RADH - Radisson Hotel Group

[Packer16]

From my experience, I think you are missing a very real possibility of a price decline below 35.  This can happen in an offer at 35 happens & Jin Jiang lets it hang out there.  Once the 35 offer expires your floor is gone.  Is there a guarantee that Jin Jiang's subsequent offer has to be at least 35 or can it be lower?  Or can they just buy at below 35 in the market & make no subsequent offer.  They can also just wait for the subsequent bump in the road associated with a levered cyclical business. 

 

This is very similar to AIQ.  AIQ was going through a turn-around & always sold at a discount to comps because Oaktree had a majority stake.  Oaktree sold their stake to the Chinese firm & the stock price sank.  A few months later, the Chinese firm was able to take AIQ private at a large discount to the majority price paid by the Chinese firm.  I did not have enough shares to force an appraisal action as the price paid was at significant discount to market comps but they were able to argue the price based upon DCF (that became much worse than management guidance a few month before) & that a minority interest was worth less than a controlling interest.  Unless Jin Jiang is forced to pay you at least 35 (which I am unsure of past the first offer), I think the same could happen here.  Remember management's incentives is to please the new owner not the remaining minorities.

 

I am not saying this will not work out but I think there is a real possibility of the stock trading below 35 & this workout becomes more dependent upon the price that Jin Jiang wants to pay versus the economics of the business.

 

Packer

 

i totally understand what you are saying, and largely agree.  what i think you are missing though is that if they bid $35, you don't have to wait around to see if the price will decline after.  you can just hit the $35 bid, then go home.  in that case, you are paying 1% for a look at 20%.  its almost a free look.

 

as for whether or not it goes up or down if they make a $35 bid and some people tender, and some don't.  i have no idea.  its definitely possible it goes down.  however, presumably anyone that thinks it is worth less than $35 would just sell at $35, so not sure who would be around to sell it lower, although human nature being what it is, i'm sure we would find out as time dragged on or if there was any kind of macro issue.

 

It really depends upon what you think the probability of them bidding over 35.  You seem to be pretty confident in this.  I do not see any incentives for this as they can wait & get it lower in the future unless they want to sell the hotel group to someone else or something that is not disclosed.  The reason it would go down has nothing to do with valuation but the discount the market puts on these types of situation & the lack of buyer interest.  The arbs will sell their stakes at 35 & the only investors you have left would be the ones who think the market will price this over 35.  From experience with these types of situation including AIQ is there is typically a discount that a stub trades at after a control transaction takes place. 

 

If they bid 35 then I do not see much upside here.  I would be more hopeful if the bidder were not a Chinese state-owned firm.  I actually see all the incentives to create downside, like what happened with AIQ.  I could be wrong but it would be nice to understand the buyer's motivation, character & background to help you understand what type of upside bid is possible.

 

Packer

[NeverLoseMoney]

From my experience, I think you are missing a very real possibility of a price decline below 35.  This can happen in an offer at 35 happens & Jin Jiang lets it hang out there.  Once the 35 offer expires your floor is gone.  Is there a guarantee that Jin Jiang's subsequent offer has to be at least 35 or can it be lower?  Or can they just buy at below 35 in the market & make no subsequent offer.  They can also just wait for the subsequent bump in the road associated with a levered cyclical business. 

 

This is very similar to AIQ.  AIQ was going through a turn-around & always sold at a discount to comps because Oaktree had a majority stake.  Oaktree sold their stake to the Chinese firm & the stock price sank.  A few months later, the Chinese firm was able to take AIQ private at a large discount to the majority price paid by the Chinese firm.  I did not have enough shares to force an appraisal action as the price paid was at significant discount to market comps but they were able to argue the price based upon DCF (that became much worse than management guidance a few month before) & that a minority interest was worth less than a controlling interest.  Unless Jin Jiang is forced to pay you at least 35 (which I am unsure of past the first offer), I think the same could happen here.  Remember management's incentives is to please the new owner not the remaining minorities.

 

I am not saying this will not work out but I think there is a real possibility of the stock trading below 35 & this workout becomes more dependent upon the price that Jin Jiang wants to pay versus the economics of the business.

 

Packer

I agree with this view.

 

This situation seems a bit politically sensitive as well: a Chinese state owned company is coming to the aid of troubled HNA, which, you could argue, got into trouble in the first place because of a lack of oversight by Chinese authorities. Of course HNA's troubles are a lot bigger than this deal, but the point is that a lot of attention is being paid to the whole HNA situation by investors and the media right now. I don't think you should count on Jin Jiang acting here like a profit maximizing firm, but more like an embarrassment-minimizing instrument from the Chinese state.

 

Paying more than the required 35 SEK makes little sense in this view. If RADH's operations improve substantially in the short term, it only makes HNA look like bigger idiots by them basically being forced sellers here. Much better in that case to wait 5 or 10 years, perhaps for a downturn to come along and then take this quietly off the market. By then the story of HNA will have blown over and will no longer be on anyone's mind. The newspaper articles will have stopped, hedge funds will no longer be writing about RADH in investor letters and the eventual buy-out of minorities might not even get a post here anymore. :)

[alwaysinvert]

From my experience, I think you are missing a very real possibility of a price decline below 35.  This can happen in an offer at 35 happens & Jin Jiang lets it hang out there.  Once the 35 offer expires your floor is gone.  Is there a guarantee that Jin Jiang's subsequent offer has to be at least 35 or can it be lower?  Or can they just buy at below 35 in the market & make no subsequent offer.  They can also just wait for the subsequent bump in the road associated with a levered cyclical business. 

 

This is very similar to AIQ.  AIQ was going through a turn-around & always sold at a discount to comps because Oaktree had a majority stake.  Oaktree sold their stake to the Chinese firm & the stock price sank.  A few months later, the Chinese firm was able to take AIQ private at a large discount to the majority price paid by the Chinese firm.  I did not have enough shares to force an appraisal action as the price paid was at significant discount to market comps but they were able to argue the price based upon DCF (that became much worse than management guidance a few month before) & that a minority interest was worth less than a controlling interest.  Unless Jin Jiang is forced to pay you at least 35 (which I am unsure of past the first offer), I think the same could happen here.  Remember management's incentives is to please the new owner not the remaining minorities.

 

I am not saying this will not work out but I think there is a real possibility of the stock trading below 35 & this workout becomes more dependent upon the price that Jin Jiang wants to pay versus the economics of the business.

 

Packer

I agree with this view.

 

This situation seems a bit politically sensitive as well: a Chinese state owned company is coming to the aid of troubled HNA, which, you could argue, got into trouble in the first place because of a lack of oversight by Chinese authorities. Of course HNA's troubles are a lot bigger than this deal, but the point is that a lot of attention is being paid to the whole HNA situation by investors and the media right now. I don't think you should count on Jin Jiang acting here like a profit maximizing firm, but more like an embarrassment-minimizing instrument from the Chinese state.

 

Paying more than the required 35 SEK makes little sense in this view. If RADH's operations improve substantially in the short term, it only makes HNA look like bigger idiots by them basically being forced sellers here. Much better in that case to wait 5 or 10 years, perhaps for a downturn to come along and then take this quietly off the market. By then the story of HNA will have blown over and will no longer be on anyone's mind. The newspaper articles will have stopped, hedge funds will no longer be writing about RADH in investor letters and the eventual buy-out of minorities might not even get a post here anymore. :)

 

It's a potentially true view that Jin Jiang is acting like one giant face saver for HNA and China Inc. But I don't see how you reach the conclusion that they would keep RADH listed for 10 years and the market consequently being regularly reminded of these events. That is, rather than swiftly buying it out and it going down the memory hole. Why not pay a big premium and get it over with if they don't care about profits anyway? Mind you, I don't see that either course of action follows from your premise.

[Packer16]

I think you need to understand the motivations of the Jin Jiang.  They hold all the cards.  Why would they pay up when they can wait & get it cheaper going forward?  They know these stub situations trade a discount after control transactions so the most logical approach is to be bid 35 & wait to see what happens to the price.  Given the stocks reaction to the last great earnings, the price is clearly tied to what Jin Jiang is willing to pay vs. fundamentals.  Given this it becomes more of political/motivational analysis versus a valuation analysis.  My experience with Chinese companies is they will take bargains from dumb Westerners if they can & IMO the situation is set up to do this.

 

Packer

[whistlerbumps]

I understand why people burned by AIQ would never want to touch a company with a Chinese owner again.  While superficially, these situations appear similar, I think a deeper analysis shows they are quite different.  Swedish minority investor protections appear to be very good and the specific facts of this situation are different.  As always, please do you own diligence but I think digger deeper here shows that it is far more attractive than the AIQ situation.

 

1) 10% shareholders (or as a group) can cause significant trouble.  They can require EGMs to be held, appoint a minority auditor to check the numbers, refuse to absolve the board of liability, require dividend payments from profit and block certain resolutions issuing shares and taking up loans.  Shareholders can also request arbitration in a squeeze out scenario that has to be paid by the company.

 

2)  Sweden has what's known as the nominating board which is made up of the 3 largest shareholders (currently HNA, Fidelity and Polygon).  This board is responsible for the selection of board members and of the auditor.  Thus, Jin Jiang will not be able to pack the board without the approval of Fidelity and Polygon.

 

3) In AIQ, the board recommended the offer.  In this situation, independent board members (who are the only ones who have a say) unanimously rejected HNA's offer at ~35 for not properly valuing the company when EBITDA was 25% lower.  I don't see how independent board members could recommend anything close to 35 this time around.

 

4) Mgmt is not necessarily staying.  The CFO is retiring and its unclear whether the CEO will remain or whether Jin Jiang will bring in their own people (unlike HNA, they are a hands-on operator).

 

5) I also dispute that JJ "saved" HNA.  In fact, I believe JJ picked off HNA due to the Chinese government's anger about HNA's reckless expansion.  There were multiple rumored strategic bidders for Radisson but instead of running an auction (as HNA did for their NH minority stake) to get the highest price, HNA ended up selling to JJ at their cost despite a 25% improvement in EBITDA.  Seems more that the Chinese government brokered the transction to give a great deal to an SOE by taking advantage of a private entity that was not in its good graces.  I think this transaction is less about saving face and more about JJ getting a great deal. 

 

[alwaysinvert]

I think you need to understand the motivations of the Jin Jiang.  They hold all the cards.  Why would they pay up when they can wait & get it cheaper going forward?  They know these stub situations trade a discount after control transactions so the most logical approach is to be bid 35 & wait to see what happens to the price.  Given the stocks reaction to the last great earnings, the price is clearly tied to what Jin Jiang is willing to pay vs. fundamentals.  Given this it becomes more of political/motivational analysis versus a valuation analysis.  My experience with Chinese companies is they will take bargains from dumb Westerners if they can & IMO the situation is set up to do this.

 

Packer

 

I understand the dynamics perfectly well. It seems like you have read something into my posts that is not there (probably down to me being unclear in some way). I wrote several posts ago that the clear base case is that they put out a minimum bid. Maybe I haven't spelt it out completely, but I also agree with you that it is likely that the stock trades down after such a bid runs out.

 

What I was arguing against above was the logic that a non-profit maximizing Jin Jiang -> minimum bid and long squeeze-out. That premise fits the bullish thesis better, which is self-evidently true if you stop and think about it for 2 seconds. Now you seem to argue against my logic with the notion of Jin Jiang as shrewd financially rational operators who take advantage of "dumb Westerners". But these two premises are mutually exclusive; they can't both be non-financially motivated and financial geniuses at the same time and these two contradicting arguments can't both point towards a squeezeout.

[Packer16]

I think JJ can be both (profit maximizing getting a good deal) & state controlled.  In this case, the profit maximization does not conflict with the state's objectives.  As whistlerbumps pointed out it looks like JJ was able to obtain HNA stake at a below market price.  I was not aware as I stated in my responses of the Swedish laws.  It looks like it provides better protection for minorities than the US.  It also looks like there are large enough shareholders to influence the process.  In the case of AIQ, even though I knew the fairness opinion was terrible, I could not find enough shares (I needed 1%) to force an appraisal action.  The key here is understanding JJ's history & owners.  It looks like some here have done that & come up with data that support probabilities that would support a higher first bid & if does not turn out to be the case you can get 35 back & go home.

 

Packer

[whistlerbumps]

Special examiner and minority auditor is rare but here is one example:

 

STOCKHOLM, June 16 (Reuters) - Hedge fund Elliott Management has moved to bring in a special examiner at Axis as its standoff with Japan’s Canon in the Swedish video surveillance firm intensified.

 

In a rare move, the hedge fund proposed that a minority auditor and a special examiner be appointed after its proposal for a dividend to shareholders was rejected, a statement from Axis annual general meeting showed on Tuesday.

 

Elliott wants the special examiner to investigate if the board and management acted in all shareholders’ best interest after Canon’s takeover offer for Axis.

 

Under Swedish law, shareholders with 10 percent or more of shares can demand that a minority auditor and a special examiner be appointed, meaning Elliott may now apply for the appointments with the Swedish Companies Registration Office, Axis said.

 

Axis’ board said in May it was proposing to pay no dividend for 2014 while Elliot had proposed a payout of 6 Swedish crowns per share.

 

https://www.reuters.com/article/axis-canon/hedge-fund-elliott-to-bring-in-special-examiner-at-canons-axis-idUSL5N0Z20Q720150616

 

[Packer16]

Thanks whistlerbumps for providing some details about governance in Sweden.

 

Packer

[writser]

With the Jin Jiang acquisition completed as of today I couldn't help myself and bought a few shares. No more deal risk, price down ~2% since last discussion (now slightly below the transaction price of 35 SEK) and we are a few weeks closer to the launch of the tender offer. I still have very low expectations regarding a possible price increase but at current prices you're getting paid to find out. Only small position and wouldn't mind selling opportunistically though.

[writser]

Well, that escalated quickly. Sold again for a ~5% gain.

[alwaysinvert]

An extraordinary shareholders' meeting has been called:

 

https://www.radissonhospitalityab.com/static-files/112dfac9-1de2-4ddd-9540-6404cc9712ff

 

Potential for fireworks seeing as the bid will be launched shortly before and the acceptance period will be running. Perfect opportunity to tighten the thumbscrews on the minority if they are so inclined...

 

 

[alwaysinvert]

Also by the way a good opportunity for a possible activist to step forward.

[whistlerbumps]

EGM not a suprise.  Had to happen so that the Jin Jiang board members could replace the HNA board members.

[alwaysinvert]

EGM not a suprise.  Had to happen so that the Jin Jiang board members could replace the HNA board members.

 

Sure, I know the reason listed, but I'm not positive that it *had* to happen that quickly or even at an extraordinary meeting.

 

When HNA came in they didn't call an extra one, they did their business at the AGM in the spring.

[whistlerbumps]

You have to have an EGM to replace half the board... Not sure why Jin Jiang would want to wait another 5 months and leave HNA in control of this asset.  They are actual hotel operators as opposed to HNA.

 

I'm with you on conspiracy theories for Jin Jiang but not sure how they are going to "tighten the thumbscrews" when most investors will vote remotely given that the only material thing on the agenda is the replacement of the HNA board members and Jin Jiang already controls a majority of the vote.

[alwaysinvert]

You have to have an EGM to replace half the board... Not sure why Jin Jiang would want to wait another 5 months and leave HNA in control of this asset.  They are actual hotel operators as opposed to HNA.

 

I'm just saying that HNA did in fact wait several months to put in their own board.

 

I'm with you on conspiracy theories for Jin Jiang but not sure how they are going to "tighten the thumbscrews" when most investors will vote remotely given that the only material thing on the agenda is the replacement of the HNA board members and Jin Jiang already controls a majority of the vote.

 

They could always add more things to the agenda when we are closer to the meeting and the bid has been launched. There are several possibilties for shenanigans in order to coax a higher acceptance rate: change of dividend policy, delisting proposal. I'm definitely not positively claiming it will happen, but it's not impossible to imagine. We will just have to wait and see. First thing is the bid.

[whistlerbumps]

I agree with you in general that shady things can happen but it seems these are mostly concerns in the US capital markets and you are not paying attention to the specific situation here with RADH and Swedish investor law.

 

RADH doesn't pay a dividend (or have a dividend policy)currently so there's nothing to cancel.  Furthermore, under Swedish law, 10% of shareholders can demand a dividend payment out of the company's profit. 

 

In Sweden, they can't delist without getting to 90% ownership and squeezing out the minorities.

 

Overall, I think the specifics of the situation are very different than the times that investors have been burned by Chinese companies in the US markets.

[alwaysinvert]

I agree with you in general that shady things can happen but it seems these are mostly concerns in the US capital markets and you are not paying attention to the specific situation here with RADH and Swedish investor law.

 

RADH doesn't pay a dividend (or have a dividend policy)currently so there's nothing to cancel.  Furthermore, under Swedish law, 10% of shareholders can demand a dividend payment out of the company's profit. 

 

In Sweden, they can't delist without getting to 90% ownership and squeezing out the minorities.

 

Overall, I think the specifics of the situation are very different than the times that investors have been burned by Chinese companies in the US markets.

 

I am Swedish and well aware of Swedish investor law.

 

They don't need 90% to delist. What they need 90% for is to forcibly pay out the minority at the bid level. Delisting they can do with a simple majority decision and the stock will have to trade OTC from then on. It's a very unusual move but certainly not unheard of.

 

They do have a dividend policy. The reason why they didn't pay a dividend was because they hardly made a profit last year. The dividend policy is unchanged at one third of net income.

[whistlerbumps]

Fair enough.  Apologies for being misinformed on the dividend and for misunderstanding what you meant by delisting.

[alwaysinvert]

No problem. And I agree with you that the blanket pessimism is a heuristic that is a bit off in this case.

[writser]

40 SEK / share. Congratulations to the longs, in particular to alwaysinvert who presented the bull case clearly and was right on the money. I made a few bucks thanks to him. Maybe I was too pessimistic in hindsight. Then again, I sold at ~37 SEK - at that price a decent chance of a higher offer was already priced in.

[compounding]

I don't understand this bid.

 

The valuation based on guided EBITDA for 2018 is ~6x. HNA's bid, that the board did not recommend shareholders to accept, was for 7.2x EBITDA. The company is now in better shape operationally, has a leadership team engaged with the objective of implementing a strategic plan that they successfully implemented elsewhere in a similar company, and they have financing secured (that's right) for that plan. Does this seem like an asset that is worth a lower multiple than what HNA bid? The board should reject this bid as well. The board will announce its recommendation at least two weeks before the accept period expires, which means January 18, at the latest.

 

6x EBITDA also compares favourably to valuations pertained by other hotel companies around the world, as has been covered elsewhere. Furthermore, Radisson is not levered! Most hotel companies are levered 2-4x EBITDA, which means buying the equity for 6x is a downright steal.

 

So why are they bidding this low? In my estimation the probability that they get to 90% with a SEK 40 bid is about the same as if they bid the minimum amount, which makes the bump up to 40 hard to understand. If they want to take the company private, which it seems like the do, they will probably have to bid higher than 40, and in that case they have to pay the higher amount to all shareholders that accepted the 40 bid, which reduces the incentive for a mini-raise of this sort. If they want to squeeze out a few shares as cheaply as possibly, they might as well just have bid the minimum, in my view. Perhaps the hope was that trading would settle below the bid price, and that they would be able to buy a significant amount of shares from arbs?

 

So far in the trading there has been a pretty strong bid at 40, and even some shares traded above 40, which is kind of interesting. Seems to imply that there are people out there betting on a higher bid, and not a lot of shares for the arbs. I can't imagine active funds buying this for the fundamental case are happy with this bid—will be interesting to see if there is any noise made.

 

To temper my position a bit, I should say that I agree with alwaysinvert about the potential pitfalls of this situation, in that Jin Jiang can do things to mess with minority holders. The arguments above are more directed at understanding the bid and the current dynamics in this situation.

[whistlerbumps]

I think this bid is actually a smart attempt to anchor shareholders at a low price so that a future raise seems like a good deal.  I agree that there is no valuation that supports SEK 40 but I also don't think that's where this ends.  They can raise the tender in the future at very little cost so why not start at a low price and go from there?

 

I think this shows they want to own this (if not, why not just bid 35).  I think the board will recommend that shareholders not accept which will begin a period of negotiations to find a more acceptable price.

 

Also, AccorHotels recently tendered for the minority shares in its Polish master franchisee Orbis for >8.5x EBITDA.  This is a very good comparable transaction for Radisson. (tender from majority owner, master franchisee etc).  I don't think this gets done at ~6x EBITDA

[alwaysinvert]

I think this bid is actually a smart attempt to anchor shareholders at a low price so that a future raise seems like a good deal.  I agree that there is no valuation that supports SEK 40 but I also don't think that's where this ends.  They can raise the tender in the future at very little cost so why not start at a low price and go from there?

 

I think this shows they want to own this (if not, why not just bid 35).  I think the board will recommend that shareholders not accept which will begin a period of negotiations to find a more acceptable price.

 

Also, AccorHotels recently tendered for the minority shares in its Polish master franchisee Orbis for >8.5x EBITDA.  This is a very good comparable transaction for Radisson. (tender from majority owner, master franchisee etc).  I don't think this gets done at ~6x EBITDA

 

I agree completely with your assessment. My guess would be that the independent committe says no, but leaves an out for saying yes at a somewhat higher price (43-45), which would put it at a premium comparable to other takeouts with a strong majority owner. Still a stingy takeout but full value probably won't be realized here.

 

There is still a good opening for an activist to make some noise and it may not be impossible for such an actor to squeeze even more out of the situation - certainly if they are willing to play the waiting game after this mandatory bid has been concluded.

 

I also note that IBKR has bought over 1m shares at 40 and above today. At least somebody is angling for a higher price.