'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/903/original/2020-09-09_10-14-19.png?1599614088" class="editor-image img-responsive" data-smartkarma-image-id="157903"></figure><div class="content-caption">Source for all charts: Japan Analytics</div>LISTED RESTAURANTS - Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both <a href="https://www.smartkarma.com/entities/create-restaurants-holdings-inc" target="_blank" data-smartkarma-citation="entities:11513:1" rel="noopener">create restaurants (3387 JP)</a>, and <a href="https://www.smartkarma.com/entities/colowide-co-ltd" target="_blank" data-smartkarma-citation="entities:13967:1" rel="noopener">Colowide (7616 JP)</a> have positioned themselves as consolidators, but have become highly leveraged in the process.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/917/original/File%202020-09-09%2010%2025%2051.jpeg?1599614981" class="editor-image img-responsive" data-smartkarma-image-id="157917"></figure>Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed 'diversified'. Furthermore, there are only five listed take-out/delivery specialists, of which <a href="https://www.smartkarma.com/entities/ride-on-express-co-ltd" target="_blank" data-smartkarma-citation="entities:2812:1" rel="noopener">Ride On Express (6082 JP)</a> has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months - a third quartile performance. Colowide's 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for <a href="https://www.smartkarma.com/entities/ootoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:7329:1" rel="noopener">OOTOYA (2705 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/928/original/2020-09-09_10-38-37.png?1599615530" class="editor-image img-responsive" data-smartkarma-image-id="157928"></figure>YUTAI KEN - One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company's restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.<a href="https://www.smartkarma.com/entities/yoshinoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14630:1" rel="noopener"></a>100,000+ CLUB - <a href="https://www.smartkarma.com/entities/yoshinoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14630:1" rel="noopener">Yoshinoya (9861 JP)</a>, <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom (7412 JP)</a>, <a href="https://www.smartkarma.com/entities/zensho-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:4586:1" rel="noopener">Zensho (7550 JP)</a>, <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a>, <a href="https://www.smartkarma.com/entities/komeda-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:24019:1" rel="noopener">Komeda (3543 JP)</a>, and <a href="https://www.smartkarma.com/entities/create-restaurants-holdings-inc" target="_blank" data-smartkarma-citation="entities:11513:1" rel="noopener">create (3387 JP)</a> are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders -  beef-bowl chain Yoshiniya has 308,265 exceeding <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui (8031 JP)</a> which has twenty-four times the capitalisation.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/942/original/2020-09-09_11-15-31.png?1599617746" class="editor-image img-responsive" data-smartkarma-image-id="157942"></figure>In this DETAIL below, we shall review Colowide's long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains - <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a> and <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom (7412 JP)</a> and the franchise chain Reins International which also operates in Asia and the US.

Source for all charts: Japan AnalyticsLISTED RESTAURANTS - Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both create restaurants (3387 JP), and Colowide (7616 JP) have positioned themselves as consolidators, but have become highly leveraged in the process.Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed 'diversified'. Furthermore, there are only five listed take-out/delivery specialists, of which Ride On Express (6082 JP) has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months - a third quartile performance. Colowide's 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for OOTOYA (2705 JP).YUTAI KEN - One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company's restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.100,000+ CLUB - Yoshinoya (9861 JP), Atom (7412 JP), Zensho (7550 JP), Kappa Create (7421 JP), Komeda (3543 JP), and create (3387 JP) are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders -  beef-bowl chain Yoshiniya has 308,265 exceeding Mitsui (8031 JP) which has twenty-four times the capitalisation.In this DETAIL below, we shall review Colowide's long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains - Kappa Create (7421 JP) and Atom (7412 JP) and the franchise chain Reins International which also operates in Asia and the US.

🇯🇵 Japan • Colowide (7616 JP) - A Bite Too Far

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Yesterday after the close, as the Tender Offer for <a href="https://www.smartkarma.com/entities/ootoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:7329:1" rel="noopener">OOTOYA Holdings (2705 JP)</a> (<a href="https://www.ootoya.jp/common/pdf/corporate_profile.pdf" target="_blank" rel="noopener">corporate profile in English</a>) was drawing to a close (and as it had already gone ex-), <a href="https://www.smartkarma.com/entities/colowide-co-ltd" target="_blank" data-smartkarma-citation="entities:13967:1" rel="noopener">Colowide Co Ltd (7616 JP)</a> announced amendments to terms which both extended the Tender Offer from its close yesterday to 8 September, and more importantly, lowered the minimum number of shares required for success to 1.51mm shares from 1.872mm shares prior. The extension itself would have been an indication that they weren't going to get the shares they wanted at first crack. The fact that the minimum has been lowered is a reason to understand that they think it will be difficult to get there in any case. The change in the minimum a reduction of 19% of that number and sets their minimum target shareholding to exactly 40.00% rather than 45.00%. This makes it slightly more difficult to "control" Ootoya if they get to the minimum but no more, but if necessary to get anywhere near a chunky non-majority piece, the fact that they felt they needed to lower it tells you about the loyalty of existing shareholders. Ootoya shares responded by climbing 9.4% today to ¥2,954 apiece. As I <a href="https://www.smartkarma.com/insights/colowide-partial-tender-for-ootoya-is-a-sell" target="_blank" rel="noopener">said</a> on 12 July when the shares traded ¥3,050-3,115, those who had shares should sell. Those who could borrow should short. It wasn't worth waiting for the Tender Offer. It is not clear why that advice does not still stand, but below I go through the numbers.

Yesterday after the close, as the Tender Offer for OOTOYA Holdings (2705 JP) (corporate profile in English) was drawing to a close (and as it had already gone ex-), Colowide Co Ltd (7616 JP) announced amendments to terms which both extended the Tender Offer from its close yesterday to 8 September, and more importantly, lowered the minimum number of shares required for success to 1.51mm shares from 1.872mm shares prior. The extension itself would have been an indication that they weren't going to get the shares they wanted at first crack. The fact that the minimum has been lowered is a reason to understand that they think it will be difficult to get there in any case. The change in the minimum a reduction of 19% of that number and sets their minimum target shareholding to exactly 40.00% rather than 45.00%. This makes it slightly more difficult to "control" Ootoya if they get to the minimum but no more, but if necessary to get anywhere near a chunky non-majority piece, the fact that they felt they needed to lower it tells you about the loyalty of existing shareholders. Ootoya shares responded by climbing 9.4% today to ¥2,954 apiece. As I said on 12 July when the shares traded ¥3,050-3,115, those who had shares should sell. Those who could borrow should short. It wasn't worth waiting for the Tender Offer. It is not clear why that advice does not still stand, but below I go through the numbers.

Ootoya Tender Offer - Still Tough, Still a Sell

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Colowide announced yesterday that they would be extending their TOB deadline from the 25th of August to the 8th of September while reducing the lower limit from 1,872,392 shares to 1,510,138 shares (which would get them to 40% voting rights). Ootoya’s options now seem limited to emphasising freshness and food quality. Colowide notes that they could consolidate Ootoya at 40% due to voter turnout averaging 56.93-73.16% over the last four years in an explicitly stated version of Murakami’s strategy with Shibaura Machine. One wonders whether “traditional” Japanese small caps may want to consider if proper shareholder engagement would maybe just maybe increase that voter turnout and leave them less vulnerable to unwanted TOBs… Just a thought.

Colowide announced yesterday that they would be extending their TOB deadline from the 25th of August to the 8th of September while reducing the lower limit from 1,872,392 shares to 1,510,138 shares (which would get them to 40% voting rights). Ootoya’s options now seem limited to emphasising freshness and food quality. Colowide notes that they could consolidate Ootoya at 40% due to voter turnout averaging 56.93-73.16% over the last four years in an explicitly stated version of Murakami’s strategy with Shibaura Machine. One wonders whether “traditional” Japanese small caps may want to consider if proper shareholder engagement would maybe just maybe increase that voter turnout and leave them less vulnerable to unwanted TOBs… Just a thought.

Ootoya – Colowide Extends Drama and TOB Deadline With an Eye on Low Shareholder Turnout

On the 14th Ootoya announced that they would tie-up with online organic vegetable and meal kit seller Oisix Ra Daichi. According to the Nikkei Ootoya has been searching unsuccessfully for a white knight to come in over the top of Colowide’s bid. This is not surprising given stretched valuations but will this tie-up be enough to stave off Colowide’s TOB?

On the 14th Ootoya announced that they would tie-up with online organic vegetable and meal kit seller Oisix Ra Daichi. According to the Nikkei Ootoya has been searching unsuccessfully for a white knight to come in over the top of Colowide’s bid. This is not surprising given stretched valuations but will this tie-up be enough to stave off Colowide’s TOB?

Ootoya – Oisix Ra Daichi Tie-Up Could Sway Some Votes But Unlikely to Solve LT Issues

Japanese Restaurant Chain Amalgamator <a href="https://www.smartkarma.com/entities/colowide-co-ltd" target="_blank" data-smartkarma-citation="entities:13967:1" rel="noopener">Colowide Co Ltd (7616 JP)</a> purchased stakes in <a href="https://www.smartkarma.com/entities/ootoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:7329:1" rel="noopener">OOTOYA Holdings (2705 JP)</a> last autumn from two founding family members who wanted to sell. They they purchased a small number of shares in the market. That got them to just over 19%. Colowide approached Ootoya to see if they could join together as Colowide has by purchasing 50+% stakes in <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom Corp (7412 JP)</a> and <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a> and REINS International (formerly known as Rex Holdings, purchased from Advantage Partners in 2012 and 2015). Ootoya has a particular shtick, which is well different than other chains in Japan. This is the founding ethos and it is clear as clear can be on their homepage.<table class="table table-striped"><tbody>
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<h3>Real Food. Ootoya</h3>


Our motto is "Japanese meals"
The way our mothers and their mothers before them
who thinking of their children's health
worked hard in the kitchen,
we take customer orders, one dish at a time,
and prepare the food right there. 
That has always been important to us.



In order for us to get closer to that feeling a mother has, preparing for her family... We wash and prepare vegetables, at the shop
We shave the dried bonito, making soup stock, at the shop
We carefully make pickles and marinade in the shop
We grill, simmer, and cook, at the shop.
We make good food by making the effort.




</td>
</tr>
</tbody></table>Ootoya has one brand. It makes "home-cooked food", on the spot, and that is its claim to fame. It has approximately 340 restaurants as of the end of May, across all locations, run by the company or by franchisees.Colowide runs, or owns 50% of companies which run, a total of nearly 50 different brands across 2700 restaurants ranging from Karubi, "hamburg steak", sushi, cooked seafood, tonkatsu, Italian, French, Spanish, pizza, yakitori, several "regional food" specialty chains, shabu shabu, Freshness Burger, Wolfgang Puck, and others. They even have a new steak grill and deli food restaurant in Tokyo called "The Dad Bod." Colowide's revenue is, not unexpectedly with 8x the storecount, about 10x higher than Ootoya's. Colowide tries to run things efficiently, and so tends to run things wherever possible with centralized kitchen hubs feeding pre-prepared dishes and content to the for finishing at restaurant kitchens. For more on the differing natures of Ootoya and Colowide, please refer to <a href="https://www.smartkarma.com/profiles/mio-kato-cfa" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato, CFA</a>'s writeup in <a href="https://www.smartkarma.com/insights/ootoya-the-order-may-be-delivered-but-it-could-leave-a-bad-taste-in-colowide-s-mouth" target="_blank" data-smartkarma-citation="insights:41123" rel="noopener">Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth</a>. There is nothing I disagree with there. The Colowide model did not appeal to Ootoya management when Colowide approached the firm, so negotiations went nowhere. Colowide made overtures to Ootoya shareholders, proposing that Ootoya become a subsidiary, before the shareholder meeting starting in April, and their proposals got soundly defeated at the AGM at the end of June 2020. Crushed, in fact. In response, Colowide launched a hostile tender offer to go from 19.2% to 51% of shares out. Ootoya's <a href="https://contents.xj-storage.jp/xcontents/AS00928/c8abc4ef/889c/4d35/ac82/8151f88b2ce9/140120200709460175.pdf" target="_blank" rel="noopener">initial response</a> said the Tender Offer was launched without warning, and proposes to make Ootoya a subsidiary despite the fact that it's proposals suffered a resounding defeat just two weeks ago. Ootoya will separately release an official Target Opinion. This is due 10 days from the Colowide announcement. I expect it to declare opposition to this hostile Tender Offer but I do not see what Ootoya can do. Ootoya is being priced expensively here. And that is in the middle of a pandemic which is causing the firm to burn cash. It is not clear who might rescue Ootoya from a buyer who wants to change the entire ethos of the Ootoya brand.  More below the fold, with charts, and of course, Ye Olde Arb Grids.

Japanese Restaurant Chain Amalgamator Colowide Co Ltd (7616 JP) purchased stakes in OOTOYA Holdings (2705 JP) last autumn from two founding family members who wanted to sell. They they purchased a small number of shares in the market. That got them to just over 19%. Colowide approached Ootoya to see if they could join together as Colowide has by purchasing 50+% stakes in Atom Corp (7412 JP) and Kappa Create (7421 JP) and REINS International (formerly known as Rex Holdings, purchased from Advantage Partners in 2012 and 2015). Ootoya has a particular shtick, which is well different than other chains in Japan. This is the founding ethos and it is clear as clear can be on their homepage.









Real Food. Ootoya


Our motto is "Japanese meals"
The way our mothers and their mothers before them
who thinking of their children's health
worked hard in the kitchen,
we take customer orders, one dish at a time,
and prepare the food right there. 
That has always been important to us.



In order for us to get closer to that feeling a mother has, preparing for her family...  We wash and prepare vegetables, at the shop
We shave the dried bonito, making soup stock, at the shop
We carefully make pickles and marinade in the shop
We grill, simmer, and cook, at the shop.
We make good food by making the effort.






Ootoya has one brand. It makes "home-cooked food", on the spot, and that is its claim to fame. It has approximately 340 restaurants as of the end of May, across all locations, run by the company or by franchisees.Colowide runs, or owns 50% of companies which run, a total of nearly 50 different brands across 2700 restaurants ranging from Karubi, "hamburg steak", sushi, cooked seafood, tonkatsu, Italian, French, Spanish, pizza, yakitori, several "regional food" specialty chains, shabu shabu, Freshness Burger, Wolfgang Puck, and others. They even have a new steak grill and deli food restaurant in Tokyo called "The Dad Bod." Colowide's revenue is, not unexpectedly with 8x the storecount, about 10x higher than Ootoya's. Colowide tries to run things efficiently, and so tends to run things wherever possible with centralized kitchen hubs feeding pre-prepared dishes and content to the for finishing at restaurant kitchens. For more on the differing natures of Ootoya and Colowide, please refer to Mio Kato, CFA's writeup in Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth. There is nothing I disagree with there. The Colowide model did not appeal to Ootoya management when Colowide approached the firm, so negotiations went nowhere. Colowide made overtures to Ootoya shareholders, proposing that Ootoya become a subsidiary, before the shareholder meeting starting in April, and their proposals got soundly defeated at the AGM at the end of June 2020. Crushed, in fact. In response, Colowide launched a hostile tender offer to go from 19.2% to 51% of shares out. Ootoya's initial response said the Tender Offer was launched without warning, and proposes to make Ootoya a subsidiary despite the fact that it's proposals suffered a resounding defeat just two weeks ago. Ootoya will separately release an official Target Opinion. This is due 10 days from the Colowide announcement. I expect it to declare opposition to this hostile Tender Offer but I do not see what Ootoya can do. Ootoya is being priced expensively here. And that is in the middle of a pandemic which is causing the firm to burn cash. It is not clear who might rescue Ootoya from a buyer who wants to change the entire ethos of the Ootoya brand.  More below the fold, with charts, and of course, Ye Olde Arb Grids.

Colowide Partial Tender for Ootoya Is a Sell

Japan

OOTOYA, Holdings Co., Ltd. operates a restaurant chain which serves Japanese set meals.  The Company operates its own restaurants based in Kanto.

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OOTOYA Holdings (2705 JP)

🇯🇵 Japan • Colowide (7616 JP) - A Bite Too Far

LISTED RESTAURANTS

Campbell Gunn

Ootoya Tender Offer - Still Tough, Still a Sell

Yesterday after the close, as the Tender Offer for OOTOYA Holdings (2705 JP) (corporate profile in English) was drawing to a close (and as it had...

Travis Lundy

Ootoya – Colowide Extends Drama and TOB Deadline With an Eye on Low Shareholder Turnout

Colowide announced yesterday that they would be extending their TOB deadline from the 25th of August to the 8th of September while reducing the...

Mio Kato

Ootoya – Oisix Ra Daichi Tie-Up Could Sway Some Votes But Unlikely to Solve LT Issues

On the 14th Ootoya announced that they would tie-up with online organic vegetable and meal kit seller Oisix Ra Daichi. According to the Nikkei...

Mio Kato

Colowide Partial Tender for Ootoya Is a Sell

Japanese Restaurant Chain Amalgamator Colowide Co Ltd (7616 JP) purchased stakes in OOTOYA Holdings (2705 JP) last autumn from two founding family...

Travis Lundy

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