Japan

This should be considered a Big Question in terms of the Power Dynamics of Shareholders vs Management in the last EGM and the upcoming AGM.

It is difficult to know exactly.

It may also be difficult to define.

It is important to note that the Record Date of the recent EGM was 1 February and in the month after that, nearly 10% of shares out will have changed hands from one type of investor to another. 

It is also important to note that Toshiba directors, if they had chosen to know, could have known a few days into April (before the 6 April CVC approach) with some degree of clarity what the shape of the shareholder base looked like as of 31 March. Most of the rest of us have to wait until the yuho is released near end-June. 

This insight takes a look at the Shareholder Structure as of a point in time when we knew it, and compares it to the rest of MSCI Japan and TOPIX. Then we look at what MIGHT HAVE HAPPENED because of recent float ownership changes and whether that changes anything.

Mitsubishi Corp (8058 JP) has had a longstanding interest in Japan’s third largest convenience store chain, Lawson Inc (2651 JP), for quite some time, lifting its stake in Lawson to 50.1% from 33.4% in 2016 via a tender offer at ¥8,650 per share.

With Itochu Corp (8001 JP) acquiring 100% of FamilyMart Co Ltd (8028 JP) mid-way through last year and Seven & I Holdings (3382 JP) standing strong on its own, Lawson has become even more important to Mitsubishi’s food processing and distribution businesses. At 1.35x Topix, Lawson is currently trading at a new historical low level relative to the Topix index and could perhaps lure Mitsubishi into taking full control.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events – or SPACE – in the past week)

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

On April 15, the Nikkei reported that Japan’s Ministry of Economy, Trade and Industry and Organization for Cross-regional Coordination of Transmission Operators have drawn up plans to double the nation’s interregional power grid capacity by linking the northern and southern islands of Hokkaido and Kyushu to the main island of Honshu and expanding connections between other regions. Details are expected to be announced later this month.

This should provide long-term support for Nissin Electric and other makers of electric power equipment. In the meantime, Nissin’s power equipment, ion implant and other businesses are rebounding from the COVID downturn. 

Projected valuations indicate 30% potential upside.

Square Enix is up 13% today as Bloomberg has reported that M&A Reporting company CTFN has said that Square Enix is the subject of M&A interest from a variety of companies, according to two investment banking sources.

Today after the close, Invesco Office J Reit (3298 JP) announced that it was asking Starwood Capital Group for an extension of their Tender Offer (launched a week ago) to 60 days, made an announcement establishing a Special Committee with appointed committee members and related consultations, and posted a Notice Concerning Statement of Opinion (Opinion Reserved) regarding the Tender Offer by Starwood Capital Group.

It’s an interesting response. It includes elements I had not expected but which are worthwhile. And the units are now trading 2.15% through Terms+Dividend.

• NSG’s share price has rebounded to its pre-COVID level but is still 44% below its 2018 high.
• Demand for architectural, automotive and speciality glass is on the rebound. Year-on-year sales and operating profit comparisons have turned or are turning positive.
• As business returns to normal, projected valuations suggest 30% to 50% potential upside.

ZOZO Inc (3092 JP) is accelerating category expansion and last month unveiled a new luxury/designer section alongside its new cosmetics space. Zozo Villa will help Zozo increase sales as well as raise margins through higher average shipment values.

Arteria Networks is a facilities-based provider of fixed telecom services that stands out for having the fourth-largest fiber network in Japan whilst it is also a major provider of ISP services to condominiums. Its main business is the provision of Internet and network services to Enterprise customers and the company is well positioned to grow, especially as a coronavirus-driven demand shift expands the market. We initiate coverage at Buy supported by a ¥2,380 target price for FY21-end implying 48% potential upside.  

We consider Internet Initiative Japan (IIJ) to be a core holding in the Japan telecom space, supported by exposure to faster growth corporate revenue buoyed by a track record of success in bringing new products and services to market. The company has generally operated at the leading edge of service offerings being among the first to offer cloud services and MVNO mobile, followed more recently by network tools like security and IoT solutions. This progression of adding services to sell into a receptive enterprise user base has helped generate consistent top-line growth for over 20 years with margin improvement and free cash flow generation now ramping up. We value IIJ at ¥3,270/share and with 25% potential upside we are initiating coverage at Buy.  

Seijo Ishii is Japan’s largest upscale supermarket chain and is owned by Lawson Inc (2651 JP) (and thus in turn, Mitsubishi Corp (8058 JP)). Last year, as people stayed at home and looked for higher quality foods  to replace dining out, the chain outperformed. Selling fresh food and its own range of exclusive deli and many imported brands, it is an excellent partner for overseas firms.

Seijo now has one of the highest margins of any supermarket in Japan.

After market-close on 14th April, Logistics J-REIT Lasalle Logiport REIT (3466 JP) launched a follow-on equity offering to fund part of their recent property acquisition. 

The primary offer quantity is 140,000 units out of which 73,850 units are expected to be allocated to the domestic market and 66,150 units are expected to be allocated to foreign buyers. There is also an over-allotment quantity of 7,000 units. The total size of this offering could be around ¥25bn (~US$230mn). 

That famous phrase is not internally contradictory. It announces the death of the late monarch, and announces the ascension of the new monarch to replace him. 

A flurry of articles late last night Japan time – some of them referenced in a few discussion points posted to the most recent insight Gaming Out a CVC Bid for Toshiba – The Right Noises, The Wrong Price, and Toast and others said that Kurumatani-san was going to be dismissed, or resign, at an extraordinary board meeting to be held on the 14th of April. 

The various articles were more or less revealing depending on how much the masthead represents Japan as Japan Inc would have itself represented. Articles from institutions with a more neutral/critical eye were more forthcoming about the turmoil under the surface. 

The phrases from the former were on the order of “it became inevitable that Kurumatani-san would have to resign.” The FT suggested one board member would put forth a motion to dismiss him after the CVC approach last week threw senior management into “civil war.”

Later versions suggested Kurumatani-san would himself resign at the beginning of a meeting, which would forestall an effort to boot him (The King is Dead). Toshiba’s exchange release this morning in response to press coverage all but confirms it.

If Kurumatani-san is going to fall on his sword because of the CVC conflict (and the idea that by getting CVC to bid to distract from the other things going on, he was somehow entrenching himself in ways not befitting Toshiba adherence to the spirit of the Corporate Governance Code), one would expect Fujimori-san may resign as well. 

All the stories suggest the current Chairman and former CEO Tsunakawa-san would take the reins (Long Live the King!) but despite Tsunakawa-san being on friendlier terms with some of the activists, the Board needs to find someone else. I expect there would be shareholder pressure to have that person come from without, but Toshiba is a sensitive asset and there could be considerable pressure to have that person come from within, or if from without, from within the Keidanren. I think investors need to prepare themselves for the possibility that the replacement for Tsunakawa-san may not be the CEO Toshiba needs either, but that may be jumping the gun.

The result is not dissimilar to what Mio Kato and I had suggested was inevitable, but the speed of the unwind may catch people by surprise. I expect that the news reports of the internal survey conducted by the Nomination Committee which showed a majority of senior executives distrusted Kurumatani-san will be viewed as the tipping point…

But investors should note that the results of that survey were known in March, conveyed to Kurumatani-san at end-March, and the Board knew it at end-March – before the CVC bid. The results of that survey were not enough to ask for his head at the time unless the CVC bid was well-and-truly concocted by CVC and Kurumatani-san himself as a way to maintain power. If that is the case, CVC needs to get out in front of it, by being very public in refuting that, and continuing with a bid, even if they bid to lose. 

This whole situation, as I suggested last week, is getting interestinger. 

And we have toast. Officially, before I even finished this piece, Toshiba is out with a press release saying Kurumatani-san is out and Tsunakawa-san is in. It’s pretty spare, but there is a news conference after the close.

NOW we look at what comes next. With KKR and Brookfield potential bids, and more details about CVC intentions overnight, it’s worth looking at structure. So there’s more below the fold.

The fact is that Toshiba is now in play for privatisation with the CEO out and one of the more prominent activists citing their position and desired starting valuation. However, this is likely to be far from a linear trajectory to its end chapter. It will likely remain a fast-moving situation – as we write this note, the landscape has evolved almost on an hourly basis – and we do not expect it to slow in the next few weeks. As we stand at the time of publishing, there are several summary points to consider, particularly as we leave the Introduction phase of this story and proceed to embark on Chapter One of our fourth theme in 2021’s activist landscape. 

Tess Holdings offers an interesting play on the developing solar and renewables theme in Japan which has done very well over the last twelve months. Prospects appear positive and the stock looks reasonable on a PE basis, so the question is how to interpret the high levels of leverage.

As of last week, the Nikkei Newspaper reported The US$20 billion buyout offer for Toshiba by U.K. investment firm CVC Capital Partners. This confirmed our view that we shall see an increasing number of Private Equity Managers start to use its dry powder in more significant ways to create and lobby for corporate change, thereby assuming their activism role. We discuss valuation, the key items which must occur for traditional activists to accept this transaction as well as the chances of a competing bid amongst other items. We specifically examine why management is going to have to declare their position and interests, in the coming days to ensure a clear and efficient. Failure to do so is likely to see them out of office ahead of this transaction even having the chance to be successful.

The news flow cycle for Toshiba kicked up again overnight as Travis has pointed out. As Travis and I have suggested would happen, Kurumatani is out and other PE funds have started to circle. The initial reaction here should be positive given that it has been reported that KKR is contemplating a higher bid, however, the long-term outlook becomes a little more complex.

Tess Holdings offers relatively pure play leverage into Japan’s developing cogeneration and especially solar energy markets at a time when there is increasing news flow in the area. With a business model covering the full chain from land procurement, regulatory approvals, construction, operation and maintenance and asset management, the company offers a one-stop-shop in the area. There are thus many positives, though the debt levels are a slight concern.

The war between Softbank Corp (9434 JP)/Z Holdings (4689 JP) and Rakuten for leadership in digital ecosystems has seen Z Holdings acquire new partners and subsidiaries, and take leadership in cashless payments and then messaging through its merger with LINE Corp (3938 JP).

Now Rakuten Inc (4755 JP) is fighting back with a truly game changing deal with Japan Post Holdings (6178 JP) that could provide the reach and finance to develop new synergies in e-commerce, logistics, cashless payments and points, banking, insurance and mobile.

This is a major reset in the rivalry in digital commerce, making Rakuten almost like a state-backed enterprise – with all the benefits that implies. Z Holdings should be worried.

Things are heating up.

Some might say after today that Kurumatani-san is on the hot seat feeling considerably toasty.

Over the weekend, there were more noises as the Nikkei reported that Toshiba would “take the CVC bid seriously”, had set up an internal review committee to be chaired by a Vice President, and that the approvals would be expected by early summer, a Tender Offer would start in July, and if successful, Toshiba would be delisted in October. 

This morning there is a report that the large increase in position by Singapore-based (and as the Nikkei describes them “noisy shareholder” 3D Investment Partners reported in the previous insight was in fact 3D purchasing the stake from Harvard Investment Management. This is important because 3D voted against Kurumatani-san last year as director and later asked the firm to investigate vote-counting irregularities. Harvard,  with 4.7%, abstained, reportedly after former GPIF CIO Hiromichi Mizuno – champion of governance and stewardship while at GPIF and then-special advisor to METI – communicated with Harvard and voiced the possibility that if they voted against Kurumatani-san there could be a probe based on the idea that if shareholders coordinate to vote without declaring joint ownership, there can be issues (Reuters report, FT article).

Now there appears to be no issue of a Harvard abstention and clear increase in voting power for shares held by those who would challenge management (with or without Kurumatani-san) on capital and management policy, but to be clear, votes FOR are measured as a percentage of votes PLUS active abstentions. If Harvard actively abstained (rather than passively not voting), then this won’t change the support ratio (it would just change the optics). IF the 21.4mm share position moved from passive abstention to active opposition, it would have lowered the votes FOR from 57.98% to 54.46%, but Kurumatani-san would have squeaked through still. 

The entire situation is great fun. The situation of Toshiba governance has become something of a governance nightmare and with national security issues at stake for a minority of the business, a potential bureaucratic quagmire. But the company is doing decently well, and is long a desirable asset, and there are LOTS of shareholders who are heavily vested in seeing this through. And it appears with the March EGM result that they have a majority. 

Sitting in the audience, it makes me want to have a squirt gun, rubber gloves, rice, newspaper, and toast. Gotta have toast. 

This is the follow-up report on the financials and valuation aspects of Stella Pharma, after our previous report on its business model ad technology. Given the early stage of the business, firm conclusions are difficult here, but assessing potential prospects against the market sizes for cancer treatment, the niches the company is targeting and its particular technology, on balance we feel positioning is attractive.

Fast Retailing (9983 JP) delivered 2QFY21 results on 9^th April 2021 with revenue and operating profit falling behind consensus estimates by ¥21.5bn (4%) and ¥6.7bn (11%) respectively. However, the company raised its FY21 consolidated revenue and operating income guidance by ¥10.0bn each to ¥2,210bn and ¥255.0bn respectively.

Even following a 20% decline in the share price in the last couple of months, Fast Retailing’s valuation remains extremely expensive. Thus, we would not rush to buy this dip.

Yaskawa kicked off earnings season for the FA segment on Friday posting revenue of ¥390bn, above consensus of ¥388bn and guidance of ¥381bn. However, OP was just ¥27.2bn, marginally below guidance and significantly below consensus of ¥28.7bn. Yaskawa’s weak margins make us bullish on future margins.

Hitachi Ltd.’s restructuring continues with the acquisition of Kyoto Robotics and the planned sale of Hitachi Metals. We regard both developments as positive. 

• On April 8, the Nikkei reported that Hitachi Ltd. had given preferential negotiating rights for the sale of its 53.6% stake in Hitachi Metals metals to a consortium led by Bain Capital. The price was estimated at ¥800 billion (¥7.3 billion) or more, which could pay for most of Hitachi Ltd.’s recently announced purchase of GlobalLogic for $9.6 billion.

• Also on April 8, Hitachi Ltd. announced that it had purchased 96% of Kyoto Robotics, a designer and producer of three-dimensional machine vision and AI control systems for handling robots. This gives Hitachi advanced robotics technology and expertise, enhancing its ability to provide integrated systems for logistics and factory automation.

The removal of Hitachi Metals (5486 JP) from Hitachi Ltd.’s consolidated accounts would reduce total revenues by 9% compared with FY Mar-21 guidance but have a small but positive short-term impact on operating profit.

Toshiba was down 5.4% today after its board chair downplayed the possibility of any quick decision on CVC’s preliminary, non-binding offer. It is now down 11.2% from the ¥4,805 high yesterday and is 14.7% below the indicative bid price of ¥5,000 suggesting limited confidence in a bid actually going through. This is not necessarily wrong, but there is much to consider here and some of Toshiba’s moves here are interesting.

When Starwood Capital Group the other day announced its plans for a Tender Offer on Invesco Office J Reit (3298 JP) it did so saying it would pay ¥20,000/share. 

It was a surprise to Invesco Office J-REIT, apparently, and there was no other information provided in the announcement other than Starwood said that it was a good opportunity for existing investors to get out and for private ownership to improve the assets. The website Starwood was setting up to describe it was not yet functional. 

Yesterday, Starwood launched the Tender Offer itself. The details are somewhat…

👀 

By law, Invesco J-REIT has 10 days to respond with their opinion. There may be machinations in the background which could come out with a better result. But this situation is unprecedented, and the behavioural response of the current investor base is at best, untested. 

Visional Inc (4194 JP) is looking to raise up to US$609m in its Japan IPO.

Visional Inc. is a human resources (HR) technology company based in Japan. The company operates BizReach, an online recruiting platform that helps to connect professional job seekers to direct employers and third-party recruiters. It also offers HRMOS, which is a cloud-based human capital management (HCM) platform.

In this note, we share our thoughts on assumptions, valuation, and deal dynamics.

Visional’s financials are a little difficult to unentangle as it combines Bizreach, which looks to be very profitable, with a number of growing and loss-making businesses, we believe that close scrutiny should reveal the excellent value on offer here.