Bracell: a pretty juicy merger arb play







Recent events and the opportunistic bid for the company








Heads I win, tails…I win more?





Disclosure: long 1768.HK

27 thoughts on “Bracell: a pretty juicy merger arb play

    • Not sure it has been set yet but it should be relatively soon. Co will announce 1H in mid-Aug, and MS should issue some opinion on the fairness of the bid. I would suggest a vote by September sometime, thought this is purely an estimate.

      Liked by 1 person

      • What I don’t understand about this proposal is why the bidding party waited until after the profit warning announcement to make the offer. Wouldn’t it have made more sense for them to make the offer a month or two before the announcement to minimize consideration? Given that they are insiders, they would have had knowledge of the company’s improved performance even prior to the announcement.


  1. Well, clearly if they bid before the profit announcement it would have seemed even more blatantly opportunistic. additionally, by waiting until after the positive profit alert, they can claim they are bidding at a substantial premium to the average 30/60/120 day price (a typical move in acquisitions), even though the premium to the post-profit alert price is basically minimal…so really waiting helped thme here.


  2. Looks like the controlling shareholder bumped the offer from 1.78 to 2.28 (28% increase). Well down, Jeremy (thus far at least, knocking on wood).

    Price is 2.10 as I look, leaving a nice 8.5% spread on a stock that still looks reasonably inexpensive (though it now has further to fall on a deal break). You think this deal gets accepted? Curious regarding your latest thoughts?


    • thanks Thomas. I still think the spread is too wide and I actually added to my position. The acquirer has clearly demonstrated they want to clean up the remaining shareholders and raised their initial bid 28% before the 1H results even came out. At ~6x EBITDA and 7-8x FCF, the bid has simply gone from ‘insanely cheap’ to still ‘very cheap’.

      I think it highly unlikely the deal breaks, at this point, and there is still a decent chance (25-30%?) that the bid gets raised again once MS comes out with a fairness opinion on the new price. Either way I still think the price is pretty attractive.


  3. The company hired MS, whereas the independent committee hired Rothschild. If there’s a difference of opinion between the two, which one do you think takes precedence? Also, given that this is the 85% shareholder buying out the 15% minority shareholder, would the concept of a minor discount come into play and offset any/all acquisition premiums?


    • not sure i follow your second question. the minority shareholders need to give 75% approval to any deal accding to HK takeover law.

      the MS/Rothschild difference is probably not meaningful either


      • Hi, sorry my question wasn’t clear. In the scenario where a third party wants to buy Barcell, there would be a control/acquisition premium paid, that we all get. However, in this situation, it is the majority shareholder buying out the minority shareholder, and a third party would never buy out just the stakes of the minority shareholders. As such, there may be a minority discount (not minor discount, typo for me, my bad) as opposed to a control premium. So, the question is, MS/Rotschild will come up with an estimated fair value for Barcell, but would they apply a minority discount (say, I don’t know, 15%) to reflect the nature of the transaction?


      • i see what you are saying, though in my experience these independent valuations generally just value the co in line with comps without considering minority/majority ownership or control premiums, and then say if they think its fair or not. clearly this can and will generate a large variation in fair value but 1.78 was massively cheap on any metric, while 2.28 is still at the low end of most all reasonable metrics but may be technically defensible from a comp perspective. i still think the bid will be raised a bit but even if its not the return is still attractive from here


  4. The Company hired MS, whereas the Independent Committee hired Rothschild. If there’s a difference of opinion, which side do you think carries more weight? Also, given that this is 85% majority squeezing out the 15% minority, would the concept of a minority discount trump any/all acquisition premiums here?


  5. ‘Further to the Price Increase Announcement, the Offeror advised the Bracell Board on 19 August 2016 that the Offeror does not intend to increase the Revised Cancellation Consideration and the RSU Offer Price and does not reserve its right to do so. Accordingly, the cash consideration for every Scheme Share cancelled under the Revised Proposal will remain at HK$2.28 and the ‘see-through’ price payable in cash by the Offeror to the RSU Holders under the Revised RSU Offer will remain at $2.28 for each RSU.

    Shareholders and potential investors of Bracell should be aware that, following the making of this statement, the Offeror will not be allowed to increase the Revised Cancellation Consideration and the RSU Offer Price save in wholly exceptional circumstances in accordance with Rule 18.3 of the Takeovers Code.’

    Does your thesis remain the same even after this statement was released by Bracell today?


    • sorry i was traveling. clearly it makes further upside quite unlikely, I think 2.28 is still too cheap but given the bankers suggest it is ‘reasonable’ minority shareholders probably just take it and walk away. not the best outcome but still not too bad at all if you got in at 1.6…


  6. I closed my position today. My understanding is the prospect of a deal bump is gone. Using 2.17 current price, 2.28 upside, 1.50 downside… market pricing probability of deal going through at 86%.

    Ultimately, I’m not a huge merger arb guy + I can count the number of things I am 86% sure of on one hand.

    Jeremy, thanks again for the great recommendation. Very handsome profit on this one! I owe you a drink or ten.


    • glad this worked out for you Tom. I concur the deal is likely to close and there isn’t much upside left. But I think downside is much smaller than 1.5, I think it would retrace only to 1.75 or so (given the acquirer could come back in again 6mos later), so I still think the implied spread here is too high.

      While unfortunately another higher bid didn’t follow, given the independent bankers suggest 2.28 is ‘fair and reasonable’, I do think this gets over the line so annualized return for the amount of risk here should still look good.

      Liked by 1 person

  7. “Payment…will be despatched by ordinary post at the risk of the recipients to their registered addresses shown in the register of members of the Company.”

    A check for a significant amount floating around in the ordinary post system at the risk of recipient? Doesn’t inspire much confidence. Guess registered post must be too experience for a billion dollar company.


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