Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

On Thursday 25 March after the close, it was <a href="http://www.sakaiovex.co.jp/ir/3138_sakai.pdf" target="_blank" rel="noopener">announced</a> that the MBO/Takeover/Tender Offer for <a href="https://www.smartkarma.com/entities/sakai-ovex-co-ltd" target="_blank" data-smartkarma-citation="entities:20002:1" rel="noopener">Sakai Ovex (3408 JP)</a> which had been bumped in price from ¥2850 to ¥3000 had, in fact failed. The company announced that it was reinstating the March-end dividend that it had previouslyFrom the beginning, the takeover was too cheap. I discussed the original bid in <a href="https://www.smartkarma.com/insights/sakai-ovex-mbo-wrong-price-and-the-bidder-knows-it" target="_blank" data-smartkarma-citation="insights:47961" rel="noopener">Sakai Ovex MBO - Wrong Price (And the Bidder Knows It)</a>. The shares traded through terms almost immediately, then higher. Then it was bumped +5.26%, which I thought was weak (discussed in <a href="https://www.smartkarma.com/insights/savai-ovex-mbo-a-very-weak-bump" target="_blank" data-smartkarma-citation="insights:48933" rel="noopener">Savai Ovex MBO - A Very Weak Bump</a>) but shares traded down to terms and just below as the Tender Offer was ending. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/197/733/original/Screenshot+2021-03-28+at+9.01.40+PM.png?1616937800" class="editor-image img-responsive" data-smartkarma-image-id="197733"></figure></section>The Tender Offer ended up getting ~63+% of the shares out, which was less than the 66.67% necessary to complete successfully. That the tender offer got to that level and was not extended on a technicality is somewhat telling.That 37% of shareholders did NOT tender is quite interesting. Then on Friday, after the stock dipped hard and bounced back decently, we got new news of an activist having bought 6.2% of the shares out. This changes things. More discussion below.

On Thursday 25 March after the close, it was announced that the MBO/Takeover/Tender Offer for Sakai Ovex (3408 JP) which had been bumped in price from ¥2850 to ¥3000 had, in fact failed. The company announced that it was reinstating the March-end dividend that it had previouslyFrom the beginning, the takeover was too cheap. I discussed the original bid in Sakai Ovex MBO - Wrong Price (And the Bidder Knows It). The shares traded through terms almost immediately, then higher. Then it was bumped +5.26%, which I thought was weak (discussed in Savai Ovex MBO - A Very Weak Bump) but shares traded down to terms and just below as the Tender Offer was ending. The Tender Offer ended up getting ~63+% of the shares out, which was less than the 66.67% necessary to complete successfully. That the tender offer got to that level and was not extended on a technicality is somewhat telling.That 37% of shareholders did NOT tender is quite interesting. Then on Friday, after the stock dipped hard and bounced back decently, we got new news of an activist having bought 6.2% of the shares out. This changes things. More discussion below.

Sakai Ovex Tender Offer Fails But The Stock Gains an Activist

Almost exactly a month ago, an MBO was launched on <a href="https://www.smartkarma.com/entities/sakai-ovex-co-ltd" target="_blank" data-smartkarma-citation="entities:20002:1" rel="noopener">Sakai Ovex (3408 JP)</a> at ¥2850/share.
It was launched at an all-time high, but it was the wrong price. And one of the well-known value players in Japan knew it was the wrong price, because he was the bidder as was discussed in <a href="https://www.smartkarma.com/insights/sakai-ovex-mbo-wrong-price-and-the-bidder-knows-it" target="_blank" data-smartkarma-citation="insights:47961" rel="noopener">Sakai Ovex MBO - Wrong Price (And the Bidder Knows It)</a>.
I suggested a bump might be necessary.
The shares immediately jumped through terms, and shares have traded through terms every day since then with both VWAP and closing price above the ¥2850/share Tender Offer Price every day since announcement. 40% of shares out and 50% of float has traded, but nobody has announced a Large Shareholder Filing on the buy side since the original announcement. 
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Today brought new news.
<h2>The NEW News</h2>
Today, the Bidder for Sakai Ovex <a href="https://disclosure.edinet-fsa.go.jp/E01EW/BLMainController.jsp?uji.verb=W00Z1020initialize&amp;uji.bean=ek.bean.EKW00Z1020Bean&amp;TID=W00Z1020&amp;PID=W1E63041&amp;SESSIONKEY=1615194046039&amp;lgKbn=2&amp;dflg=0&amp;iflg=&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=S100KXCF" target="_blank" rel="noopener">announced</a> they had raised their bid from ¥2850/share to ¥3000/share, for a bump of 5.26%. 
A little arithmetic will tell you this is STILL the wrong price. 
More below the fold.

Almost exactly a month ago, an MBO was launched on Sakai Ovex (3408 JP) at ¥2850/share.
It was launched at an all-time high, but it was the wrong price. And one of the well-known value players in Japan knew it was the wrong price, because he was the bidder as was discussed in Sakai Ovex MBO - Wrong Price (And the Bidder Knows It).
I suggested a bump might be necessary.
The shares immediately jumped through terms, and shares have traded through terms every day since then with both VWAP and closing price above the ¥2850/share Tender Offer Price every day since announcement. 40% of shares out and 50% of float has traded, but nobody has announced a Large Shareholder Filing on the buy side since the original announcement. 



Today brought new news.
The NEW News
Today, the Bidder for Sakai Ovex announced they had raised their bid from ¥2850/share to ¥3000/share, for a bump of 5.26%. 
A little arithmetic will tell you this is STILL the wrong price. 
More below the fold. 

On 8 February 2021, in announcing <a href="https://ssl4.eir-parts.net/doc/2398/ir_material_for_fiscal_ym10/94981/00.pdf" target="_blank" rel="noopener">Q3 earnings</a>, <a href="https://www.smartkarma.com/entities/tsukui-corp" target="_blank" data-smartkarma-citation="entities:13727:1" rel="noopener">Tsukui Corp (2398 JP)</a> also announced that an entity called MBPK Life LLC - formed by MBK Partners.
The Tender Offer is struck at ¥924/share, which is well below the highs reached two years ago. 
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This has been structured by MBK and the #1 shareholder so that the #1 shareholder Tsukui Kikaku does not tender at ¥924/share, but instead sells shares back to the company after the deal is complete, doing so at ¥753/share. This is presented as an effort to maximize the profits of the ordinary shareholders, but there is tax planning going on in the background. 
The average weighted Adjusted EV is a few turns lower than the headline EV Tender Offer Price to minorities, but that means the buyer probably has room for manoeuvre if pushed. This is not as egregiously bad as some other recent MBOs and take-privates in the space. 
Some of it depends on the nature of the assets. Is it an asset play or a service play. Strangely enough, the service plays seem to get a higher multiple. 
</section>
More below the fold.

On 8 February 2021, in announcing Q3 earnings, Tsukui Corp (2398 JP) also announced that an entity called MBPK Life LLC - formed by MBK Partners.
The Tender Offer is struck at ¥924/share, which is well below the highs reached two years ago. 




This has been structured by MBK and the #1 shareholder so that the #1 shareholder Tsukui Kikaku does not tender at ¥924/share, but instead sells shares back to the company after the deal is complete, doing so at ¥753/share. This is presented as an effort to maximize the profits of the ordinary shareholders, but there is tax planning going on in the background. 
The average weighted Adjusted EV is a few turns lower than the headline EV Tender Offer Price to minorities, but that means the buyer probably has room for manoeuvre if pushed. This is not as egregiously bad as some other recent MBOs and take-privates in the space. 
Some of it depends on the nature of the assets. Is it an asset play or a service play. Strangely enough, the service plays seem to get a higher multiple. 

More below the fold. 

Tsukui Holdings (2398) - Another CHEAP Japan Nursing Care Take-Private Deal

Today during trading hours, smallcap textile manufacturer <a href="https://www.smartkarma.com/entities/sakai-ovex-co-ltd" target="_blank" data-smartkarma-citation="entities:20002:1" rel="noopener">Sakai Ovex (3408 JP)</a> announced its Q3 earnings and also announced an MBO by its president, Matsuki-san. 
The stock was briefly suspended then went limit up, closing at ¥2683.
The Tender Offer to take the company private is at ¥2,850/share, an all-time high.
The Number 3 Shareholder Nippon Active Value Fund PLC ("NAVF") has agreed to tender their 389,900 shares counting for 6.30%. In return for this, the NAVF will be allocated "B Shares" (non-voting preference shares, where terms are not yet decided) in the acquirer. The NAVF is a small (£112mm) LSE-listed closed end fund which was launched in February 2020. It is managed by investment adviser Rising Sun Management. 
This is not a fund named "Nippon Active Value Fund" getting out. This is a listed closed end fund agreeing to own a private "B Share" of an unlisted company at an all-time high price. 
If you know who is behind Rising Sun Management, you should take a closer look. 
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While ¥2850/share is an all-time high share price, it is still well short of Book Value Per Share (now just above ¥3,700/share). 
And Book Value is probably well short of Real Value as it includes some investments in affiliates which are earning VERY well - far above the average ROE of the average suffering affiliate. And because they are investments in affiliates, they are not marked to market. And conveniently, they don't seem to show up in the "free cash flow" valuation by the 3rd party valuation agent on this deal. 
That book value also includes fixed assets which have been depreciated down 90%. 
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This company, which management would tell you desperately needs to be restructured, and so needs to be taken private to spare shareholders of the indignity of negative and volatile earnings over the next couple of years, is supposed to earn a net return on EV (less listed securities) of something like 15-20% over the next few years, all while supporting short-term net assets equivalent to half of EV.
The issue here is that the headline figures do not tell you the valuation of the company, and once again, the "financial advisors" to the acquirer never seem to do the right thing in valuing companies which get taken over. Sakai Ovex directors seem happy to recommend a takeover at an all-time high and a 31.7% premium to last, but once again, the issue is that headline figures do not tell you the real value of the company, and once again, the "financial advisors" never seem to get it quite right. 
Why is it that MBOs always seem to be done at below book value?
Oh... those securities worth 3x EBITDA?   Don't mind those...
The fixed assets earning an OPCF Less Capex return of 20+%?   Hmmm.... 
Key for investors in these situations is to understand that IF a bank is going to lend the entire purchase price to the MBO buyers who themselves are well-known value/activist shareholders, the MBO is probably going to be done at the wrong price. 
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There is, as always, lots more below the fold.

Today during trading hours, smallcap textile manufacturer Sakai Ovex (3408 JP) announced its Q3 earnings and also announced an MBO by its president, Matsuki-san. 
The stock was briefly suspended then went limit up, closing at ¥2683.
The Tender Offer to take the company private is at ¥2,850/share, an all-time high.
The Number 3 Shareholder Nippon Active Value Fund PLC ("NAVF") has agreed to tender their 389,900 shares counting for 6.30%. In return for this, the NAVF will be allocated "B Shares" (non-voting preference shares, where terms are not yet decided) in the acquirer. The NAVF is a small (£112mm) LSE-listed closed end fund which was launched in February 2020. It is managed by investment adviser Rising Sun Management. 
This is not a fund named "Nippon Active Value Fund" getting out. This is a listed closed end fund agreeing to own a private "B Share" of an unlisted company at an all-time high price. 
If you know who is behind Rising Sun Management, you should take a closer look. 




While ¥2850/share is an all-time high share price, it is still well short of Book Value Per Share (now just above ¥3,700/share). 
And Book Value is probably well short of Real Value as it includes some investments in affiliates which are earning VERY well - far above the average ROE of the average suffering affiliate. And because they are investments in affiliates, they are not marked to market. And conveniently, they don't seem to show up in the "free cash flow" valuation by the 3rd party valuation agent on this deal. 
That book value also includes fixed assets which have been depreciated down 90%. 

This company, which management would tell you desperately needs to be restructured, and so needs to be taken private to spare shareholders of the indignity of negative and volatile earnings over the next couple of years, is supposed to earn a net return on EV (less listed securities) of something like 15-20% over the next few years, all while supporting short-term net assets equivalent to half of EV.
The issue here is that the headline figures do not tell you the valuation of the company, and once again, the "financial advisors" to the acquirer never seem to do the right thing in valuing companies which get taken over. Sakai Ovex directors seem happy to recommend a takeover at an all-time high and a 31.7% premium to last, but once again, the issue is that headline figures do not tell you the real value of the company, and once again, the "financial advisors" never seem to get it quite right. 
Why is it that MBOs always seem to be done at below book value?
Oh... those securities worth 3x EBITDA?   Don't mind those...
The fixed assets earning an OPCF Less Capex return of 20+%?   Hmmm.... 
Key for investors in these situations is to understand that IF a bank is going to lend the entire purchase price to the MBO buyers who themselves are well-known value/activist shareholders, the MBO is probably going to be done at the wrong price. 

There is, as always, lots more below the fold. 

Sakai Ovex MBO - Wrong Price (And the Bidder Knows It)

Japan

SAKAI OVEX CO., LTD. processes synthetic fabrics, focusing on the dyeing process.  The Company also designs, manufactures, and sells apparel and textile products on Original Equipment Manufacturer(OEM) basis.  Sakai Ovex also plans and produces factory automation system.

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Sakai Ovex (3408 JP)

Sakai Ovex Tender Offer Fails But The Stock Gains an Activist

Sakai Ovex MBO came out at the wrong price and the bump was too small. So now it's a failed tender, but overhang may not be big, and now there's an...

Travis Lundy

Savai Ovex MBO - A Very Weak Bump

The Sakai Ovex (3408) MBO gets a 5% bump. That's a little bump. Not a big bump. It needs a big bump. This is still WAY cheap. The right bump is...

Travis Lundy

Tsukui Holdings (2398) - Another CHEAP Japan Nursing Care Take-Private Deal

Tsukui Hldgs is another cheap-ish nursing care take-private. These cases are where opportunistic PE Funds buy from catalyst-driven sellers. It's...

Travis Lundy

Sakai Ovex MBO - Wrong Price (And the Bidder Knows It)

The Sakai Ovex MBO is effectively sponsored by one of the large, well-known value investors in Japan. It comes at an OK premium but the WRONG...

Travis Lundy

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