AVIC International Holdings (HK:0161) – Merger Arbitrage – 10% Upside

Current Price: HK$8.21

Merger Consideration: HK$9.00

Upside: 10%

Expiration Date: 6th of March

Composite Document

 

AVIC International Holdings (ref. AIH) has received takeover proposal from its parent AVIC International (ref. AI) on the 2nd of October. The consideration stands at HK$9/share in cash presenting 10% spread to current prices. The buyer is a state-owned conglomerate operating in aviation and defense industry, while the target business is mostly in electronics (display panel manufacturing etc.). AIH has two types of shares - domestic (unlisted and unavailable for purchasing) and Hong Kong listed H shares. The parent holds 100% of the domestic shares and 2% of H shares giving it the combined ownership of 37.5% of total shares.

Merger is conditioned on:

  • 75% independent H shareholders approving and less than 10% objecting the transaction.
  • 90% of independent H share holders tendering their shares.

Shareholder meeting is set for the 14th of February. The tender has been opened on the 8th of January and will be closed on the 6th of March.

Apparently none of the shareholders have the ability to block the transaction single-handedly. Moreover, 9% owner CK Hutchison is supporting the merger. It also seems that aside CK Hutchison, there are no other significant holders of H shares.

A few additional thoughts:

  • Aviation and defense industry in controlled very tightly in China. AVIC International is a huge conglomerate (151 place in Fortune 500) with $65bn in revenues and 450k employees. If it now decides to take-over its significantly smaller subsidiary (and the largest shareholder supports it), isn't this already a done deal? Or in other words - I struggle to understand why the spread of 10% exists in this case.
  • AIH valuation at HK$9/share appears to be fair looking from historical share price perspective -only a few times AIH share price has reached these levels. In late '17 there was a major restructuring of the company (refocused on the core business, disposed a few non-core assets, moved towards IPO of a key subsidiary) that seems to have caused temporary hype in the markets. Since then revenues have grown (+17% during '18 and +8% in H1'19), however the company is struggling with profitability ('18 was negative for the first time in several years and '19 interim = -16% YoY). Reported net asset value of the company has remained about the same since late '17 hype.
  • I wasn't able to find any other recent subsidiary acquisitions by AI.
  • Spread volatility is also interesting. It used to be even wider (about 20% for the whole November), but tightened a bit after the announcement of CK Hutchison support. Then it slowly widened again and bounced back in mid December (possibly influenced by the rise of the Hong Kong index).

2 COMMENTS

  1. nostradamus

    The problem is the 90% tender. Whatever the offer, these are notoriously difficult to get in HK.

    Harbin Electric last year got to 88%. Offer was very fair, at a very large premium, the Hong Kong Exchange even allowed an extension of the offer against all precedent, etc etc. But the required % just didn’t tender, presumably not because a lot of shareholders opposed it but simply because they were not aware of the offer, forgot they had stocks somewhere in a drawer, who knows. Offer lapsed, shareprice completely collapsed, and for absolutely no good reason.
    At the time, I read this apparently happened more often in HK and people were arguing the rules should be changed. They haven’t been changed yet.

    Now here we are again, similar situation. That explains the spread.

  2. nostradamus

    Btw, I read at the time there’s a public register of some sort (not sure how public) which allows you to see which % has been tendered on HK tender offers. I wasn’t able to find it then, if anybody knows, please do share.

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