Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Early in the morning Friday February 24th, the Nikkei published an <a href="http://asia.nikkei.com/Business/Deals/Morinaga-snack-dairy-makers-to-combine-in-2018" target="_blank">article</a> suggesting that Japan's fourth largest confectioner by sales, <a href="https://www.smartkarma.com/entities/1835" target="_blank" data-smartkarma-citation="entities:1835:1">Morinaga &amp; Co Ltd (2201 JP)</a> and Japan's second largest dairy producer <a href="https://www.smartkarma.com/entities/20907" target="_blank" data-smartkarma-citation="entities:20907:1">Morinaga Milk Industry Co (2264 JP)</a> would seek to integrate in April 2018. The two companies, as is standard, released comments (<a href="http://www.morinaga.co.jp/company/newsrelease/detail.php?no=1422" target="_blank">2201</a>, <a href="http://www.morinagamilk.co.jp/information2/20170224.html" target="_blank">2264</a>) saying the "news" in the Nikkei was not released by them and was not "fact" (see <a href="https://www.smartkarma.com/insights/a-kinki-osaka-menage-a-trois" target="_blank" data-smartkarma-citation="insights:9023">A Kinki Osaka Ménage à Trois?</a> for an explanation) but it was true that they were in talks with each other and would disclose any relevant news as soon as applicable. This likely means when the board agrees to the Basic Agreement, they will announce it. That may or may not include a full plan and merger ratio. I would suggest a merger ratio may come later.The Backstory: Long ago, the two companies were one - the origins of the milk business being in the heated rivalries present in the condensed milk business in the 1910s. Morinaga Milk Industry was spun off in 1949 from its parent and the two companies have since been separate. The effort of joining the two together again would seek to combined logistics, R&amp;D, and procurement efforts to lower costs to better compete with larger rivals, notably <a href="https://www.smartkarma.com/entities/15996" target="_blank" data-smartkarma-citation="entities:15996:1">Meiji Holdings Co Ltd (2269 JP)</a> which merged its milk and confectionery businesses in 2009.Morinaga &amp; Co owns a 10.5% stake in Morinaga Milk, and the two companies share a headquarters building in Minato-ku. The two companies have in recent years both centered efforts to combat deflation on "new products" with "health benefits." For Morinaga, this includes fiber drinks, jelly drinks and products, and chocolate advertising high polyphenol content. For Morinaga Milk, this has been largely centered on so-called "functional yoghurts" which have compounds which are said to benefit skin tone or better intestinal health.How Will This Work Out? <ul><li>One company has had revenue growth. The other hasn't. </li><li>One company trades at a serious EV/EBITDA or PER premium to the other. </li><li>A chart of either company's stock price over the past few years tells you shareholders aren't unhappy now.</li><li>The traditional methods of determining a "fair value" scrip ratio suggest there is a risk the shareholders of one side could end up being unhappy. </li></ul>Discussion of what may come below the fold...

Early in the morning Friday February 24th, the Nikkei published an article suggesting that Japan's fourth largest confectioner by sales, Morinaga &amp; Co Ltd (2201 JP) and Japan's second largest dairy producer Morinaga Milk Industry Co (2264 JP) would seek to integrate in April 2018. The two companies, as is standard, released comments (2201, 2264) saying the "news" in the Nikkei was not released by them and was not "fact" (see A Kinki Osaka Ménage à Trois? for an explanation) but it was true that they were in talks with each other and would disclose any relevant news as soon as applicable. This likely means when the board agrees to the Basic Agreement, they will announce it. That may or may not include a full plan and merger ratio. I would suggest a merger ratio may come later.The Backstory: Long ago, the two companies were one - the origins of the milk business being in the heated rivalries present in the condensed milk business in the 1910s. Morinaga Milk Industry was spun off in 1949 from its parent and the two companies have since been separate. The effort of joining the two together again would seek to combined logistics, R&amp;D, and procurement efforts to lower costs to better compete with larger rivals, notably Meiji Holdings Co Ltd (2269 JP) which merged its milk and confectionery businesses in 2009.Morinaga &amp; Co owns a 10.5% stake in Morinaga Milk, and the two companies share a headquarters building in Minato-ku. The two companies have in recent years both centered efforts to combat deflation on "new products" with "health benefits." For Morinaga, this includes fiber drinks, jelly drinks and products, and chocolate advertising high polyphenol content. For Morinaga Milk, this has been largely centered on so-called "functional yoghurts" which have compounds which are said to benefit skin tone or better intestinal health.How Will This Work Out? One company has had revenue growth. The other hasn't. One company trades at a serious EV/EBITDA or PER premium to the other. A chart of either company's stock price over the past few years tells you shareholders aren't unhappy now.The traditional methods of determining a "fair value" scrip ratio suggest there is a risk the shareholders of one side could end up being unhappy. Discussion of what may come below the fold...

Japan

Morinaga Milk Industry Co., Ltd. produces and sells milk and related dairy products such as ice cream and yogurt.  The Company also develops biochemical product and pharmaceutical.

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Morinaga Milk Industry Co (2264 JP)

Morinaga Merger Musings

Early in the morning Friday February 24th, the Nikkei published an article suggesting that Japan's fourth largest confectioner by sales, Morinaga...

Travis Lundy

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