Radisson Hospitality (RADH.ST) – Mandatory Offer – 10%+ Upside

Current Price – SEK35.5

Buyout Consideration – SEK40+ (expected)

Upside – 10%+ (expected)

Expiration Date – Q4 2018 / Q1 2019 (expected)

 

I learned about this opportunity while browsing through comments on Aimia in the latest Laughing Water Capital investor letter. It has background info and detailed explanation of the thesis. Below I am outlining a brief summary.

Radisson Hospitality is the 5th largest hotel group in Europe and is listed in Stockholm. 70% of the stock is owned by currently distressed Chinese conglomerate HNA. In August Jin Jiang (Chinese hotel group controlled by government) agreed to buy HNA’s stake at SEK35/share as part of the bigger transaction of acquiring U.S. based Radisson Hotel Group. By Swedish law Jin Jiang must offer to buyout remaining minority shareholders within 4 weeks of the closing and at a price not lower than what it paid for the controlling stake.

So that’s the basic thesis. Downside seems to be well protected by upcoming mandatory offer of at least SEK35/share and upside depends on Jin Jiang determination to acquire the whole company and board’s/shareholders determination not to sell out cheaply.

Jin Jiang should be motivated to buy out the minority shareholders as (1) it would own bigger pie of upside economics and (2) it would not need to deal with the Swedish public listing for only small part of the total deal. However, a counter argument is that HNA faced similar situation two years ago when it acquired 50% of RADH, launched mandatory bid at low price and then did not pursue minority shareholder buyout any further. The reason for that might have been the onset of HNA’s financial woes, as it even struggled to settle with tendered shareholders for almost 9 months. Jin Jiang on the other hand does not seem to be in distress, has sufficient liquidity ($1.9bn cash as of Q2 2018) and is owned 75% by Chinese government.

Board’s upcoming opinion appears obvious. It recommended not to accept HNA’s mandatory bid at SEK34.86. As operations and EBITDA have improved in the meantime, it is likely the board will again recommend passing on the low ball offer.

Despite board’s recommendation shareholders were quite willing to participate in HNA’s offer – in total 20% tendered their shares, raising HNA’s stake from 50% to current 70%. One could argue that the weak hands are out and that the remaining shareholders value the company higher, especially keeping in mind operational improvements. A counter argument is that RADH share price has languished in the SEK25-SEK35 range, which might convince further bunch of shareholders to sell. Worth noting that US hotel index as well as Swedish stock market index also trade at 2017 Q1 levels following recent sell-off.

Another important risk is that HNA / Jin Jiang deal fails to close in which case RADH shares are likely to drop, at least temporarily. Unaffected price before rumors on Radisson sale started spreading was around 28SEK/share.

And finally my biggest concern is that Jin Jiang begins with minimum tender of SEK35  (i.e. why overpay?) and then speculators like me will face a hard decision: by participating in the tender I am exiting the position at a tiny loss and by not participating in the tender I am risking that Jin Jiang will not pursue this any further for considerable time. The only reason for Jin Jiang to start with the higher bid right away would be expectation of material operational improvements (RADH is undergoing turnaround) and higher subsequent tender price if delayed (there seems to be six month gap requirement between subsequent bids, otherwise previously bought out shareholders need to be compensated accordingly).

Note: Ticker on IB is REZT.