Category Archives: Spin off

Hankook Tire Co. (ISIN KR7161390000) – Spin-off Gangnam style ?

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Hankook Tire is well known as a succesful Korean manufacurer of Tires worldwide. This year however, the company performed a spin-off which to a certain extend looks strange compared to other spin offs.

Basically, Hankook Tires spun off the operating tire business into a new entity. The old entity has been renamed Hankook Tire Worldwide and trades under the old ISIN KR7000240002. The spin-off entity is called Hankook Tire Co. and trades under the ISIN KR7161390000.

The spin off is strange to me at least for those “specialties”:

1. Before the spin-off, the stock was suspended from Trading for ~5 weeks, from August 30th to October 5th.
2. After the spin-off, the holding company will receive royalties from the operating company

There is a very interesting report from KDB Daewoo Securities about this “korean style” spin-offs in general and Hankook in particular.

Genrally, this seems to be the result of new rules in Korea which limits cross shareholdings as a mean to control companies.

If I understood the mechanics correctly, the process in general works the following way and intends to increase the stake in the HoldCo to the highest percentage possible:

A) The OldCo is split into a HoldCo and OpCo. So the “big shareholder” holds equal percentages in both compnaies
b) in a second step, the “big shareholder” will then execute both, a rights issue and a tender offer for the holding company

In the second step as far as I understood, the HoldCo will issue new shares. The “big shareholders” will tender their OpCo shares for new HoldCo shares. As not many investors are interested in in the new HoldCo shares. the price of the Holdco will suffer.

In order to maximise their final percentage in the HoldCo, the “big shareholder” has the following incentives:
– push down the value of the HoldCo shares before the offer
– push up the value of the OpCo shares before the offer

This leads, according to the research report to the following “investment opportunities”:

– buy the OpCo shares after spin off and sell before or at tender offer
– buy the HoldCo shares after the tender offer

If we look at the stock charts, at least the first step seems to work perfectly:

So the HoldCo already lost -25% since October 4th. However the second part, the increase in value of the OpCo shares didn’t really work out so well, especially after the OpCo lost ~5% market value today.

So this might be a good special opportunity to buy the OpCo shares now and maybe hedge them with a Kospi Short position.

The only practical problem with this is that Hankook shares are not listed outside Korea and it is currently not that easy to buy shares on the Korean stock exchange. Ii still did not try to open a brokerage account with a Korean broker, but maybe I Should at some point in time….

I am not sure if I should open a “paper trading” position for the portfolio. If I would really run a 10 mn fund, it would be reall making sense to open a Korean brokerage account.

To be continues…….

Spin-off watch – TNT and Cable & Wireless

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Following last years oposts about spin-offs (part 1, part 2, part 3), I tried to keep track of some of the more interesting spin off situations.

TNT Express

TNT Express was the express service spin-off from the Dutch Postal company. I had them on my research pile somewhere at position 10 to 15. However on the weekend, UPS made a 9 EUR per share offer for TNT Express, roughly a 50% premium on the previously traded price.

If we look at the chart, until last week, both shares significantly underperformed the index since the spin-off happened, only TNT Express made it above the index after the offer.

The 30% stake of TNT Express which PostNL owns, has almost the same value as PostNL’s market value. So PostNL might be an interesting company to look at.

Cable and Wireless

Cable and Wirless, the UK telephone company spun off the “international” part into Cable and Wireless Worldwide in February year. The international part was supposed to be the sexy part, but due to management and accounting issues, the stock suffered.

Last week, there was the rumour that Vodafone might be interested in hte “boring” part, the UK fixed line operations. However there was no confirmation from Vodafone and so the shares didn’t manage to rise as TNT Express did.

Again, as with TNT/PostNL, both parts underperformed the index significantly, as the chart shows:

So is there something to learn form this ?

Both cases show that spin offs per se are not a sure thing at all. In the case of C&W it rather looks like a desperate measure of a desperate company. In both cases, the performance after the spin-off event was relatively bad, so there is no need to hurry aftger spin offs are executed. As with all other “special situation” investment startegies, patience is required.

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