BLOG — Sep 30, 2022
Untying the Knots: Simplifying Corporate Actions
Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, S&P's Global Corporate Actions team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.
The EY Split
On September 8, 2022, Ernst & Young (EY) announced its upcoming plan to split their auditing business from its consulting and advisory practice in order to promote "more profitability while also avoiding the internal conflicts-of-interest currently faced." Although the big bosses at EY are in favor of the split, the firm still needs to convince and receive approval from partners in 140 countries around the globe. So to say the least, the announcement is still extremely preliminary [1].
Nonetheless, we still cannot help but ask… "Why is the world's third largest accounting firm looking to make the same move we've seen many retail monopoly players make this year alone?" Well, the premise behind a divestiture in the form of a Spin Off is usually either one of two:
- The company believes that, if separated, the new firm will provide more value to all parties involved, or... the exact opposite;
- The company believes that the sub-unit is becoming a burden since it generates no significant revenue, and the idea might be to sell it off.
Counterinitiative to popular belief, the latter concept is not as "prevalent" as one might assume, especially for companies that are realistically doing just fine. When you look at Ernst & Young's financial statements, the firm is expected to report record global revenues of USD $45 billion in the past financial year. Proving that they are by no means struggling as a firm [2].
Therefore, the former premise can be true. The remarks surrounding "more profitability and the avoidance of internal conflicts-of-interest" is truly where this all stems from, even though such upper-level remarks are usually intended as a simple headline cover. That said, the explanation is worth drawing more attention to since the two are deeply intertwined. From recent reports published on the matter, EY's auditing side is seemingly constraining the consulting side from getting all of the business it could potentially win due to the conflict-of-interest rules established by the firm whereby EY's consulting arm is unable to sell to existing auditing clients. So logistically speaking, by separating the two business into distinct companies, the consultancy arm will have more leverage to maximize and win over opportunities it was always restrained from pursuing [3].
While the idea and reasons all seem like a no-brainer, there are still the realistic hurdles and consequences to consider here as with any divestiture. First of course is getting past the approval from partners located in 140 different countries. That's asking 140 different countries and their accounting regulations to move in coordination with one another, which we can all agree is not an easy task. There is also the challenge of shared resources that are used by both sides and, of course, the brand name alone. As in, who will get to claim the "Ernst and Young" name? Finally, what will happen to the businesses within EY that are related to both auditing and consulting: for example, the EY tax business? All critical nuances to consider.
Does history repeat itself?
We'll have to see the final outcome. Historically speaking, we've seen this same split by leading accounting firms in the past, namely EY with the sale of their consulting business to French IT services company Capgemini in 2000 as well as KPMG and the sale of their consulting firm to BearingPoint [4]. One of the more interesting components to the outcomes of this play will be based EY's decision concerning the spun-off consulting firm. Do they sell, like both historical situations, or will they keep the newly formed company and IPO [5]?
The S&P Global Corporate Actions Team will continue to track the EY movement throughout the lifecyle of the approval process and keep the industry informed.
A "Well-Timed" IPO? Porsche AG
In the June 2022 publication of Untying the Knots: Simplifying Corporate Actions, our Team wrote about the apparant decrease in the number of planned initial public offerings (IPO) materazlied thus far in 2022. A slew of factors such as market volatility, rising inflation, and fears of a recession, all compounded by the war in Ukraine, has brought the listing boom to an abrupt halt, with more than 300 companies waiting on the side lines until the market stabilizes. However, the German sports car company Porsche AG refused to put the brakes on its planned initial public offering, and instead resulted with the title of Germany's biggest IPO since Deutsche Telekom in 1996.
Once upon a time
In November 1996, Deutsche Telekom, the world's third-largest telecommunications company, completed one of the biggest IPOs ever, raising as much as USD $13.2 billion. Telekom sold 623 million shares, 24% stake, toward the upper end of the 25- to 30-mark expected price range to the public and employees. The share price valued Telekom at about USD $49.7 billion and ushered in a new era for the company and for the German equities market.
The IPO had a hard time attracting interest from U.S. institutional investors, who claimed the shares were pricey considering the debt and upcoming competition from battle-hardened telecommunications companies such as AT&T Corp. As for the non-German investors, they did not find it appealing either as they didn't get a discount on the shares, the dividend was higher than benchmark German government bonds, nor did they receive any sort of a tax break [6].
Some 26 years later…
The story's totally different. On September 29, Porsche AG successfully crossed the finish line of its initial public offering with the ringing of the bell at the Frankfurt Stock Exchange as it carried the name as the largest IPO ever carried out in Europe in terms of market capitalization (78 billion euros). So how was Porsche and its parent company Volkswagen able to make such a killing in an extremely volatile market? While brand name and profitability most definitely played a substantial role in the IPO's success, one key attribute we couldn't help but beg was their extreme focus on one of the year's hottest (and viably so) buzz words: ESG - Environmental, social, and corporate governance [7].
When Volkswagen and Porsche first announced the potential IPO of Porsche shares, the key driver surrounded Volkswagen's determination "to play a leading role in a world of zero-emission and autonomous mobility." As Volkswagen's CEO stated,
"We have set the right course with our NEW AUTO strategy and thanks to our substantial cash flows will invest with clear focus to enter new profit pools such as battery & charging, autonomous driving, and our own mobility platform in the next few years. An IPO of Porsche AG would give us additional flexibility to further accelerate the transformation" [8].
While the world continues to experience extreme heat, wildfires, and hurricanes (most recently Hurricane Ian), discussions around ESG and business valuations are on the rise. Statistics show that sustainable investment assets globally grew 15% over the past two years to reach an all-time high of USD $35 trillion, suggesting that ESG topics and promotions are indeed highly prevalent in the marketplace today. So the idea to support an IPO of a highly luxurious car whose aim is to promote a growth in the company's electric-based vehicles is highly welcomed. The "E" in ESG takes the lead [9]. And as the public market paid tribute to the Porsche IPO, Volkswagen returned the favor with their recently announced proposal to pay a special dividend of 19.06 euros (USD $18.66) per share from the proceeds of the listing of Porsche AG [10].
Since IPOs have been slower in 2022, it becomes difficult to find a correlation to this massive German IPO. However, of all the planned IPOs expected to take place until the end of 2022, there is one stock we have our eye on to help draw comparisons with what we have witnessed. As we await the IPO of VinFast LLC, a company that has caught the ears of many investors, we look to see how the market reacts to its first Vietnamese car brand which has expanded into producing EVs such as electric cars and electric scooters with a primary focus on luxury.
The S&P Corporate Actions Team will continue to track questions surrounding the timing and ESG component with VinFast LLC, while also examining whether the lack of social presense in the "E" from ESG played a factor in the less-than-expected Nikola Motor Company 2020 IPO? Let's see what the following months have in store...
A Perfect Match
Background
On September 26, 2022, South Korea's 7th largest conglomerate specializing in defense and energy with 80 trillion won in assets, Hanwha Group (012450.KS), signed a conditional memorandum of understanding with Daewoo Shipbuilding & Marine Engineering (DSME, 042660.KS).
Under the conditional memorandum, Hanwha's subsidiaries will purchase DSME's newly issued stocks worth 2 trillion won (USD $1.39 billion) to acquire a controlling stake of 49.3% and managerial control of the shipbuilder. Following the deal's conclusion, Korea Development Bank will have its ownership in DSME reduced to 28.2% after the stock acquisition is completed.
The deal will proceed as a stalking-horse bid, whereby the acquirer sets the initial bid on the assets of the bankrupt company, setting the low-end bidding bar so that other bidders cannot underbid the purchase price [11]. That said, the memorandum outlines that any investor willing to make a higher offer price may do so before the October 17, 2022, deadline [12].
Purpose of acquisition
The entire businesses of DSME will merge into Hanwha Group and will bring multiple synergies and growth to Hanwha:
- Complete Hanwha Group's defense business portfolio ranging over land, sea, and air [13]; and
- DSME's LNG business fits into Hanwha's green energy business, where solar panels are Hanwha Solution's profitable product.
With the shipbuilding industry revitalized by high exchange rates and shipbuilding contracts with 41 trillion KRW, Hanwha Group remains optimistic that DSME will make a turnaround in the next few years [14].
A formal acquisition agreement is anticipated to be announced in November, with the transaction planned to conclude in the first half of 2023 [15].
Market Reaction
DSME shares jumped 13.4% to the highest rise in a month, closing at 24,950 won per share. Hanwha Group stock fell 5.2% to 25,950 won per share amid vast uncertainty in the market for Hanhwa's fundraising capability for the deal [16].
MCA's event setup
Since the event counts as a private placement specifically for Hanwha Group to purchase DSME shares, this is not an offer available to the other shareholders of DSME. The acquisition is still in the preliminary stage, and many details, including which Hanhwa's subsidiaries will be acquiring DSME and how the group will fund the deal, have yet to be announced. MCA will tightly monitor to confirm whether there will be any corporate action events that affect the existing shareholders. Especially shareholders who dissent to Hanwha Group's acquisition of a majority stake which is a claim/purchase (매수청구) under Article 374-2 where Hanhwa will have to purchase the shares owned by the dissenting shareholders at a reasonable price [17].
Once announced, MCA will create a Tender Offer - Dissent event on DSME's security ID to be published to customers.
Is It Ever Just a Dividend Anymore?
TE Connectivity Ltd
Shares Premium Dividend
ISIN: CH0102993182; SEDOL: B62B7C3
On March 9, 2022, TE Connectivity Ltd.'s shareholders approved a dividend of USD $2.24 per share to be paid out of reserves from capital contributions in TE Connectivity Ltd.'s Swiss statutory accounts in four equal quarterly installments of USD $0.56 each. The dividend will be paid on: 1. June 3, 2022, to the shareholders of record on May 20, 2022, 2. September 2, 2022, to the shareholders of record on August 19, 2022, 3. December 2, 2022, to the shareholders of record on November 18, 2022, and 4. March 3, 2023, to the shareholders of record on February 17, 2023.
Since the dividend was coming from the reserves, MCA correctly created the four dividend events as a Shares Premium Dividend with the payout Tax Exempted. A large mutual fund company reached out to MCA if the event type was correct as Bloomberg had reflected the events to be a regular cash dividend event. The client also asked MCA to confirm the difference between the Shares Premium Dividend and a regular cash dividend. MCA confirmed the event type by providing issuer source material and explained that dividends coming out of capital contribution reserves will be free from withholding tax, while regular cash dividends will be subject to tax [18].
Chord Energy Corporation
Cash Dividend
ISIN: US6742152076; SEDOL: BLDDYB1
On August 3, 2022, Chord Energy Corporation announced its updated return of capital plan, where capital would be returned through base dividends, variable dividends, and share repurchases. Chord increased its base dividend to USD $1.25 per share per quarter ($5.00 per share annualized), representing an approximate 114% increase from the prior base dividend of $0.585 per share per quarter.
Given the 'return of capital' terminology in the press release, several custodians, vendors, and DTCC created a Return of Capital event. However, given the plan's ambiguity, MCA decided to reach out to the issuer to confirm how to handle the event. We experienced a similar announcement back in Q4 of 2021 from ConocoPhillips (ISIN US20825C1045, SEDOL 2685717), where they used the same verbiage, but the event ended up being treated like an ordinary cash dividend. Chord's Investor Relation team and their tax expert confirmed that this would not be a return of capital but a regular cash dividend. Accordingly, MCA created a Cash Dividend event.
Several clients contacted MCA, including large investment banks and asset managers, to confirm the event type as both their custodians and DTCC were announcing a Return of Capital event. We informed clients of what MCA had discussed with the issuer and that they confirmed the event type as a Cash Dividend. DTCC did not correct the event type until August 25, after the ex and record date had passed [19].
Bank of Nova Scotia Dividend
Re-investment Program
ISIN: CA0641491075; SEDOL: 2076281
On August 23, 2022, Scotiabank announced a dividend on the Bank's outstanding shares, payable October 27, 2022, to shareholders of record at the close of business on October 4, 2022. Holders may elect to receive their dividends in common shares of the Bank instead of cash dividends. All distributed shares will be purchased in the secondary market.
Accordingly, MCA created a choice cash dividend event with security as the non-default option. A global investment bank reached out to MCA to confirm the security option, as their agent only provided them with the default cash option. We confirmed the DRIP event type and provided the client a link to the issuer announcement and screenshots from the Canadian Depository confirming the event type [20].
Interested in more? Please find our:
Global Corporate Actions' August 2022 Blog Post
Global Corporate Actions' June 2022 Blog Post
Global Corporate Actions' April 2022 Blog Post
Global Corporate Actions' March 2022 Blog Post
Global Corporate Actions' February 2022 Blog Post
Global Corporate Actions' January 2022 Blog Post
Global Corporate Action's November 2021 Blog Post
Global Corporate Action's October 2021 Blog Post
Global Corporate Action's September 2021 Blog Post
Global Corporate Action's August 2021 Blog Post
Global Corporate Action's July 2021 Blog Post
Global Corporate Action's June 2021 Blog Post
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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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