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M&A Updates: Chiyoda Reassignment To TSE2 Might Provide An Interesting Short Opportunity

by: Special Situation Investor

Chiyoda has been reassigned to TSE section 2.

The court has reserved its judgement on EPIX/RLM transaction. There might be still a chance it gets blocked.

Vical-Brickell merger should go through.

Chiyoda (OTCPK:CHYCF) reassignment

Chiyoda (6366 JP), a global (based in Japan) engineering company, which specializes in oil and gas midstream for LNG and gas processing, has announced a reassignment to another sector of Tokyo Stock exchange. This might present an interesting short opportunity (and later long) as a very similar situation has already happened with Sharp (OTCPK:SHCAY) in 2016 and Toshiba (OTCPK:TOSBF) in 2017. So, Tokyo Stock Exchange has several sections:

1st section (TSE1) is the best place you can get listed in Japan for “the companies that represent and lead the Japanese economy”. TSE1 companies are included in numerous indexes, for example, TOPIX (all TSE1 companies), Nikkei, which are loved by ETFs and financial institutions. Section 2 (TSE2) is also for established companies, which don’t meet TSE1 requirements. Jasdaq is for ones which don’t meet sector 2 requirements, and mothers is for the startups.

The recent year has not been so great for Chiyoda as it has greatly struggled with its Cameron (write-down), Freeport and Tangguh (extra costs) projects. As a result, the company has finished the year with negative net assets, which is not allowed for a TSE1 company. So, from the 1st of August 2019, Chiyoda will be downgraded to TSE2 and removed from TOPIX and Nikkei 225 indexes. So, all the ETFs and financial institutions that are following these indexes will have to unload their stock.

This has happened before with Sharp and Toshiba for exactly the same reason. After the announcement, Sharp shares fell about 18% and Toshiba about 23%, and both stocks started going up right after the 1st of August (date of downgrade). So, I think there is a good chance that the same will happen with Chiyoda. However, the thing that concerns me is that, after the announcement (28th June), so far, the stock hasn’t reacted much, and even went up a bit. This wasn’t the case with the two previous companies as their shares have fallen pretty much right after the announcement.


ESSA Pharma (EPIX) - Realm Therapeutics (RLM)

Some interesting developments with this acquisition (initial post). So, even though shareholders have agreed (75% was needed, 78.5% approved) to exchange $1 for 60 cents, some holders have opposed the deal, and court date was adjourned to the 8th of July. Interestingly, the court did not approve this merger, but rather has reserved its judgement and will take a decision on a later date. So, it seems that there still is a chance that this rip-off will be blocked.

Vical (VICL)

A similar situation to RLM.

So, Vical, a failed bio-pharma company has been doing a strategic review and ended up agreeing to be acquired to a reverse merger transaction with privately-held Brickell Biotech. Acquisition terms are calculated as $60m valuation for Brickell and $40m for Vical. So, after the announcement, the company’s stock has dropped from $1.14/share to current $0.82/share, which means that, depending on the calculations, it is currently trading at 55% (without warrants) - 43% (with warrants) discount to net cash. I don’t want to extend much more into the background information as you can find it in write-up made by @Ryan Bowen and my previous post.

In my opinion, this is not a very attractive situation as speculation on shareholders voting down the transaction is too dangerous (especially when ESSA/RLM has been approved just recently). By the way, although I made a mistake in my initial write-up as the pre-funded warrants didn’t have to be included in the calculations for the liquidation scenario, it still seems that their existence plays a big role in company’s moves. BVF fund is clearly looking for an opportunity to exercise their warrants and is pushing this transaction as it will give them loads of new shares, which will offset any possible further price depreciation. It is also very strange that no VICL executives will join the NewCo, and out of the 7 directors, only 2 will be from VICL. So, it is hard to understand why would they take such decision (merger) unless they are also somehow affiliated with BVF. All in all, I think this transaction will go through.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.