Free money on pavement to pick

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#1
Let me start a puzzling thread.

Hsu Fu Chi has a GO at 4.35. current price is 4.12. If the Go goes through within 4 mths time you will get a pa yield of about 16%. this almost guaranteed unless you think the GO will not go through which is unlikely because Nestle is only buying out from minority shareholders and not take over the company completely. No reason for the PRC govt to reject. So why are investors not picking the money from the pavement???
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#1
Let me start a puzzling thread.

Hsu Fu Chi has a GO at 4.35. current price is 4.12. If the Go goes through within 4 mths time you will get a pa yield of about 16%. this almost guaranteed unless you think the GO will not go through which is unlikely because Nestle is only buying out from minority shareholders and not take over the company completely. No reason for the PRC govt to reject. So why are investors not picking the money from the pavement???
Reply
#2
Jacmar Wrote:If the Go goes through within 4 mths time you will get a pa yield of about 16%. this almost guaranteed unless you think the GO will not go through which is unlikely because Nestle is only buying out from minority shareholders and not take over the company completely. No reason for the PRC govt to reject.

1. The PRC government may not approve the deal

The combined Nestle-Hsu Fu Chi entity will become #1 in the candy market. Right now Mars is #1, Hsu Fu Chi #2 and Nestle #5. Since there is a change of control (Nestle will own 60%) there may be anti-trust issues.

There was a previous deal (Coca Cola-China Huiyuan) which also failed on anti-trust issues.

2. Timeline is not definite

The PRC government can take its own sweet time to approve the deal. And if it doesn't want to approve it can simply stall. Carlyle attempted to buy Xugong (a state-owned construction company) in 2005. After waiting 3 years(!) for approval they finally gave up.

So if the PRC government takes 2 years to approve the deal your 5% absolute return becomes less than 3% annualized.

---
My $0.02 is that buying in only for the takeout premium may not be a great idea.
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#2
Jacmar Wrote:If the Go goes through within 4 mths time you will get a pa yield of about 16%. this almost guaranteed unless you think the GO will not go through which is unlikely because Nestle is only buying out from minority shareholders and not take over the company completely. No reason for the PRC govt to reject.

1. The PRC government may not approve the deal

The combined Nestle-Hsu Fu Chi entity will become #1 in the candy market. Right now Mars is #1, Hsu Fu Chi #2 and Nestle #5. Since there is a change of control (Nestle will own 60%) there may be anti-trust issues.

There was a previous deal (Coca Cola-China Huiyuan) which also failed on anti-trust issues.

2. Timeline is not definite

The PRC government can take its own sweet time to approve the deal. And if it doesn't want to approve it can simply stall. Carlyle attempted to buy Xugong (a state-owned construction company) in 2005. After waiting 3 years(!) for approval they finally gave up.

So if the PRC government takes 2 years to approve the deal your 5% absolute return becomes less than 3% annualized.

---
My $0.02 is that buying in only for the takeout premium may not be a great idea.
Reply
#3
(06-09-2011, 05:23 PM)Jacmar Wrote: Let me start a puzzling thread.

Hsu Fu Chi has a GO at 4.35. current price is 4.12. If the Go goes through within 4 mths time you will get a pa yield of about 16%. this almost guaranteed unless you think the GO will not go through which is unlikely because Nestle is only buying out from minority shareholders and not take over the company completely. No reason for the PRC govt to reject. So why are investors not picking the money from the pavement???

most probably there is something that Mr Market knows but u do not (and me as well)...For example, when SGX submitted the bid for ASX, ASX's price went close to GO's. When the market realized that it was getting harder n harder for SGX to buy what it wanted, ASX's price dropped well below the GO's.

Mr Market is a maniac for sure, but he's aint stupid for sure as well. There could be some news which u hv nt found out, but others have...
Reply
#3
(06-09-2011, 05:23 PM)Jacmar Wrote: Let me start a puzzling thread.

Hsu Fu Chi has a GO at 4.35. current price is 4.12. If the Go goes through within 4 mths time you will get a pa yield of about 16%. this almost guaranteed unless you think the GO will not go through which is unlikely because Nestle is only buying out from minority shareholders and not take over the company completely. No reason for the PRC govt to reject. So why are investors not picking the money from the pavement???

most probably there is something that Mr Market knows but u do not (and me as well)...For example, when SGX submitted the bid for ASX, ASX's price went close to GO's. When the market realized that it was getting harder n harder for SGX to buy what it wanted, ASX's price dropped well below the GO's.

Mr Market is a maniac for sure, but he's aint stupid for sure as well. There could be some news which u hv nt found out, but others have...
Reply
#4
Here's an article on Bloomberg about this TO.

http://www.bloomberg.com/news/2011-08-14...l-m-a.html


The Xugong case was much more complicated due to the 'sensitive' nature of the business and there was a lot of politicking behind the scenes that ultimately scuppered the deal.

Then again, you can point out that Huiyuan shouldn't be deemed sensitive but the deal was killed nevertheless.

The major thing that may help Nestle is that there may be a lower sense of nationalism given that HFC is not exactly Chinese.

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#4
Here's an article on Bloomberg about this TO.

http://www.bloomberg.com/news/2011-08-14...l-m-a.html


The Xugong case was much more complicated due to the 'sensitive' nature of the business and there was a lot of politicking behind the scenes that ultimately scuppered the deal.

Then again, you can point out that Huiyuan shouldn't be deemed sensitive but the deal was killed nevertheless.

The major thing that may help Nestle is that there may be a lower sense of nationalism given that HFC is not exactly Chinese.

Reply
#5
Pretty interested when Free Money comes into play.
Here's my 2cents...
Method taken from mary buffet's book on warren's arbitrage methods

Date : 13th Sept 2011
General Offer : $4.35
Current price : $4.16
Before GO : $3.50
Projected Dividends : $0.15(taking last yr's 0.75CNY DPU)

[wrap]
[table=Probabilty Success]
Adjusted Projected Profit (/share)
Dividend Adjusted Projected Profit
APR % profit

Adjusted Projected Loss (/share)
APL% downside

Risk adjusted Projected Profit
Risk adjusted Projected Profit (w Div)
RAPP %
RAPP % (w Div)
RAPP % (w 2xDiv)[/table]
[table=90%]
$0.171
$0.321
4.11%

$(0.066)
-1.59%

$0.105
$0.255
2.52%
6.13%
9.74%[/table]
[table=80%]
$0.152
$0.302
3.65%

$(0.132)
-3.17%

$0.020
$0.170
0.48%
4.09%
7.69%[/table]
[table=70%]
$0.133
$0.283
3.20%

$(0.198)
-4.76%

$(0.065)
$0.085
-1.56%
2.04%
5.65%[/table]
[table=60%]
$0.114
$0.264
2.74%

$(0.264)
-6.35%

$(0.150)
$-
-3.61%
0.00%
3.61%[/table] [/wrap]

[wrap]Lookup table for Annualized Returns
(not meant for decision making, cos we do not have control over the approval process)
[table=Proj Annualized Returns vs Prob Success]
1 mth
3
6
9
12
18[/table]
[table=90%]
30.29%
24.52%
12.26%
8.17%
9.74%
6.49%[/table]
[table=80%]
5.77%
16.35%
8.17%
5.45%
4.09%
2.72%[/table]
[table=70%]
NM
8.17%
4.09%
2.72%
5.65%
3.77%[/table]
[table=60%]
NM
0.00%
0.00%
0.00%
3.61%
2.40%[/table]


[/wrap]
The problem is how do we determine the % of success.

If I had to confidence to say there is a 90% chance the deal will be approve and paid for in 6months, I'll go for it. 12% annualized returns, not that bad.

Personally, due to my limited knowledge and experience to the M&A activities in china, I would stay out of this GO until it is approved and see whether there's indeed any money left to pick up.
Maybe even if it's 1c at 4.34, it aint that bad too right?

Other potential factors to watch out for:
  • Transaction costs
  • Potential of mega div this year?
    (since stake by Hsu family in company next year would most likely decrease)
  • Liquidity of the counter
  • Leverage options and returns
Reply
#5
Pretty interested when Free Money comes into play.
Here's my 2cents...
Method taken from mary buffet's book on warren's arbitrage methods

Date : 13th Sept 2011
General Offer : $4.35
Current price : $4.16
Before GO : $3.50
Projected Dividends : $0.15(taking last yr's 0.75CNY DPU)

[wrap]
[table=Probabilty Success]
Adjusted Projected Profit (/share)
Dividend Adjusted Projected Profit
APR % profit

Adjusted Projected Loss (/share)
APL% downside

Risk adjusted Projected Profit
Risk adjusted Projected Profit (w Div)
RAPP %
RAPP % (w Div)
RAPP % (w 2xDiv)[/table]
[table=90%]
$0.171
$0.321
4.11%

$(0.066)
-1.59%

$0.105
$0.255
2.52%
6.13%
9.74%[/table]
[table=80%]
$0.152
$0.302
3.65%

$(0.132)
-3.17%

$0.020
$0.170
0.48%
4.09%
7.69%[/table]
[table=70%]
$0.133
$0.283
3.20%

$(0.198)
-4.76%

$(0.065)
$0.085
-1.56%
2.04%
5.65%[/table]
[table=60%]
$0.114
$0.264
2.74%

$(0.264)
-6.35%

$(0.150)
$-
-3.61%
0.00%
3.61%[/table] [/wrap]

[wrap]Lookup table for Annualized Returns
(not meant for decision making, cos we do not have control over the approval process)
[table=Proj Annualized Returns vs Prob Success]
1 mth
3
6
9
12
18[/table]
[table=90%]
30.29%
24.52%
12.26%
8.17%
9.74%
6.49%[/table]
[table=80%]
5.77%
16.35%
8.17%
5.45%
4.09%
2.72%[/table]
[table=70%]
NM
8.17%
4.09%
2.72%
5.65%
3.77%[/table]
[table=60%]
NM
0.00%
0.00%
0.00%
3.61%
2.40%[/table]


[/wrap]
The problem is how do we determine the % of success.

If I had to confidence to say there is a 90% chance the deal will be approve and paid for in 6months, I'll go for it. 12% annualized returns, not that bad.

Personally, due to my limited knowledge and experience to the M&A activities in china, I would stay out of this GO until it is approved and see whether there's indeed any money left to pick up.
Maybe even if it's 1c at 4.34, it aint that bad too right?

Other potential factors to watch out for:
  • Transaction costs
  • Potential of mega div this year?
    (since stake by Hsu family in company next year would most likely decrease)
  • Liquidity of the counter
  • Leverage options and returns
Reply
#6
u refer to this..

http://www.valuebuddies.com/thread-1024-page-2.html

Reply
#6
u refer to this..

http://www.valuebuddies.com/thread-1024-page-2.html

Reply


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