gained by the Tender Offeror and resulting conflict of interest.</li></ul>
</li>
<li>The price of ¥2,000/share is likely to be about 0.45x book value per share as of 30 Sep 2021. Combined with their average in-price of about ¥1480/share for their existing 20.32% means a combined average purchase price for control of approximately ¥1,780/share or about 0.40x book (though when they first purchased shares, BVPS was lower).</li>
</ol><p style="padding-left: 25px;">The "average weighted premium" argument is unusual. I personally have never seen a company defend itself with that, though those objecting to tender offers have used the argument before, and like the "coercion" argument, it relies on the weighted average benefit being low, which it is. This tender offer is being conducted at too low a price.</p><div class="content-highlight"><p>However, Shinsei says that SBI can gain Shinsei's approval by meeting the conditions which are <strong>Requirements for Support</strong>.</p></div><ol>
<li>Either remove the upper limit for shares tendered, or conduct a Second TOB by 8 June 2022 which has no upper limit on shares tendered.</li>
<li>Raise the Tender Offer Price by negotiation with Shinsei.</li>
</ol><p>If SBI complies with these Requirements for Support by 19 November 2021 - three business days prior to the EGM intended to gauge shareholder support for the Poison Pill - by agreeing and signing an MOU, Shinsei will withdraw the proposal for the Poison Pill and cancel the EGM. It will release data and materials which would allow SBI to conduct reasonable due diligence. </p><p>Shinsei proposes that Shinsei and SBI HDS enter discussions immediately. </p><p>Separately, Shinsei said that it is conducting discussions with potential partners regarding capital and business alliances, and will do so even after the Tender Offer if it is not successful (this is tough - there is no minimum). </p><h3><strong>A First Impression: </strong></h3><ul>
<li>I am normally quite skeptical of Target Opinions which are AGAINST because they tend to be totally self-serving and management entrenching.</li>
<li>But this is remarkably different than what would normally come from a Japanese company. </li>
<li>
<em><strong>This is really quite well done by Shinsei.</strong></em> There may be places to nitpick, and Shinsei should have proposed one more measure to make sure that SBI didn't just decide to take the run and ignore Shinsei's concerns.</li>
</ul><p>Shinsei may still have room to do that thing, and if done right, that could prove devastating to SBI's near-term plans. But the window to act on that is probably pretty small, unless there is another delay in the EGM, which would be possible. </p><p><em><strong>Or unless SBI rejects Shinsei's proposals out of hand.  Which it <a href="https://www.sbigroup.co.jp/news/2021/1021_12711.html" target="_blank" rel="noopener">just did</a>. </strong></em></p><p>The situation is now more complicated than before, so I take a little more time to discuss it below.</p>

SBI Holdings (8473 JP) launched a surprise hostile-ish Tender Offer on Shinsei Bank (8303 JP) about 6 weeks ago, and that has now officially become HOSTILE.Shares traded up originally, then down below ¥1,900/share, then near ¥1,900/share, and today, after a delay, which followed an extension, or vice versa, Shinsei Bank (8303 JP) finally came out with their Target Opinion of the SBI Holdings (8473 JP) Tender Offer to purchase an additional 27.68% of Shinsei Bank at ¥2,000/share which would get them to 48% ownership. The Contents of the The Opinion were leaked by the Nikkei overnight, and indeed, the Opinion is AGAINST. This bit is not at all surprising. The arguments presented are indeed almost exactly what one would expect. It is, however, a nuanced CONDITIONAL AGAINST. And that is where it is gets interesting.
The main two complaints are that..

it does not offer minorities a way out of their shares because it is only a partial tender, but it effectively gives control to SBI. 
the price is not sufficiently high, and the premium is not high when applied to the whole minority share base (a 37% premium applied to only 27.68% shares which is about one-third of the shares SBI doesn't own suggests a 13% effective premium for all the minority shares - which is inadequate.

Shinsei Bank is, of course, right on both counts. 
SBI, by getting to 48%, can effectively control the Board because to block a full SBI slate would require that more than 96% of shareholders show up to a shareholder meeting and that is unlikely (no meeting in five years has gotten measurably above 91%), and because they cannot act in contravention of the Rehabilitation/Revitalisation Plan, and the government owns 20%, the combination of the government and SBI would own a super-majority, and even if the government were to abstain from such a vote, SBI would have 60%  of the other shares, at a minimum. And if 10% of the non-government holders were to not show up for a vote and the govt were to abstain, SBI's 48% would be more than two-thirds. The objection is to the idea of a "Coercive Tender" which is called that because it has few enough limits and while possibly short-term beneficial to shareholders prior to the announcement, even shareholders who do not want to tender may feel obliged to do so because their "minority" interest may lose value after the Tender Offer because of the control gained by the Tender Offeror and resulting conflict of interest.

The price of ¥2,000/share is likely to be about 0.45x book value per share as of 30 Sep 2021. Combined with their average in-price of about ¥1480/share for their existing 20.32% means a combined average purchase price for control of approximately ¥1,780/share or about 0.40x book (though when they first purchased shares, BVPS was lower).
The "average weighted premium" argument is unusual. I personally have never seen a company defend itself with that, though those objecting to tender offers have used the argument before, and like the "coercion" argument, it relies on the weighted average benefit being low, which it is. This tender offer is being conducted at too low a price.However, Shinsei says that SBI can gain Shinsei's approval by meeting the conditions which are Requirements for Support.
Either remove the upper limit for shares tendered, or conduct a Second TOB by 8 June 2022 which has no upper limit on shares tendered.
Raise the Tender Offer Price by negotiation with Shinsei.
If SBI complies with these Requirements for Support by 19 November 2021 - three business days prior to the EGM intended to gauge shareholder support for the Poison Pill - by agreeing and signing an MOU, Shinsei will withdraw the proposal for the Poison Pill and cancel the EGM. It will release data and materials which would allow SBI to conduct reasonable due diligence. Shinsei proposes that Shinsei and SBI HDS enter discussions immediately. Separately, Shinsei said that it is conducting discussions with potential partners regarding capital and business alliances, and will do so even after the Tender Offer if it is not successful (this is tough - there is no minimum). A First Impression: 
I am normally quite skeptical of Target Opinions which are AGAINST because they tend to be totally self-serving and management entrenching.
But this is remarkably different than what would normally come from a Japanese company. 

This is really quite well done by Shinsei. There may be places to nitpick, and Shinsei should have proposed one more measure to make sure that SBI didn't just decide to take the run and ignore Shinsei's concerns.
Shinsei may still have room to do that thing, and if done right, that could prove devastating to SBI's near-term plans. But the window to act on that is probably pretty small, unless there is another delay in the EGM, which would be possible. Or unless SBI rejects Shinsei's proposals out of hand.  Which it just did. The situation is now more complicated than before, so I take a little more time to discuss it below.

Shinsei Objects to SBI Tender - Offers "Requirements" To Approve

SBI Shinsei Bank

Shinsei Objects to SBI Tender - Offers "Requirements" To Approve