Kemet (KEM) – Merger Arbitrage – 30% Upside

Current Price: $21.14

Offer Price: $27.20

Upside: 30%

Expected Closing Date: H2 2020

Proxy

This idea was shared by Brian.

 

On the 11th of November electronic component manufacturer Kemet has agreed to be acquired by its Taiwanese peer Yageo. The consideration stands at $27.20/share in cash ($1.8bn in total). So far the merger has received approvals from KEM shareholders, US antitrust and Mexican regulators. The remaining conditions include approvals from Chinese and Taiwanese regulators as well as the CFIUS blessing (likely the main hurdle).  On the 11th of March CFIUS has extended the investigation period, which is now expected to be completed by the 23rd of April. Companies state that the extension was expected and the closure is still estimated in H2 2020.

The problem is that KEM has exposure to some of the more sensitive industries (defense), however the board says that the approvals should be eventually received. From the Q2 conference call (Nov'19):

Matt Sheerin (analyst)

Okay, fair enough. And then just on the sort of the regulatory issues, particularly your exposure to military, aerospace, some of the industrial markets have you vetted that just to make sure that there aren't any specific challenges or hurdles that you might have to overcome?

Bill Lowe (KEM CEO)

As a, Greg mentioned, we do have to file for CFIUS approval. We're not expecting that to be a particular issue, but we do have to file for that approval that could take six months, seven months to get that through. One time or the other we'll have various components that are considered to be ITAR-related, but not on a consistent basis. So it's not a – it shouldn't be a major material issue to deal with. So that filing will occur. Our expectations are that we will work through that.

Greg Thompson (KEM CFO)

And Matt, as you might imagine, we have a number of advisors that have helped us assess all that, who deal with these kinds of issues all the time. And all those kinds of things that you've mentioned and others similar to it had been looked at very…

Bill Lowe

Very closely.

In the latest conference call (Feb'20) KEM has also several times stated that the regulatory approval process is advancing smoothly and that "nothing is out of the ordinary".

Since the announcement KEM used to trade quite tight (2-3%), so apparently market perceived this transaction as likely to close. However, with the recent fall in the stock market, upside has increased to the current 33% (CFIUS extension might have added a bit to that as well).

Transaction is not subject to financing. Yageo intends to finance the merger with cash on hand + committed financing (already obtained).

In case the regulatory approval is not received, Yageo will be subject to $65m (~4% of deal value) termination fee.

 

Companies

Kemet manufactures capacitors and a variety of other passive electronic components - AC line filters, EMI cores and filters, flex suppressors etc. The company generates 43% of its revenues in APAC, 21% in EMEA, 22% in the Americas and 14% in Japan and Korea.

Yageo ($3.8bn market cap) specializes in passive devices - resistors, capacitors and inductors. Reportedly it is also the largest passive components manufacturer in the world. The company gets a majority of its revenues from China (57%), Europe (14%) and US (6%).

1 COMMENT

  1. Ilja

    CFIUS, Chinese and Taiwan FTC approval was received. Remaining condition is consent from Ministry of Economic Affairs in Taiwan, which shouldn’t be an issue.

    The remaining spread stands at <1%, so the idea was closed with ~30% profit in 1.5 months.

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