OCBC / Wing Hang

OCBC / Wing Hang: CIMB notes that Hedge fund Elliott Management disclosed on 3rd Jul that it has accumulated 7.8% stake in Hong Kong's Wing Hang. The house questions What is the hedge fund trying to do? It is trying to play bluff with OCBC. Under Hong Kong rules, if OCBC falls short of 90%, but has more than 75%, regulators will require OCBC to issue Wing Hang shares back to the market to maintain the 25% minimum float requirement. It is highly likely those reissued shares would sell at a substantial discount to the HK$125 /share (1.77x P/BV) that OCBC has bought the shares for. Before the offer, Wing Hang was trading at 1.2x P/BV. CIMB opines that the hedge fund is trying to play a dangerous game of poker with OCBC. It is clear that Elliott Management is trying to bargain for a second, better offer from OCBC. If OCBC cannot get to the 90%-mark, the cost for OCBC will be high. Not only will it have to sell back shares into the market (at a lower price) to meet the 25% free float requirement, OCBC will have to take a capital charge on a financial institution that is not fully consolidated. While the house cannot get to OCBC management for clarifications, but from its checks, understand that exchange rules generally do not allow for OCBC to raise the offer price to a select group of sellers e.g. Elliott Management, without extending the offer at the revised price, to the rest of the buyers who have previously accepted the offer. The risk for OCBC is that it would have to raise the offer to 1.8x - 1.9x P/BV and this would mean an even more expensive acquisition, and dilution from share issuance would be even higher than our original expectations of 2-7% dilution. This would be a negative for OCBC. Is buying Wing Hang now a good bet? The house would struggle to think so. In its opinion, this is quite a risky risk-arbitrage game for Elliot Management to play also. Elliott would have bought shares close to the HK$125 offer price here. If they were angling from a 1.9x P/BV, it would mean just 7% upside from the entry price. If OCBC called their bluff and chose to walk away from the Wing Hang deal (OCBC would be fairly reluctant to do this though), it would mean up to 30% downside on the bet if Wing Hang fell back to pre-offer price of 1.2x P/BV Overall, the house maintain its Add rating on OCBC with an unchanged TP of $11.01 (1.4x CY14 P/BV) as it believes that OCBC's share price had sold down earlier the year and had reflected the concerns of overpaying for Wing Hang, and the effect was not as significant as feared. However, this episode is a negative. If OCBC had to raise its offer price for Wing Hang, it would be a risk to the house call.