Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Ebook Initiative Japan Co Ltd / Event-Driven

Back in April I discussed how those looking at <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> on an EV/EBITDA basis would be measuring the company incorrectly. The insight was <a href="https://www.smartkarma.com/insights/softbank-corp-accounting-for-the-accounting-is-complicated" target="_blank" data-smartkarma-citation="insights:50684" rel="noopener">Softbank Corp - Accounting for The Accounting Is Complicated</a>.Yeah... it was an accounting thing. When you look at Softbank Corp and its consolidated revenues and EBITDA, you were looking at the parent co business of telecoms, then because Softbank Corp owned 50% of a company which owned 65% of <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a> which itself consolidated <a href="https://www.smartkarma.com/entities/ebook-initiative-japan-co-lt" target="_blank" data-smartkarma-citation="entities:10613:1" rel="noopener">Ebook Initiative Japan Co Lt (3658 JP)</a> because of the 43% it held, it meant that Softbank Corp consolidated 100% of the top line but only 14% of the bottom line. That is about to get weirder as LINE Digital Frontier has just announced a Tender Offer to take out "minorities" in Ebook Initiative Japan at ¥4750/share. That takeout price is a lifetime high, a 4-bagger since covid-crash lows, 10x book, 550+x EBITDA and one could add more comments that suggest it is a superlative exit for investors. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/841/original/Screenshot+2021-09-30+at+3.58.23+PM.png?1632988893" class="editor-image img-responsive" data-smartkarma-image-id="232841"></figure></section>Those things are nice, but....But it is likely to tick off some people. I discuss why in more detail below but a summary can be...This kind of transaction is yet another situation where the METI Fair M&amp;A Guidelines introduced in summer 2019 have been roundly ignored. There is a lack of good procedure and governance, the valuation is inadequate, the advise provided insufficient, the price manifestly too low, synergies explicitly unaccounted for, no fairness opinion, and the takeover premium is as low as I have seen. And other than that Mrs Lincoln, how was the play?This situation begs for some cowbell (and, obviously, <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a>) <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/870/original/more+cowbell.gif?1632996696" class="editor-image img-responsive" data-smartkarma-image-id="232870"></figure></section>Much more below the fold.

Back in April I discussed how those looking at Softbank Corp (9434 JP) on an EV/EBITDA basis would be measuring the company incorrectly. The insight was Softbank Corp - Accounting for The Accounting Is Complicated.Yeah... it was an accounting thing. When you look at Softbank Corp and its consolidated revenues and EBITDA, you were looking at the parent co business of telecoms, then because Softbank Corp owned 50% of a company which owned 65% of Z Holdings (4689 JP) which itself consolidated Ebook Initiative Japan Co Lt (3658 JP) because of the 43% it held, it meant that Softbank Corp consolidated 100% of the top line but only 14% of the bottom line. That is about to get weirder as LINE Digital Frontier has just announced a Tender Offer to take out "minorities" in Ebook Initiative Japan at ¥4750/share. That takeout price is a lifetime high, a 4-bagger since covid-crash lows, 10x book, 550+x EBITDA and one could add more comments that suggest it is a superlative exit for investors. Those things are nice, but....But it is likely to tick off some people. I discuss why in more detail below but a summary can be...This kind of transaction is yet another situation where the METI Fair M&amp;A Guidelines introduced in summer 2019 have been roundly ignored. There is a lack of good procedure and governance, the valuation is inadequate, the advise provided insufficient, the price manifestly too low, synergies explicitly unaccounted for, no fairness opinion, and the takeover premium is as low as I have seen. And other than that Mrs Lincoln, how was the play?This situation begs for some cowbell (and, obviously, Japan Needs More Cowbell) Much more below the fold. 

E-Book Initiative (3658 JP) Tender Offer Takeout - This One Needs Cowbell Too

Equity Bottom-Up

Traditionally, telecom companies in mature markets are "easy."  Infrastructure is basically built, but there is always maintenance and capex to upgrade throughput. Churn is low. Customers occasionally add on new services. They are generally cash machines. Comparing telcos is often reasonably easy. Mostly it comes down to how aggressively the company prices to customers, how it seeks non-standard revenue off its infrastructure and sales base, or how it returns capital to shareholders. <div class="content-highlight">Every now and then, a telecom company gets complicated. <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> is now one of those companies.</div>The issue is now significant enough that one should avoid using EBIT or EBITDA (or EBITDA less capex) for Softbank Corp as a comparative tool to <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> and <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> without more clarity. There is recently a new kicker involved too, which means one should probably consider Softbank Corp differently than the other two for OTHER reasons too.

Traditionally, telecom companies in mature markets are "easy."  Infrastructure is basically built, but there is always maintenance and capex to upgrade throughput. Churn is low. Customers occasionally add on new services. They are generally cash machines. Comparing telcos is often reasonably easy. Mostly it comes down to how aggressively the company prices to customers, how it seeks non-standard revenue off its infrastructure and sales base, or how it returns capital to shareholders. Every now and then, a telecom company gets complicated. Softbank Corp (9434 JP) is now one of those companies.The issue is now significant enough that one should avoid using EBIT or EBITDA (or EBITDA less capex) for Softbank Corp as a comparative tool to NTT (Nippon Telegraph &amp; Telephone) (9432 JP) and KDDI Corp (9433 JP) without more clarity. There is recently a new kicker involved too, which means one should probably consider Softbank Corp differently than the other two for OTHER reasons too. 

Softbank Corp - Accounting for The Accounting Is Complicated

Japan

Ebook Initiative Japan Co.,Ltd. was founded in 2000. The company's line of business includes providing on-line information retrieval services on a contract or fee basis.

Ebook Initiative Japan Co Ltd (3658 JP)

E-Book Initiative (3658 JP) Tender Offer Takeout - This One Needs Cowbell Too

This takeout of Ebook Initiatives "minorities" is a related party transaction which should have more procedural approval but governance here is a...

Travis Lundy

Softbank Corp - Accounting for The Accounting Is Complicated

Softbank Corporation is more expensive than it appears when one uses traditional telco metrics such as EV/EBITDA or EV/OP multiples. It's all in...

Travis Lundy