Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

On May 10th this year, a fund called Lion Partners which is part of the Star Asia Group announced a proposal to merge <a href="https://www.smartkarma.com/entities/star-asia-investment-corp" target="_blank" data-smartkarma-citation="entities:24040:1" rel="noopener">Star Asia Investment (3468 JP)</a> ("Star Asia" or "SAR") with <a href="https://www.smartkarma.com/entities/sakura-sogo-reit" target="_blank" data-smartkarma-citation="entities:23566:1" rel="noopener">Sakura Sogo REIT (3473 JP)</a> ("SSR") to improve its management and governance. Lion Partners - associated with the sponsors of Star Asia Investment - was at the time, and remains, one of the larger shareholders of the Sakura Sogo REIT at roughly 3.6% of units outstanding. 
The <a href="http://starasiamanagement.com/en/file/190510.pdf" target="_blank" rel="noopener">document</a> notes that SSR had lowered its forecast for the year to Dec 2018 from ¥2700 to ¥2600 because it sold properties resulting in a decline in revenues. The REIT did not distribute those monies to unitholders, and instead tried and failed at a follow-on offering. Due to tenant departures, SSR has now lowered its DPU forecast for fiscal period Dec 2019 to ¥2427, which is a 10% decline from the initial forecast.
Since listing, SSR has executed no follow-on offerings and only one property purchase (against two sales) leaving declining AUM, higher-than average management fees, and the manager has taken property sale fees despite AUM dropping.
Star Asia/Lion Partners proposed a merger with Star Asia Group which is roughly 60% larger, to see a higher and more stable DPU, a pattern of expansion, lower management fees and lower average interest rates on debt, and governance which is aligned between unitholder and manager.
No terms were noted. 
Instead, Star Asia called for an EGM which would take place in July 2019 to change the Executive Director of the REIT and to change the Asset Manager of the REIT to Star Asia. The managers of the two REITs (SSR and SAR) would then conduct negotiations to come up with a win-win situation for the unitholders of both REITs, targeting a merger agreement in Sep 2019, unitholder meetings to approve afterwards, and a merger executed in about Feb 2020. 
One week later, Sakura Sogo REIT <a href="http://sakurasogoreit.com/file/en-news-e4c8bfda1488fa634f8eb865a83e1383a76e8536.pdf" target="_blank" rel="noopener">responded</a> and noted that all this had been done with "no request for discussion, consultation or negotiation for a proposed merger prior to their request for an extraordinary unitholders’ meeting." Based on that, SSR assigned a bad intention to SAR. That assignment of bad intention on the part of SAR continued through the document and SSR denied their request for an EGM.
If that weren't clear, they offered a <a href="http://sakurasogoreit.com/file/en-news-ac7441881b965412c0b3c8972ae1022b1e0b00b6.pdf" target="_blank" rel="noopener">presentation deck</a> to go with it. The first page showed how things were going to go:
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/955/original/Screenshot%202019-07-24%20at%205.55.13%20PM.png?1564015249" class="editor-image img-responsive" data-smartkarma-image-id="93955"></figure>

It continues on for a few pages and does not get any friendlier than that. There is zero pretext in the document issued seven days after the Star Asia proposal for anything other than blasting Star Asia. 
A week after that, SSR issued a <a href="http://sakurasogoreit.com/file/en-news-057fbdb16097ac7bb90def5d4e354cb6c9ffbd49.pdf" target="_blank" rel="noopener">Further Rebuttal</a>. In this Further Rebuttal presentation, SSR explains why the proposal is deemed hostile and abusive. It is in large part because of the "Deemed Approval" system. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/954/original/Screenshot%202019-07-24%20at%206.12.45%20PM.png?1564015221" class="editor-image img-responsive" data-smartkarma-image-id="93954"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/956/original/Screenshot%202019-07-24%20at%206.12.59%20PM.png?1564015261" class="editor-image img-responsive" data-smartkarma-image-id="93956"></figure>

<div class="content-highlight">
SSR suggests that the process of asking for an EGM is abusive to shareholders. Why?
<ul>
<li>By holding an EGM to change a director and manager, and subsequently pursuing negotiations to merge with SAR, there would be no alternative options remaining for Sakura unitholders.</li>
<li>The election of directors and choice of management company would effectively define what merger and merger terms came afterward.</li>
<li>Sakura unitholders would then have an EGM to decide a merger by two-thirds approval and they would have no alternative other than to accept a forced merger irrespective of terms.</li>
</ul>
To top it off, SAR had the audacity to propose this without providing proposed merger terms.
</div>
Sakura Sogo REIT management has a point to make here. 
But it isn't the one they think they are making.
<div class="content-highlight">
The "Deemed Approval" system is one of the abominations of the legal framework of Japan investment corporations including Japan REITs which means that if a proposal is made, any unitholder not voting is deemed to have voted for the proposal. 
Star Asia owns 3.6%. If 50% of unitholders do not vote, then that 50% will have been deemed to have voted for Star Asia's proposal at an EGM and a proposal to install a new director could be made with the resulting 53.6% "For" vote.
</div>
But that leads to another problem. 
In response to this Sakura Sogo decided it would try find an alternative for SSR investors.
Lion Partners had filed a petition for permission to convoke an SSR unitholders’ meeting with the Director-General of the Kanto Local Finance Bureau. The KLFB came back and said SSR needed to set up an EGM by 30 September. 
So on 28 June, SSR announced that fact, complained about how it was unfair, proposed that unitholders take no action with regard to whatever materials they might receive from Lion Partners, and SSR set up a different EGM for August 30th, a month before the deadline for an EGM to be called by Lion Partners.
SSR management did this to avoid SSR unitholders being subject to an "abusive and hostile merger" which would be foisted upon them by SAR by a captive management team, on yet to be determined terms (which is bad), which might be negotiated between two management teams sometime later. 
Sounds dastardly and awful. 
A week later and Sakura Sogo REIT announced that its management team was negotiating with <a href="https://www.smartkarma.com/entities/mirai-corp" target="_blank" data-smartkarma-citation="entities:27741:1" rel="noopener">Mirai Corp (3476 JP)</a> on a possible merger. With no terms yet announced. And noted that the upcoming EGM would ask unitholders to change directors and assign a new manager to the surviving entity if the merger was approved, using the same captive 50% majority that was bad when Lion Partners suggested changing directors and managers. 
Fast forward two more weeks and on 19 July, Sakura Sogo REIT and <a href="https://www.smartkarma.com/entities/mirai-corp" target="_blank" data-smartkarma-citation="entities:27741:1" rel="noopener">Mirai Corp (3476 JP)</a> <a href="http://sakurasogoreit.com/file/en-news-0324d9fd159eb3e38abf2f3ba6f6299b0d068f0b.pdf" target="_blank" rel="noopener">announced</a> a plan to merge, to be decided in the upcoming EGM on August 30th (which had been prepared especially for Sakura to be able to provide a then un-named alternative to Lion Partners' proposal).
And still no merger terms. Those are still in negotiation. But you are not supposed to listen to Lion Partners because their proposal for a merger with as-yet-undetermined-terms is "abusive and hostile." SSR's proposal for a merger with as-yet-undetermined-terms with a different REIT is obviously fair and good so should benefit from the "Deemed Approval" system. 
<div class="content-highlight">
This is a Guess The Ratio trade.
Before discussing merger terms, I will start by saying that this is a governance nightmare.
<ul>
<li>SSR management appears to have met once with the rep from Lion Partners and their proposed director, on 14 May.</li>
<li>They did not discuss terms. And for that it is "abusive and hostile." </li>
<li>SSR put out much documentation explaining the Deemed Approval system and how approving a director and manager based on a proposal was structurally unfair because non-voters were deemed to approve it. Then SSR proposed doing the same.
</li>
<li>SSR railed on SAR for not providing merger terms, but is effectively proposing a merger now, with no terms.
</li>
</ul>
</div>
<h2>Documents</h2>
The documents related to this situation are available at the following websites:
<ul>
<li>Sakura Sogo REIT Press Release Page (<a href="http://sakurasogoreit.com/en/ir/index.html?cate=all&amp;year=2019" target="_blank" rel="noopener">English</a>, <a href="http://sakurasogoreit.com/ja/ir/index.html?cate=all&amp;year=2019" target="_blank" rel="noopener">Japanese</a>)</li>
<li>Mirai Corporation Press Release Page (<a href="http://3476.jp/en/ir/index.html" target="_blank" rel="noopener">English</a>, <a href="http://3476.jp/ja/ir/index.html" target="_blank" rel="noopener">Japanese</a>)</li>
<li>Star Asia Investment (<a href="http://starasia-reit.com/en/ir/index.html" target="_blank" rel="noopener">English</a>, <a href="http://starasia-reit.com/ja/ir/index.html" target="_blank" rel="noopener">Japanese</a>)</li>
</ul>
<hr>
For other insights on Japanese M&amp;A please check the list of Japan-related Event-Driven insights <a href="https://www.smartkarma.com/insights?collection=all-insights&amp;filters=countries%3AJapan%7Cverticals%3A29" target="_blank" rel="noopener">here</a>. As a reference to Japan M&amp;A rules and practices, please see the <a href="https://www.smartkarma.com/insights/quiddity-japan-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:28911" rel="noopener">Quiddity Japan M&amp;A Guide 2019</a>.

On May 10th this year, a fund called Lion Partners which is part of the Star Asia Group announced a proposal to merge Star Asia Investment (3468 JP) ("Star Asia" or "SAR") with Sakura Sogo REIT (3473 JP) ("SSR") to improve its management and governance. Lion Partners - associated with the sponsors of Star Asia Investment - was at the time, and remains, one of the larger shareholders of the Sakura Sogo REIT at roughly 3.6% of units outstanding. 
The document notes that SSR had lowered its forecast for the year to Dec 2018 from ¥2700 to ¥2600 because it sold properties resulting in a decline in revenues. The REIT did not distribute those monies to unitholders, and instead tried and failed at a follow-on offering. Due to tenant departures, SSR has now lowered its DPU forecast for fiscal period Dec 2019 to ¥2427, which is a 10% decline from the initial forecast.
Since listing, SSR has executed no follow-on offerings and only one property purchase (against two sales) leaving declining AUM, higher-than average management fees, and the manager has taken property sale fees despite AUM dropping.
Star Asia/Lion Partners proposed a merger with Star Asia Group which is roughly 60% larger, to see a higher and more stable DPU, a pattern of expansion, lower management fees and lower average interest rates on debt, and governance which is aligned between unitholder and manager.
No terms were noted. 
Instead, Star Asia called for an EGM which would take place in July 2019 to change the Executive Director of the REIT and to change the Asset Manager of the REIT to Star Asia. The managers of the two REITs (SSR and SAR) would then conduct negotiations to come up with a win-win situation for the unitholders of both REITs, targeting a merger agreement in Sep 2019, unitholder meetings to approve afterwards, and a merger executed in about Feb 2020. 
One week later, Sakura Sogo REIT responded and noted that all this had been done with "no request for discussion, consultation or negotiation for a proposed merger prior to their request for an extraordinary unitholders’ meeting." Based on that, SSR assigned a bad intention to SAR. That assignment of bad intention on the part of SAR continued through the document and SSR denied their request for an EGM.
If that weren't clear, they offered a presentation deck to go with it. The first page showed how things were going to go:


It continues on for a few pages and does not get any friendlier than that. There is zero pretext in the document issued seven days after the Star Asia proposal for anything other than blasting Star Asia. 
A week after that, SSR issued a Further Rebuttal. In this Further Rebuttal presentation, SSR explains why the proposal is deemed hostile and abusive. It is in large part because of the "Deemed Approval" system. 




SSR suggests that the process of asking for an EGM is abusive to shareholders. Why?

By holding an EGM to change a director and manager, and subsequently pursuing negotiations to merge with SAR, there would be no alternative options remaining for Sakura unitholders.
The election of directors and choice of management company would effectively define what merger and merger terms came afterward.
Sakura unitholders would then have an EGM to decide a merger by two-thirds approval and they would have no alternative other than to accept a forced merger irrespective of terms.

To top it off, SAR had the audacity to propose this without providing proposed merger terms.

Sakura Sogo REIT management has a point to make here. 
But it isn't the one they think they are making.

The "Deemed Approval" system is one of the abominations of the legal framework of Japan investment corporations including Japan REITs which means that if a proposal is made, any unitholder not voting is deemed to have voted for the proposal. 
Star Asia owns 3.6%. If 50% of unitholders do not vote, then that 50% will have been deemed to have voted for Star Asia's proposal at an EGM and a proposal to install a new director could be made with the resulting 53.6% "For" vote.

But that leads to another problem. 
In response to this Sakura Sogo decided it would try find an alternative for SSR investors.
Lion Partners had filed a petition for permission to convoke an SSR unitholders’ meeting with the Director-General of the Kanto Local Finance Bureau. The KLFB came back and said SSR needed to set up an EGM by 30 September. 
So on 28 June, SSR announced that fact, complained about how it was unfair, proposed that unitholders take no action with regard to whatever materials they might receive from Lion Partners, and SSR set up a different EGM for August 30th, a month before the deadline for an EGM to be called by Lion Partners.
SSR management did this to avoid SSR unitholders being subject to an "abusive and hostile merger" which would be foisted upon them by SAR by a captive management team, on yet to be determined terms (which is bad), which might be negotiated between two management teams sometime later. 
Sounds dastardly and awful. 
A week later and Sakura Sogo REIT announced that its management team was negotiating with Mirai Corp (3476 JP) on a possible merger. With no terms yet announced. And noted that the upcoming EGM would ask unitholders to change directors and assign a new manager to the surviving entity if the merger was approved, using the same captive 50% majority that was bad when Lion Partners suggested changing directors and managers. 
Fast forward two more weeks and on 19 July, Sakura Sogo REIT and Mirai Corp (3476 JP) announced a plan to merge, to be decided in the upcoming EGM on August 30th (which had been prepared especially for Sakura to be able to provide a then un-named alternative to Lion Partners' proposal).
And still no merger terms. Those are still in negotiation. But you are not supposed to listen to Lion Partners because their proposal for a merger with as-yet-undetermined-terms is "abusive and hostile." SSR's proposal for a merger with as-yet-undetermined-terms with a different REIT is obviously fair and good so should benefit from the "Deemed Approval" system. 

This is a Guess The Ratio trade.
Before discussing merger terms, I will start by saying that this is a governance nightmare.

SSR management appears to have met once with the rep from Lion Partners and their proposed director, on 14 May.
They did not discuss terms. And for that it is "abusive and hostile." 
SSR put out much documentation explaining the Deemed Approval system and how approving a director and manager based on a proposal was structurally unfair because non-voters were deemed to approve it. Then SSR proposed doing the same.

SSR railed on SAR for not providing merger terms, but is effectively proposing a merger now, with no terms.



Documents
The documents related to this situation are available at the following websites:

Sakura Sogo REIT Press Release Page (English, Japanese)
Mirai Corporation Press Release Page (English, Japanese)
Star Asia Investment (English, Japanese)


For other insights on Japanese M&amp;A please check the list of Japan-related Event-Driven insights here. As a reference to Japan M&amp;A rules and practices, please see the Quiddity Japan M&amp;A Guide 2019.

Sakura Sogo/Mirai: White Knight Guess The Ratio Isn't Easy Pickings

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Star Asia Investment Corporation is a real estate investment trust(REIT). The Company mainly invests in real estate properties such as business offices, logistics facilities, residential buildings and hotels.

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Sakura Sogo/Mirai: White Knight Guess The Ratio Isn't Easy Pickings

On May 10th this year, a fund called Lion Partners which is part of the Star Asia Group announced a proposal to merge Star Asia Investment (3468...

Travis Lundy