Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Thematic (Sector/Industry)

<ul>
<li>This is part of a series of M&amp;A guides that our Quiddity* <a href="https://www.smartkarma.com/companies/quiddity-advisors/team" target="_blank" rel="noopener">team</a> is publishing to aid investors in understanding the rules, parameters, possibilities, and processes in M&amp;A. </li>
<li>They are designed to contain links to all the relevant rules, oversight entities, and provide details as to how M&amp;A is conducted and what rules apply.</li>
<li>In many of the insights on deals in specific markets and countries, these insights will be used as points of reference. </li>
</ul>


This is part of a series of M&amp;A guides that our Quiddity* team is publishing to aid investors in understanding the rules, parameters, possibilities, and processes in M&amp;A. 
They are designed to contain links to all the relevant rules, oversight entities, and provide details as to how M&amp;A is conducted and what rules apply.
In many of the insights on deals in specific markets and countries, these insights will be used as points of reference. 


Equity Bottom-Up

<p>In early November, <a href="https://www.smartkarma.com/entities/japan-asia-group-ltd" target="_blank" data-smartkarma-citation="entities:12428:1" rel="noopener">Japan Asia (3751 JP)</a> was trading at roughly ¥340-350/share. </p><p>The Chairman, who has a history of failed takeovers, decided an MBO of the company was appropriate. He tied up with Carlyle to execute an odd deal whereby Carlyle would be the buyer, but the company would sell 70-80% of its two trophy assets for cash to Carlyle, and would exit, leaving the chairman long the remaining money-losing SurviveCo asset, stakes in the sold assets, and a big pile of cash.  He managed to convince the directors that a value of ¥600/share was reasonable, and recommendable to investors. <em>Discussed in <a href="https://www.smartkarma.com/insights/japan-asia-3751-jp-management-buyout-should-there-be-a-bump" target="_blank" data-smartkarma-citation="insights:44928" rel="noopener">Japan Asia (3751 JP) Management Buyout: Should There Be a BUMP?</a> </em></p><p>Well-known Japanese activist Yoshiaki Murakami took issue with this, bought 20% of the shares outstanding, then proposed his own takeover at ¥840/share. <em>Discussed in <a href="https://www.smartkarma.com/insights/murakami-fund-s-tender-for-jag-3751-may-be-rangebound-near-term" target="_blank" data-smartkarma-citation="insights:47158" rel="noopener">Murakami Fund's Tender for JAG (3751):  May Be Rangebound Near-Term</a>. </em></p><p>The company did not engage and Carlyle did not respond, until he was on the verge of launching, and then the chairman and Carlyle rejigged their deal to offer ¥1200/share. Funnily enough, this too was recommended by JAG directors. <em>Discussed in <a href="https://www.smartkarma.com/insights/japan-asia-group-3751-murakami-wins-the-mother-of-all-bumps-100" target="_blank" data-smartkarma-citation="insights:47437" rel="noopener">Japan Asia Group (3751): Murakami Wins the Mother Of All Bumps +100%</a>. </em></p><p>Murakami-san objected and requested due diligence to be able to fully formulate the plan to raise Medium-Long-Term Corporate Value and the chance to meet with employees. The Company rejected the due diligence request saying that he did not have a plan to raise Medium-Long-Term Corporate Value and rejected the meeting with employees. Murakami-san responded by launching a Tender Offer at ¥1210/share, ending 22 March 2021. The shares have traded higher since. The MBO conducted by the Chairman and Carlyle failed. <em>Discussed in <a href="https://www.smartkarma.com/insights/overbid-jag-special-committee-plays-stupid-so-murakami-plays-hardball" target="_blank" data-smartkarma-citation="insights:47802" rel="noopener">Overbid: JAG Special Committee Plays Stupid so Murakami Plays Hardball</a>. </em></p><p>Somehow, the directors figured out that the Chairman's plan at ¥1200/share was great and recommendable but Murakami-san's plan at ¥1210/share was awful and destined to bring the company to ruin. They opposed his TOB. <em>Discussed in <a href="https://www.smartkarma.com/insights/japan-asia-group-mbo-fails-now-jag-against-murakami-s-higher-bid" target="_blank" data-smartkarma-citation="insights:48360" rel="noopener">Japan Asia Group MBO Fails, Now JAG Against Murakami's Higher Bid</a>. </em></p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/191/605/original/Screenshot+2021-03-01+at+5.26.07+PM.png?1614598916" class="editor-image img-responsive" data-smartkarma-image-id="191605"></figure><p></p></section></section><p>The Company has now decided that it wants to improve value for all shareholders. Today, it released a <em>Notice Regarding Measures for Improving Corporate Value and Returning Shareholders </em>(<a href="https://www.japanasiagroup.jp/wordpress/wp-content/uploads/2021-3-1_1.pdf" target="_blank" rel="noopener">Japanese only</a>) and in it, the Board proposes to...</p><ol>
<li>Have a Management Plan for moving forward, including the concept of a "Second Founding" of the company.</li>
<li>Pay a Special Dividend of ¥300/share</li>
<li>Sell large portions of the Two Major Sellable Assets to a "New Partner"</li>
<li>Have a policy regarding implementation of significant returns to shareholders. </li>
</ol><div class="content-highlight">
<p>This plan is effectively quite similar to what JAG's Board accused Murakami-san of planning to do.</p>
<p>It is designed to obstruct the Murakami Tender Offer, and it will likely succeed in doing so.</p>
<p>I could not exclude the possibility of a Bull Dog Sauce situation here.</p>
</div><p>Much more below the fold.</p>

In early November, Japan Asia (3751 JP) was trading at roughly ¥340-350/share. The Chairman, who has a history of failed takeovers, decided an MBO of the company was appropriate. He tied up with Carlyle to execute an odd deal whereby Carlyle would be the buyer, but the company would sell 70-80% of its two trophy assets for cash to Carlyle, and would exit, leaving the chairman long the remaining money-losing SurviveCo asset, stakes in the sold assets, and a big pile of cash.  He managed to convince the directors that a value of ¥600/share was reasonable, and recommendable to investors. Discussed in Japan Asia (3751 JP) Management Buyout: Should There Be a BUMP? Well-known Japanese activist Yoshiaki Murakami took issue with this, bought 20% of the shares outstanding, then proposed his own takeover at ¥840/share. Discussed in Murakami Fund's Tender for JAG (3751):  May Be Rangebound Near-Term. The company did not engage and Carlyle did not respond, until he was on the verge of launching, and then the chairman and Carlyle rejigged their deal to offer ¥1200/share. Funnily enough, this too was recommended by JAG directors. Discussed in Japan Asia Group (3751): Murakami Wins the Mother Of All Bumps +100%. Murakami-san objected and requested due diligence to be able to fully formulate the plan to raise Medium-Long-Term Corporate Value and the chance to meet with employees. The Company rejected the due diligence request saying that he did not have a plan to raise Medium-Long-Term Corporate Value and rejected the meeting with employees. Murakami-san responded by launching a Tender Offer at ¥1210/share, ending 22 March 2021. The shares have traded higher since. The MBO conducted by the Chairman and Carlyle failed. Discussed in Overbid: JAG Special Committee Plays Stupid so Murakami Plays Hardball. Somehow, the directors figured out that the Chairman's plan at ¥1200/share was great and recommendable but Murakami-san's plan at ¥1210/share was awful and destined to bring the company to ruin. They opposed his TOB. Discussed in Japan Asia Group MBO Fails, Now JAG Against Murakami's Higher Bid. The Company has now decided that it wants to improve value for all shareholders. Today, it released a Notice Regarding Measures for Improving Corporate Value and Returning Shareholders (Japanese only) and in it, the Board proposes to...
Have a Management Plan for moving forward, including the concept of a "Second Founding" of the company.
Pay a Special Dividend of ¥300/share
Sell large portions of the Two Major Sellable Assets to a "New Partner"
Have a policy regarding implementation of significant returns to shareholders. 

This plan is effectively quite similar to what JAG's Board accused Murakami-san of planning to do.
It is designed to obstruct the Murakami Tender Offer, and it will likely succeed in doing so.
I could not exclude the possibility of a Bull Dog Sauce situation here.
Much more below the fold.

Japan Asia Group (3751) : Defense Against Hostile TOB Is Bad News

Equity Analyst, Event-driven, Quiddity Advisors

Janaghan Jeyakumar, CFA

Equity Analyst, Event-driven

Event-Driven

<p>During the month of February 2021, one of the most anticipated TOPIX Inclusion candidates, <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> completed its TOPIX Inclusion Event. We also saw four new names announce their TSE1 moves during this month, among which was <a href="https://www.smartkarma.com/entities/faithnetwork-co-ltd" target="_blank" data-smartkarma-citation="entities:29132:1" rel="noopener">FaithNetwork Co Ltd (3489 JP)</a> the third stock out of the four pre-event bets highlighted in <a href="https://www.smartkarma.com/insights/topix-inclusion-trade-summary-sep-2020" target="_blank" data-smartkarma-citation="insights:43700" rel="noopener">TOPIX Inclusion Trade Summary: Sep 2020</a>. During this month, we also introduced new pre-event picks to be added to our list in <a href="https://www.smartkarma.com/insights/topix-inclusions-who-is-ready-3-0" target="_blank" data-smartkarma-citation="insights:48306" rel="noopener">TOPIX Inclusions: Who Is READY? 3.0</a>. </p><p>In this insight, I have provided performance updates for 4 "Live" event stocks which are expected to have Inclusion Events at the end of March/April 2021 and 17 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021. </p>

During the month of February 2021, one of the most anticipated TOPIX Inclusion candidates, Toshiba Corp (6502 JP) completed its TOPIX Inclusion Event. We also saw four new names announce their TSE1 moves during this month, among which was FaithNetwork Co Ltd (3489 JP) the third stock out of the four pre-event bets highlighted in TOPIX Inclusion Trade Summary: Sep 2020. During this month, we also introduced new pre-event picks to be added to our list in TOPIX Inclusions: Who Is READY? 3.0. In this insight, I have provided performance updates for 4 "Live" event stocks which are expected to have Inclusion Events at the end of March/April 2021 and 17 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021. 

<p>In the month of January 2021, one of the most anticipated TOPIX Inclusion candidates, <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> announced its move to TSE1 triggering what could potentially be one of the largest TOPIX Inclusion events in recent memory. The stock could see its TOPIX Inclusion take place at the end of February, along with <a href="https://www.smartkarma.com/entities/sansan-inc" target="_blank" data-smartkarma-citation="entities:28112:1" rel="noopener">Sansan Inc (4443 JP)</a> - another larger-than-usual candidate - and two other super-high-impact names <a href="https://www.smartkarma.com/entities/bull-dog-sauce-co-ltd" target="_blank" data-smartkarma-citation="entities:16235:1" rel="noopener">Bull Dog Sauce (2804 JP)</a> and <a href="https://www.smartkarma.com/entities/alps-logistics-co-ltd" target="_blank" data-smartkarma-citation="entities:3935:1" rel="noopener">Alps Logistics (9055 JP)</a>. There is plenty to look forward to. </p><p>In this insight, I have provided performance updates for 6 "Live" event stocks (including the names mentioned above) which are expected to have Inclusion Events at the end of February 2021 and 14 "Post" event stocks that completed their Inclusion Events at the end of December 2020 and January 2021 (on 28 January 2021).</p><p>Furthermore, I have also highlighted some interesting Pre-event situations involving stocks that are likely to become TSE1-promotion candidates in the near future. </p>

In the month of January 2021, one of the most anticipated TOPIX Inclusion candidates, Toshiba Corp (6502 JP) announced its move to TSE1 triggering what could potentially be one of the largest TOPIX Inclusion events in recent memory. The stock could see its TOPIX Inclusion take place at the end of February, along with Sansan Inc (4443 JP) - another larger-than-usual candidate - and two other super-high-impact names Bull Dog Sauce (2804 JP) and Alps Logistics (9055 JP). There is plenty to look forward to. In this insight, I have provided performance updates for 6 "Live" event stocks (including the names mentioned above) which are expected to have Inclusion Events at the end of February 2021 and 14 "Post" event stocks that completed their Inclusion Events at the end of December 2020 and January 2021 (on 28 January 2021).Furthermore, I have also highlighted some interesting Pre-event situations involving stocks that are likely to become TSE1-promotion candidates in the near future. 

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/181/288/original/Ruby+Rhod+Slide+In.gif?1610016661" class="editor-image img-responsive" data-smartkarma-image-id="181288"></figure><p></p></section><p>A long time ago in a land far, far away, there was a small company which made sauce, which was the subject of a Tender Offer by an activist who had developed something of a reputation for being hostile. To defend itself, the company asked its shareholders to allow it to execute a poison pill and indeed it executed the poison pill which said that all investors<em> other than</em> the activist would get the opportunity to buy three new shares for every one share owned, for 1 yen each, while the activist was given a market price-based cash equivalent for three quarters of the new position. </p><div><p>The activist, Steel Partners, took it to court trying to get an injunction on the issuance of the warrants. The District Court allowed the issuance to go forward, Steel appealed, and the Tokyo High Court (the middle one in this case) decided Steel Partners was an "abusive acquirer." In August of 2007, the Supreme Court agreed with the lower courts and decided that the issuance could proceed.</p></div><div>
<div><p>It is generally thought amongst Tokyo legal experts that the case was a triumph for shareholder supremacy because shareholders had voted to create such a warrant system to dilute acquirers which an independent committee had determined to be detrimental or abusive. The conclusion by the company's board to go ahead with the issuance was at the behest of a process <em>pre-agreed</em> by shareholders. </p></div>
<div><p>The precedents which were seen to have been set in this case were that... </p></div>
<div>
<ul style="list-style-type: disc;">
<li>a company could defend itself against a hostile bidder (or perhaps shareholder) if that shareholder's actions were deemed to be detrimental to the corporate value of the company or to other shareholders. </li>
<li>But that such a defense had to be fair. In this case, Bulldog provided compensation for the share warrants issued to other shareholders.</li>
</ul>
<p>In hindsight, the result was far better for Steel Partners than for the other shareholders.</p>
<p>On a split-adjusted basis, 13+ years later, the shares have not recouped one-quarter of their price prior to when Steel Partners raised their bid. The fall in share price in the chart below was because of the massive new issuance. The shares should have fallen in price by three quarters to account for the new issuance. Instead, they fell by three quarters then fell by half again to account for the fact there was no more takeover premium. </p>
<p>At ¥1590 at today's close, that is ¥6360 pre-dilution. </p>
</div>
</div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/181/287/original/Screenshot+2021-01-07+at+6.34.54+PM.png?1610015783" class="editor-image img-responsive" data-smartkarma-image-id="181287"></figure></section><p></p><p>So now, some 13 years later, we have a smidgen of good news. </p><h3>The Good News</h3><p>Today, after the close, the company <a href="https://www.bulldog.co.jp/common/upload/news/210107_etc.pdf" target="_blank" rel="noopener">announced</a> (Japanese only) that it had been accepted to move its shares from TSE2 to the TSE's First Section on 14 January. That means it will be included in TOPIX some 6 weeks later. </p><p>For those who follow the Quiddity TOPIX Inclusion Framework, this inclusion is GREEN.</p><p>It is, indeed... </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/181/289/original/SuperGreen.gif?1610016747" class="editor-image img-responsive" data-smartkarma-image-id="181289"></figure></section><p></p><p>And as always after that kind of introduction, there is more below the fold.</p>

A long time ago in a land far, far away, there was a small company which made sauce, which was the subject of a Tender Offer by an activist who had developed something of a reputation for being hostile. To defend itself, the company asked its shareholders to allow it to execute a poison pill and indeed it executed the poison pill which said that all investors other than the activist would get the opportunity to buy three new shares for every one share owned, for 1 yen each, while the activist was given a market price-based cash equivalent for three quarters of the new position. The activist, Steel Partners, took it to court trying to get an injunction on the issuance of the warrants. The District Court allowed the issuance to go forward, Steel appealed, and the Tokyo High Court (the middle one in this case) decided Steel Partners was an "abusive acquirer." In August of 2007, the Supreme Court agreed with the lower courts and decided that the issuance could proceed.
It is generally thought amongst Tokyo legal experts that the case was a triumph for shareholder supremacy because shareholders had voted to create such a warrant system to dilute acquirers which an independent committee had determined to be detrimental or abusive. The conclusion by the company's board to go ahead with the issuance was at the behest of a process pre-agreed by shareholders. 
The precedents which were seen to have been set in this case were that... 


a company could defend itself against a hostile bidder (or perhaps shareholder) if that shareholder's actions were deemed to be detrimental to the corporate value of the company or to other shareholders. 
But that such a defense had to be fair. In this case, Bulldog provided compensation for the share warrants issued to other shareholders.

In hindsight, the result was far better for Steel Partners than for the other shareholders.
On a split-adjusted basis, 13+ years later, the shares have not recouped one-quarter of their price prior to when Steel Partners raised their bid. The fall in share price in the chart below was because of the massive new issuance. The shares should have fallen in price by three quarters to account for the new issuance. Instead, they fell by three quarters then fell by half again to account for the fact there was no more takeover premium. 
At ¥1590 at today's close, that is ¥6360 pre-dilution. 

So now, some 13 years later, we have a smidgen of good news. The Good NewsToday, after the close, the company announced (Japanese only) that it had been accepted to move its shares from TSE2 to the TSE's First Section on 14 January. That means it will be included in TOPIX some 6 weeks later. For those who follow the Quiddity TOPIX Inclusion Framework, this inclusion is GREEN.It is, indeed... And as always after that kind of introduction, there is more below the fold.

TOPIX Inclusion: Bull-Dog Sauce (2804) Is SUPER GREEN

Japan

BULL-DOG SAUCE CO., LTD. primarily produces and sells Worcester sauce.  The Company also produces commercial and household-use products, as well as processed food products.  Bull-Dog Sauce also operates restaurants and provides real estate leasing services.

Bull Dog Sauce (2804 JP)

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Japan Asia Group (3751) : Defense Against Hostile TOB Is Bad News

JAG (3751) announces a Special Dividend designed to get Murakami-san to withdraw his tender offer. He likely will. That's bad news for shareholders.

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TOPIX Inclusion: Bull-Dog Sauce (2804) Is SUPER GREEN

Bull-Dog Sauce is surprisingly high float and surprisingly low volume and now it is going into TOPIX at end-Feb. This situation is SUPER GREEN...

Travis Lundy