Special situation: Kuka (ISIN DE0006204407) take-over discount “arbitrage”
A few weeks ago, Kuka, the Robotics specialist and one of the typical German “Mittelstand” hidden champions came suddenly into the spotlight.
Chinese company Midea Group (listed, ~20 bn USD market cap) made a 115 EUR per share offer. Midea already owned a stake before but now wanted to have more.
Initially, the offer drew a lot of loud negative adhoc responses from German politics. German politicians wanted to have a ” European solution”, preferably with someone like Siemens bidding more. But pretty soon it became obvious that no one wanted to top the price. Right now it seems that no one will object in any serious way against the transaction.
Interestingly Kuka’s management pretty early recommended to shareholders to accept the offer, so from that perspective it is a friendly merger.
The offer itself can be found here . It can be summarized as follows:
- a minimum threshold of 30%
- Kuka not doing any stupid things in between
- and obtaining required approvals
Midea will pay 115 EUR per share for every offered share. The extended offer period runs until August 3rd.
If we look at the conditions, the first 2 are already cleared. Midea announced that they now have already 86% of Kuka and with the Kuka management supportive, I think we can rule out the second issue as well.-
The open issue now are the required approvals. The offer document lists the following ones:
- EU merger control
- US FTC & DoJ competition control
- China MOFCOMM
- Russia anti competition
- Brazil anti competition
- Mexico anti competition
- Germany Ministry of Commerce
- US Foreign investment
The offer states that if the approvals cannot be obtained until March 31st 2017, the offer will expire. In this case it is clearly relatively likely that the stock price goes back to the undisturbed price of around 85-90 EUR per share.
From my perspective, all the anti competition approvals should be a formality, as Midea doesn’t produce any robots. So a merger doesn’t change anything with regard to competition. I think an approval by the Chinese regulator is more or less certain. Robotics is one of the current focus area in China’s industrial strategy and I think this transaction clearly has all the required blessings of the Chinese Top Leadership.
So what remains is the German Ministry and the US foreign investment issue.
Personally; i don’t think that the German Ministry won’t do much. There is a famous saying “: Don’t cut the branch on which you are sitting”, meaning that the German economy is so dependent on exports to China that they can hardly afford to veto anything which is not directly related to national security.
So the only wild card is the US, but I am not sure if the Americans want to play hardball for a midsized German company.
The stock trades now at 107,50 EUR, which means we have a 7,50 EUR or 7% upside. If the deal gets pulled, the downside would most likely be (107,50-87,50)= 20 EUR or -18,6%. So implicitly (and very crudely), the market seems to assume a probability of the deal not happening of ~27,3%.
Personally I do find this as much too high. I do think that the Chinese really want to buy this company. They already offered to the Germans that they could sell again a certain percentage (after the offer) if the Germans feels happier about it.
Two of the major Kuka shareholders were German billionaires (Voigt and Loh) who would not be happy to see a couple of hundred millions disappear.
Of course I am not an expert on all the regulatory aspects, but my guess is that the discount is much more a function of Western investors being sceptical on Chinese offer in general. Whenever I talked with people about Kuka, most said. “Oh, I don’t want to have anything to do with those Chinese”. Germany had its fair share of fake “Chinese-German” listings, so caution is clearly necessary.
However I do think that this offer is a lot less critical compared for instance to the Syngenta/ChemChina case. Food is clearly more strategic than some production robots. I also think funding is less of an issue for Midea.
Of course there is always the risk that something happens so as always one should be cautious. Some might say that this is “picking up pennies in front of a steamroller”, but in my opinion, it is not if one consistently invests in only those situations where the objectively determined expected value is positive. Yes, there will be losing investments as well but on average an over time this will make money.
I think from a risk/return perspective, the Kuka investment is similar to invest in short dated BBB or BB bonds but in this case with a much better spread of 700 bps compared to negative yields for most BBBs and very low positive yields for BBs.
I do like the risk/return relationship of the Kuka special situation. Although the downside is not insignificant, I think the odds for the deal NOT happening is a lot lower than the market assumes. I therefore invest 2,0% of the portfolio as “Special situation” at a price of 107,50 EUR per share.