WHAT CURRENCY RISK? – It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short ‘blip’ to ¥102.36 on 9th March.
Source • Japan Analytics
¥ BELOW 100 – If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen ‘peaks’ we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.
Source • Japan Analytics
KEY DRIVER – Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results & Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.
• CORRELATION ANALYSIS •
Source • Japan Analytics
CORRELATIONS – Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of Nippon Express (9062 JP), while Nikon (7731 JP) is negatively correlated.
• THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •
Source • Japan Analytics
FCTA – The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model. The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company’s global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders’ Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.
Source • Japan Analytics
CITC & NET INCOME – Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently ‘recycled’ as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders’ Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders’ Equity for non-financial Japanese companies. In the last two reported quarters, the ‘gap’ between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.
Source • Japan Analytics
FCTA BY SECTOR – Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors – Autos, Wholesale, Electrical Equipment, Technology Hardware, Machinery, Other Consumer Products and Telecommunications (Softbank Group). The least-exposed Sectors are Services, IT & Internet, Multi-Industry and Restaurants.
In the DETAIL section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where Eisai Co Ltd (4523 JP) and Dic Corp (4631 JP) have the most significant amounts of positive and negative Accumulated FCTA’s relative to Equity, respectively.
Source • Japan Analytics
This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income ‘gaps’.
Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.
Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.
RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.
Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).
SMALL CHANGE – With over half of the companies with February, May, August and November year-ends having reported, the gap between the performance of larger and smaller capitalisation companies is widening again – as was the case prior to the March COVID ‘crash’. The former are benefiting from a relatively more robust earnings momentum and the willingness of shareholders to look through to 2022. For the latter, their mostly-retail investor base is focused more on the prolongation of current operating losses despite, in many cases, ample Net Financial Assets. 42% of companies reporting on Friday had net losses for the last three months on an average decline in revenues of 14%. For the next reporting ‘cohort’ with one less ‘normal’ month, these statistics will be worse.
A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?
Is this just a double bubble, and does that imply double trouble ahead?
We are not sure. We are torn between Bob Farrell’s Rule No. 4:
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
And Rule No. 7.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.
Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.
* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;
* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,
*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.
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Japanese consumer goods company Meiji Holdings (2269 JP) issued a press release on Friday (12th June 2020) stating that the company is considering a stock split to boost liquidity and capital injection by investors.
The company previously conducted a two for one stock split on 1st October 2015. The share price rallied as much as 17.9% in the two days following Meiji’s announcement of its 2015 stock split.
We believe Meiji had genuine reasons for its previous stock split, whereas the explanation for the current considering stock split is not convincing. We explain our reasons below.
Japan’s major apparel firms are in trouble as Onward Holding (8016 JP)’s decision to slash 50% of its stores and Sanyo Shokai (8011 JP)’s fight with activist shareholders both demonstrate.
For nearly 30 years, Renown (3606 JP) was the worst of the bunch but it has at last been forced to file for bankruptcy protection, with wider implications for the apparel and department store sectors. Other apparel firms like Sanyo Shokai also look to be in trouble.
In the end, the crisis in the big apparel firms is also a crisis for department store apparel floors. Given that 30% of department store sales come from apparel and, other than cosmetics and jewellery, what profit there is in department stores also comes from clothing, this remains a serious problem. When Onward, Renown, Sanyo Shokai and others close down so many brands in so many department stores, the buildings themselves lose even more lustre, making it harder to find new tenants or wholesale suppliers. More closures and mergers may be on the cards (for details see below).
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Japan’s major apparel firms are in trouble as Onward Holding (8016 JP)’s decision to slash 50% of its stores and Sanyo Shokai (8011 JP)’s fight with activist shareholders both demonstrate.
For nearly 30 years, Renown (3606 JP) was the worst of the bunch but it has at last been forced to file for bankruptcy protection, with wider implications for the apparel and department store sectors. Other apparel firms like Sanyo Shokai also look to be in trouble.
In the end, the crisis in the big apparel firms is also a crisis for department store apparel floors. Given that 30% of department store sales come from apparel and, other than cosmetics and jewellery, what profit there is in department stores also comes from clothing, this remains a serious problem. When Onward, Renown, Sanyo Shokai and others close down so many brands in so many department stores, the buildings themselves lose even more lustre, making it harder to find new tenants or wholesale suppliers. More closures and mergers may be on the cards (for details see below).
You are currently reading Executive Summaries of Smartkarma Insights.
Want to read on? Explore our tailored Smartkarma Solutions.
Japan’s major apparel firms are in trouble as Onward Holding (8016 JP)’s decision to slash 50% of its stores and Sanyo Shokai (8011 JP)’s fight with activist shareholders both demonstrate.
For nearly 30 years, Renown (3606 JP) was the worst of the bunch but it has at last been forced to file for bankruptcy protection, with wider implications for the apparel and department store sectors. Other apparel firms like Sanyo Shokai also look to be in trouble.
In the end, the crisis in the big apparel firms is also a crisis for department store apparel floors. Given that 30% of department store sales come from apparel and, other than cosmetics and jewellery, what profit there is in department stores also comes from clothing, this remains a serious problem. When Onward, Renown, Sanyo Shokai and others close down so many brands in so many department stores, the buildings themselves lose even more lustre, making it harder to find new tenants or wholesale suppliers. More closures and mergers may be on the cards (for details see below).
The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.
Short Interest in Korea decreased led by Information Technology and Health Care.
Shorts in Taiwan were covered in almost all industry groups led by Technology Hardware, Semiconductors and Consumer Durables.
Short Interest decreased in all four markets covered as markets continued to run up. This has likely left investors underhedged in the market drop and we could see increased short activity over the next week.
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Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.
Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.
RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.
Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).
SMALL CHANGE – With over half of the companies with February, May, August and November year-ends having reported, the gap between the performance of larger and smaller capitalisation companies is widening again – as was the case prior to the March COVID ‘crash’. The former are benefiting from a relatively more robust earnings momentum and the willingness of shareholders to look through to 2022. For the latter, their mostly-retail investor base is focused more on the prolongation of current operating losses despite, in many cases, ample Net Financial Assets. 42% of companies reporting on Friday had net losses for the last three months on an average decline in revenues of 14%. For the next reporting ‘cohort’ with one less ‘normal’ month, these statistics will be worse.
A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?
Is this just a double bubble, and does that imply double trouble ahead?
We are not sure. We are torn between Bob Farrell’s Rule No. 4:
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
And Rule No. 7.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.
Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.
* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;
* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,
*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.
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.
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.
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SMALL CHANGE – With over half of the companies with February, May, August and November year-ends having reported, the gap between the performance of larger and smaller capitalisation companies is widening again – as was the case prior to the March COVID ‘crash’. The former are benefiting from a relatively more robust earnings momentum and the willingness of shareholders to look through to 2022. For the latter, their mostly-retail investor base is focused more on the prolongation of current operating losses despite, in many cases, ample Net Financial Assets. 42% of companies reporting on Friday had net losses for the last three months on an average decline in revenues of 14%. For the next reporting ‘cohort’ with one less ‘normal’ month, these statistics will be worse.
A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?
Is this just a double bubble, and does that imply double trouble ahead?
We are not sure. We are torn between Bob Farrell’s Rule No. 4:
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
And Rule No. 7.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.
Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.
* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;
* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,
*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.
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.
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.
I have not once in my 20+ year career in Japanese equities looking at takeover documentation seen a tender offer announcement which has been amended so many times.
This one injects text into the document not there when announced which brings new meaning to the minimum tender threshold of 9.9%.
In many places in the Announcement document, the Target Company and Special Committee use words “not considered to be disadvantageous to the minority shareholders.”
The results of their negotiations, and the admissions and statements of the Committee, the Target Board, and Itochu itself, all belie this understanding.
Investors should spend some time considering this.
It is important. And it is the reason why investors have the role they do.
The Amendments and the Special Committee’s View of Disadvantage of Minority Holders
The METI Fair M&A Guidelines published in June 2019 were researched and debated by experts over years to find solutions to issues and weaknesses seen where the existing Takeover law in the Financial Instruments & Exchange Act (as amended), and the Stewardship Code, and The Corporate Governance Code (as amended) did not address the fact that minority shareholders of companies where incumbent owners (parent companies, founding families, etc) who might seek to buy out minorities held a significant informational and structural advantage and abused it. Despite clear demonstrations intent to be fair to minority shareholders in the “TOB Rules” in the FIEA, strong encouragement in the Stewardship Code for investors to make their concerns known, seemingly strong shareholder rights enshrined in the Companies Act, and clear guidance in the Corporate Governance Code, and its subsequent revisions, it was clearly felt at all levels that minority investors are, in such parent company and MBO circumstances, structurally disadvantaged.
On the other hand, it has been observed that in acquisitions of a controlled company by the controlling shareholder, since the controlling shareholder, as the acquiring party, already holds a higher percentage of voting rights before the relevant M&A, the risk that the controlling shareholder will unilaterally determine transaction terms that are advantageous to itself and the interests of general shareholders of a controlled company will be harmed is higher than with MBOs. Therefore, it is necessary to evaluate these transactions more closely than MBOs.
The Guidelines are not legally binding, but they are explicit, and Japan’s lawyers are aware of them, and as shown by the document, the board of FamilyMart and the Special Committee of FamilyMart’s board were also aware of the contents. The document also shows that Itochu was well aware of its contents.
This particular M&A situation sits squarely in the realm of those which were supposed to be addressed by the Guidelines, which, among other measures, include the suggestions that Special Committees of Target Boards…
get a Fairness Opinion (not sought here),
perform a Market Check (not performed here), and
understand that a fair price is one in which general shareholders to be squeezed out enjoy “an appropriate portion” of the benefit of future synergies (p12-13)
ask the Buyer to set a minimum threshold of purchasing a Majority of the Minority (requested in this case by the Target Board but ignored by the Buyer).
The third point and fourth points are key here.
In its response to Itochu’s offer of 26 June which had no minimum, FamilyMart asked Itochu to set a majority of minority as a minimum tender success threshold. It is good that FM requested. However, Itochu did not respond favourably, and renewed its offer document offering instead to set the minimum threshold at 9.9% which would get the buyer to 60.0%.
That implied not a majority of minority but a threshold of 19.8% of minority shares. FamilyMart responded with another demand.
The Target Company, upon receipt of such offer, on June 30, 2020, requested further that, as the Target Company cannot be reasonably certain whether the proposed lower limit reflects the purpose of setting the “majority of minority” threshold (which is to satisfy the majority of shareholders that do not share material interest with the acquirer regarding the terms and conditions of the transaction), the lower limit of the Tender Offer should be set at a number that exceeds two-thirds, which includes the Ownership Ratio of ITOCHU Group.
That two-thirds level is the standard minimum threshold for Tender Offers in Japan aiming at taking a company private. And the Target Board demanded it because it could not be sure that the proposed level of setting the level of <20% of the minority fit the purpose of getting a majority of minority.
And Itochu refused.
So… while believing “Specifically, the Target Company believes that the effects of the COVID-19 infection will be temporary, while ITOCHU and the Tender Offeror believe that the effects will have medium or long term impacts…” and while apparently (or at least they tell you it was) negotiating in good faith for minority shareholders, the Special Committee and Target Board…
asked for, but obtained no minimum threshold of Majority of Minority, or even of two-thirds.
performed no Market Check to see if the price was reasonable.
did not obtain a Fairness Opinion.
noted that the premium offered is inadequate based on historical precedent (and was only a 7.3% premium to the three-week high when proposed)
And noted the “Tender Offer price is below the lower limit of the range of fair value of ¥2,472-3,040 proposed by the Stock Valuation Report obtained from PwC which is the third-party evaluation organisation of the special committee).”
should have understood (because they wrote it in the document) that the same fair value range – of which the Itochu Offer Price does not meet the lower end – DOES NOT INCLUDE ANY ASSUMPTION OF FUTURE SYNERGIES.
Furthermore, FamilyMart “informed ITOCHU and the Tender Offeror that it would be difficult for the Target Company, without a demand or request from other parties, to convene a Special Shareholders’ Meeting whose agenda items included conducting a Share Consolidation of the Target Company Shares and, subject to the effectuation of the Share Consolidation, amending the articles of incorporation to abolish provisions on share unit numbers, or implementing other squeeze-out procedures because it cannot reasonably explain to its shareholders the conditions and reasons for the squeeze-out with the tender offer price (2,300 yen) and the lower limit of shares to be purchased (50,114,060 shares).”
Decoded, this means that on 30 June, FamilyMart told Itochu that they didn’t want to promise to convene an EGM to allow the squeezeout of minorities unless Itochu got to the two-thirds level. And Itochu proposed that FamilyMart convene the EGM at Itochu’s request anyway.
So, with all of this neglect and rejection of what constitutes measures to make a Tender Offer for minorities fair, and taking away the Board’s ability to independently defend minority shareholder’s interests from getting squeezed out at a price that the Target Board does not deem adequate, being a Proposed Tender Offer Price at…. [checks notes]… a four-…. no wait… [checks notes again]… yes… four-month high – itself an 11.5% downgrade of the first Tender Offer Price offered just four days prior to that four-month high – an outside observer would suggest that the proposed bid was one which did not pass muster.
So… eight days after asking for a higher price, and a minimum threshold, and telling the buyer they could not support an EGM because they could not explain the price, a deal is announced where the document says…
Thereafter, on July 8, 2020, the Target Company received a report from the special committee stating that:
it is reasonable for the Target Company’s board of directors to declare an opinion supporting the Tender Offer and to declare an opinion leaving the decision up to the Target Company shareholders as to whether they tender their shares in the Tender Offer; and
(a) it is not considered to be disadvantageous to the Target Company’s general minority shareholders that the Target Company’s board of directors supports the Tender Offer and will leave the decision up to the Target Company shareholders as to whether they tender their shares in the Tender Offer; and (b) it is not considered to be disadvantageous to the Target Company’s minority shareholders for the Target Company’s board of directors to make a decision on taking the Company private through the Share Consolidation after the successful completion of the Tender Offer on the assumption that will be conducted using the method expected in the Transactions.
Read ii(b) carefully.
The Special Committee in its negotiations with Itochu CLEARLY thought at least some of the protections guided in the METI M&A Fair Guidelines were appropriate for minority investors, and clearly thought the final Itochu terms were disadvantageous to minority shareholders in price, and lack of majority of minority or even two-thirds threshold, and clearly said it did not want to convene an EGM if Itochu did not get to two-thirds.
Itochu asked the Committee and the Target Board to support the deal anyway, and they did, and the final comment the Special Committee has is that despite all these terms they seem to have thought disadvantageous to minority investors, the Tender offer “is not considered to be disadvantageous to the Target Company’s minority shareholders” for the Target Board to squeeze out dissenting minorities.
Then we get the Amended announcement which adds the following text…
Further, considering the fact that a minimum number of shares to be purchased has been added to the Tender Offer so that the shareholding ratio of the Tender Offeror and ITOCHU after the Tender Offer will be 60%, and although it is possible the Target Company will not be taken private even if the Tender Offer is successfully completed, the ratio of voting rights at the shareholders meetings of the Target Company in the fiscal year ended February 2019 and the fiscal year ended February 2020, after ITOCHU became the parent company of the Target Company, was 91.85% and 93.67% respectively, so even if the ownership ratio is 60%, ITOCHU holds effectively nearly two- thirds of voting rights of the shareholders in attendance, and the shareholders that have not tendered their shares in the Tender Offer may exercise their voting rights to approve the agenda item (for example, ITOCHU expects that ETFs listed on the TSE and passive index funds other than ETFs listed on the TSE might approve the agenda items of the shareholders meeting for the Share Consolidation even if they do not tender their shares in the Tender Offer), so the Target Company believes that it is unlikely that the Share Consolidation will not be approved and the Target Company will not be taken private. Further, even if the Share Consolidation is not approved and the Target Company is not taken private, ITOCHU and the Target Company will implement the measures aiming at improving the corporate value of the Target Company between the Target Company and ITOCHU, which will continue to be its parent company, as far as they can as independent listed companies.
[my bold]
My first reaction was…
The Special Committee said it “cannot be reasonably certain whether the proposed lower limit reflects the purpose of setting the “majority of minority” threshold” so demanded (with a normative phrase) Itochu raise the minimum to two-thirds, which would be the Japan standard (but still among the weakest thresholds globally).
The new document comes out and tells you they think they can force through a squeezeout by getting only 19.8% of minorities because not everyone votes and in any case, even if they couldn’t quite do so, they’d probably get it because the assumption is that the passive funds will vote for it.
They said the price was not adequate, and it was less than the lower end of the range of their advisors’ fair value estimate, and it did not include any effect of synergies on top of that, was the benefit of no market check or fairness opinion.
And here they say (in bold above) that even if the company is not taken over, Itochu and the Target Company will implement the measures to improve corporate value.
That tells you they do not need to do the transaction to implement the intended restructuring and investments.
Presumably, because the board is controlled by Itochu, and the Board agrees with the business alignment between Itochu and FamilyMart, the board would approve the various changes in personnel and responsibilities so as to enhance cooperation between the two companies.
Itochu could second personnel, or cause to be hired such personnel as required.
And If Itochu needs to invest monies, presumably because the Itochu-controlled board caused FamilyMart to purchase what is now ¥150bn of shares of Pan-Pacific International, Itochu could buy one-third of that from FamilyMart causing a cash injection of ¥50bn into FamilyMart – sufficient to enable FamilyMart to execute the investments required (as described in the document).
My Takeaways
The Special Committee should have paid more attention to the METI M&A Fair Guidelines and made more of their responsibility to make sure.
Asking for minority projections and not getting them does not mean that the Special Committee and Target Board have fulfilled their responsibilities.
Target Boards have a governance responsibility, and Special Committees have a specific directorial responsibility, to protect minority shareholders.
If the would-be acquirer does not want to pay an appropriate price, the Special Committee and Board can reject the bid. Just because the relationship exists does not mean it is the right price. Existing shareholders DO NOT CARE about the “medium-long-term corporate value” of FamilyMart after they are be kicked out. In fact, if it is done at the wrong price, it is an an immediate and permanent impairment to portfolio value for minority shareholders.
If a totally independent buyer – say Aeon, with a similar ability to integrate appropriate logistics and scale in digital capabilities – had offered ¥2300/share, would it have been “supported” and “not disadvantageous”? If not, then the Special Committee should have rejected this deal outright.
Investors should now pay attention to the over-arching problem. Do you want to be kicked out of your investment at ¥2300? If you are happy to sell at that price because it is more than fair value over the next few years, then you should have been out already.
Understand that Itochu and FamilyMart will advance the cause of restructuring and advancement even if the two companies remain listed separately.
In the meantime, make sure you know your rights. Read also about the JCOM decision on appraisal rights.
And understand your obligations under the Stewardship Codes of your jurisdiction and/or Japan. It is OK and even appropriate to say publicly – both to the Board and to other investors – that you have issues with what has happened if indeed you do.
Major passive investors who need to understand that without a vote, they still have stewardship responsibilities. If those responsibilities dictate that the price is inadequate but that the construct of the transaction means it is likely that the minority will lose their rights and their value, it is the responsibility of the Good Steward to engage. With the Company, with the Acquirer, and with Regulators and Authorities.
Regulators, lawyers, and courts need to figure out whether the fact that Boards do this with alarming regularity while paying lip service to minority shareholder rights is appropriate. And investors and lawyers need to figure out how to deal with the fact that the Supreme Court has made an irredeemable mistake in its JCOM decision precedent.
The final recourse of shareholders according to the Companies Act is their appraisal rights. That fundamental right was not erased from the Companies Act with the JCOM decision.
Directors of a target company, ignoring the numbers of their advisors which themselves are based on numbers provided by the captive company, admitting a price is inadequate, and further including no premium as provided for in the METI Fair M&A Guidelines and the fair price to be paid (see footnotes on p13 which also refer to Article 785 Paragraph 1 of the Companies Act) do not constitute the final or even appropriate word on “fairness” of price.
Perhaps an amendment to the Companies Act requiring an appraisal if so requested would be appropriate.
Perhaps an amendment to the legal level at which a squeezeout is possible should be made.
Perhaps a precedent should be set asking for a shareholder resolution to allow directors to approve a squeezeout – one which requires a majority of minority, or even a super-majority of minority – like exists in other jurisdictions. That shareholder resolution could be a condition precedent for proceeding with a Tender Offer. I believe there is no reason why a Board of Directors could not call for one now in order to ensure shareholder support – even passive investor support – for a cash takeover where they would not necessarily participate.
The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.
Short Interest in Korea decreased led by Information Technology and Health Care.
Shorts in Taiwan were covered in almost all industry groups led by Technology Hardware, Semiconductors and Consumer Durables.
Short Interest decreased in all four markets covered as markets continued to run up. This has likely left investors underhedged in the market drop and we could see increased short activity over the next week.
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A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?
Is this just a double bubble, and does that imply double trouble ahead?
We are not sure. We are torn between Bob Farrell’s Rule No. 4:
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
And Rule No. 7.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.
Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.
* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;
* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,
*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.
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.
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.
I have not once in my 20+ year career in Japanese equities looking at takeover documentation seen a tender offer announcement which has been amended so many times.
This one injects text into the document not there when announced which brings new meaning to the minimum tender threshold of 9.9%.
In many places in the Announcement document, the Target Company and Special Committee use words “not considered to be disadvantageous to the minority shareholders.”
The results of their negotiations, and the admissions and statements of the Committee, the Target Board, and Itochu itself, all belie this understanding.
Investors should spend some time considering this.
It is important. And it is the reason why investors have the role they do.
The Amendments and the Special Committee’s View of Disadvantage of Minority Holders
The METI Fair M&A Guidelines published in June 2019 were researched and debated by experts over years to find solutions to issues and weaknesses seen where the existing Takeover law in the Financial Instruments & Exchange Act (as amended), and the Stewardship Code, and The Corporate Governance Code (as amended) did not address the fact that minority shareholders of companies where incumbent owners (parent companies, founding families, etc) who might seek to buy out minorities held a significant informational and structural advantage and abused it. Despite clear demonstrations intent to be fair to minority shareholders in the “TOB Rules” in the FIEA, strong encouragement in the Stewardship Code for investors to make their concerns known, seemingly strong shareholder rights enshrined in the Companies Act, and clear guidance in the Corporate Governance Code, and its subsequent revisions, it was clearly felt at all levels that minority investors are, in such parent company and MBO circumstances, structurally disadvantaged.
On the other hand, it has been observed that in acquisitions of a controlled company by the controlling shareholder, since the controlling shareholder, as the acquiring party, already holds a higher percentage of voting rights before the relevant M&A, the risk that the controlling shareholder will unilaterally determine transaction terms that are advantageous to itself and the interests of general shareholders of a controlled company will be harmed is higher than with MBOs. Therefore, it is necessary to evaluate these transactions more closely than MBOs.
The Guidelines are not legally binding, but they are explicit, and Japan’s lawyers are aware of them, and as shown by the document, the board of FamilyMart and the Special Committee of FamilyMart’s board were also aware of the contents. The document also shows that Itochu was well aware of its contents.
This particular M&A situation sits squarely in the realm of those which were supposed to be addressed by the Guidelines, which, among other measures, include the suggestions that Special Committees of Target Boards…
get a Fairness Opinion (not sought here),
perform a Market Check (not performed here), and
understand that a fair price is one in which general shareholders to be squeezed out enjoy “an appropriate portion” of the benefit of future synergies (p12-13)
ask the Buyer to set a minimum threshold of purchasing a Majority of the Minority (requested in this case by the Target Board but ignored by the Buyer).
The third point and fourth points are key here.
In its response to Itochu’s offer of 26 June which had no minimum, FamilyMart asked Itochu to set a majority of minority as a minimum tender success threshold. It is good that FM requested. However, Itochu did not respond favourably, and renewed its offer document offering instead to set the minimum threshold at 9.9% which would get the buyer to 60.0%.
That implied not a majority of minority but a threshold of 19.8% of minority shares. FamilyMart responded with another demand.
The Target Company, upon receipt of such offer, on June 30, 2020, requested further that, as the Target Company cannot be reasonably certain whether the proposed lower limit reflects the purpose of setting the “majority of minority” threshold (which is to satisfy the majority of shareholders that do not share material interest with the acquirer regarding the terms and conditions of the transaction), the lower limit of the Tender Offer should be set at a number that exceeds two-thirds, which includes the Ownership Ratio of ITOCHU Group.
That two-thirds level is the standard minimum threshold for Tender Offers in Japan aiming at taking a company private. And the Target Board demanded it because it could not be sure that the proposed level of setting the level of <20% of the minority fit the purpose of getting a majority of minority.
And Itochu refused.
So… while believing “Specifically, the Target Company believes that the effects of the COVID-19 infection will be temporary, while ITOCHU and the Tender Offeror believe that the effects will have medium or long term impacts…” and while apparently (or at least they tell you it was) negotiating in good faith for minority shareholders, the Special Committee and Target Board…
asked for, but obtained no minimum threshold of Majority of Minority, or even of two-thirds.
performed no Market Check to see if the price was reasonable.
did not obtain a Fairness Opinion.
noted that the premium offered is inadequate based on historical precedent (and was only a 7.3% premium to the three-week high when proposed)
And noted the “Tender Offer price is below the lower limit of the range of fair value of ¥2,472-3,040 proposed by the Stock Valuation Report obtained from PwC which is the third-party evaluation organisation of the special committee).”
should have understood (because they wrote it in the document) that the same fair value range – of which the Itochu Offer Price does not meet the lower end – DOES NOT INCLUDE ANY ASSUMPTION OF FUTURE SYNERGIES.
Furthermore, FamilyMart “informed ITOCHU and the Tender Offeror that it would be difficult for the Target Company, without a demand or request from other parties, to convene a Special Shareholders’ Meeting whose agenda items included conducting a Share Consolidation of the Target Company Shares and, subject to the effectuation of the Share Consolidation, amending the articles of incorporation to abolish provisions on share unit numbers, or implementing other squeeze-out procedures because it cannot reasonably explain to its shareholders the conditions and reasons for the squeeze-out with the tender offer price (2,300 yen) and the lower limit of shares to be purchased (50,114,060 shares).”
Decoded, this means that on 30 June, FamilyMart told Itochu that they didn’t want to promise to convene an EGM to allow the squeezeout of minorities unless Itochu got to the two-thirds level. And Itochu proposed that FamilyMart convene the EGM at Itochu’s request anyway.
So, with all of this neglect and rejection of what constitutes measures to make a Tender Offer for minorities fair, and taking away the Board’s ability to independently defend minority shareholder’s interests from getting squeezed out at a price that the Target Board does not deem adequate, being a Proposed Tender Offer Price at…. [checks notes]… a four-…. no wait… [checks notes again]… yes… four-month high – itself an 11.5% downgrade of the first Tender Offer Price offered just four days prior to that four-month high – an outside observer would suggest that the proposed bid was one which did not pass muster.
So… eight days after asking for a higher price, and a minimum threshold, and telling the buyer they could not support an EGM because they could not explain the price, a deal is announced where the document says…
Thereafter, on July 8, 2020, the Target Company received a report from the special committee stating that:
it is reasonable for the Target Company’s board of directors to declare an opinion supporting the Tender Offer and to declare an opinion leaving the decision up to the Target Company shareholders as to whether they tender their shares in the Tender Offer; and
(a) it is not considered to be disadvantageous to the Target Company’s general minority shareholders that the Target Company’s board of directors supports the Tender Offer and will leave the decision up to the Target Company shareholders as to whether they tender their shares in the Tender Offer; and (b) it is not considered to be disadvantageous to the Target Company’s minority shareholders for the Target Company’s board of directors to make a decision on taking the Company private through the Share Consolidation after the successful completion of the Tender Offer on the assumption that will be conducted using the method expected in the Transactions.
Read ii(b) carefully.
The Special Committee in its negotiations with Itochu CLEARLY thought at least some of the protections guided in the METI M&A Fair Guidelines were appropriate for minority investors, and clearly thought the final Itochu terms were disadvantageous to minority shareholders in price, and lack of majority of minority or even two-thirds threshold, and clearly said it did not want to convene an EGM if Itochu did not get to two-thirds.
Itochu asked the Committee and the Target Board to support the deal anyway, and they did, and the final comment the Special Committee has is that despite all these terms they seem to have thought disadvantageous to minority investors, the Tender offer “is not considered to be disadvantageous to the Target Company’s minority shareholders” for the Target Board to squeeze out dissenting minorities.
Then we get the Amended announcement which adds the following text…
Further, considering the fact that a minimum number of shares to be purchased has been added to the Tender Offer so that the shareholding ratio of the Tender Offeror and ITOCHU after the Tender Offer will be 60%, and although it is possible the Target Company will not be taken private even if the Tender Offer is successfully completed, the ratio of voting rights at the shareholders meetings of the Target Company in the fiscal year ended February 2019 and the fiscal year ended February 2020, after ITOCHU became the parent company of the Target Company, was 91.85% and 93.67% respectively, so even if the ownership ratio is 60%, ITOCHU holds effectively nearly two- thirds of voting rights of the shareholders in attendance, and the shareholders that have not tendered their shares in the Tender Offer may exercise their voting rights to approve the agenda item (for example, ITOCHU expects that ETFs listed on the TSE and passive index funds other than ETFs listed on the TSE might approve the agenda items of the shareholders meeting for the Share Consolidation even if they do not tender their shares in the Tender Offer), so the Target Company believes that it is unlikely that the Share Consolidation will not be approved and the Target Company will not be taken private. Further, even if the Share Consolidation is not approved and the Target Company is not taken private, ITOCHU and the Target Company will implement the measures aiming at improving the corporate value of the Target Company between the Target Company and ITOCHU, which will continue to be its parent company, as far as they can as independent listed companies.
[my bold]
My first reaction was…
The Special Committee said it “cannot be reasonably certain whether the proposed lower limit reflects the purpose of setting the “majority of minority” threshold” so demanded (with a normative phrase) Itochu raise the minimum to two-thirds, which would be the Japan standard (but still among the weakest thresholds globally).
The new document comes out and tells you they think they can force through a squeezeout by getting only 19.8% of minorities because not everyone votes and in any case, even if they couldn’t quite do so, they’d probably get it because the assumption is that the passive funds will vote for it.
They said the price was not adequate, and it was less than the lower end of the range of their advisors’ fair value estimate, and it did not include any effect of synergies on top of that, was the benefit of no market check or fairness opinion.
And here they say (in bold above) that even if the company is not taken over, Itochu and the Target Company will implement the measures to improve corporate value.
That tells you they do not need to do the transaction to implement the intended restructuring and investments.
Presumably, because the board is controlled by Itochu, and the Board agrees with the business alignment between Itochu and FamilyMart, the board would approve the various changes in personnel and responsibilities so as to enhance cooperation between the two companies.
Itochu could second personnel, or cause to be hired such personnel as required.
And If Itochu needs to invest monies, presumably because the Itochu-controlled board caused FamilyMart to purchase what is now ¥150bn of shares of Pan-Pacific International, Itochu could buy one-third of that from FamilyMart causing a cash injection of ¥50bn into FamilyMart – sufficient to enable FamilyMart to execute the investments required (as described in the document).
My Takeaways
The Special Committee should have paid more attention to the METI M&A Fair Guidelines and made more of their responsibility to make sure.
Asking for minority projections and not getting them does not mean that the Special Committee and Target Board have fulfilled their responsibilities.
Target Boards have a governance responsibility, and Special Committees have a specific directorial responsibility, to protect minority shareholders.
If the would-be acquirer does not want to pay an appropriate price, the Special Committee and Board can reject the bid. Just because the relationship exists does not mean it is the right price. Existing shareholders DO NOT CARE about the “medium-long-term corporate value” of FamilyMart after they are be kicked out. In fact, if it is done at the wrong price, it is an an immediate and permanent impairment to portfolio value for minority shareholders.
If a totally independent buyer – say Aeon, with a similar ability to integrate appropriate logistics and scale in digital capabilities – had offered ¥2300/share, would it have been “supported” and “not disadvantageous”? If not, then the Special Committee should have rejected this deal outright.
Investors should now pay attention to the over-arching problem. Do you want to be kicked out of your investment at ¥2300? If you are happy to sell at that price because it is more than fair value over the next few years, then you should have been out already.
Understand that Itochu and FamilyMart will advance the cause of restructuring and advancement even if the two companies remain listed separately.
In the meantime, make sure you know your rights. Read also about the JCOM decision on appraisal rights.
And understand your obligations under the Stewardship Codes of your jurisdiction and/or Japan. It is OK and even appropriate to say publicly – both to the Board and to other investors – that you have issues with what has happened if indeed you do.
Major passive investors who need to understand that without a vote, they still have stewardship responsibilities. If those responsibilities dictate that the price is inadequate but that the construct of the transaction means it is likely that the minority will lose their rights and their value, it is the responsibility of the Good Steward to engage. With the Company, with the Acquirer, and with Regulators and Authorities.
Regulators, lawyers, and courts need to figure out whether the fact that Boards do this with alarming regularity while paying lip service to minority shareholder rights is appropriate. And investors and lawyers need to figure out how to deal with the fact that the Supreme Court has made an irredeemable mistake in its JCOM decision precedent.
The final recourse of shareholders according to the Companies Act is their appraisal rights. That fundamental right was not erased from the Companies Act with the JCOM decision.
Directors of a target company, ignoring the numbers of their advisors which themselves are based on numbers provided by the captive company, admitting a price is inadequate, and further including no premium as provided for in the METI Fair M&A Guidelines and the fair price to be paid (see footnotes on p13 which also refer to Article 785 Paragraph 1 of the Companies Act) do not constitute the final or even appropriate word on “fairness” of price.
Perhaps an amendment to the Companies Act requiring an appraisal if so requested would be appropriate.
Perhaps an amendment to the legal level at which a squeezeout is possible should be made.
Perhaps a precedent should be set asking for a shareholder resolution to allow directors to approve a squeezeout – one which requires a majority of minority, or even a super-majority of minority – like exists in other jurisdictions. That shareholder resolution could be a condition precedent for proceeding with a Tender Offer. I believe there is no reason why a Board of Directors could not call for one now in order to ensure shareholder support – even passive investor support – for a cash takeover where they would not necessarily participate.
Interestingly, the impact of FamilyMart Co Ltd (8028 JP)‘s shareholder dynamic on price may not be what “smart” active investors think it is. And the results may not be what people think it normally would be. Once again, it is possible that greedy bears get stuck.
Overall, buying LINE Corp (3938 JP) at the current price (JPY 5570/share) seems like an iffy bet. Any injury to global equity markets due to worsening COVID-19 situation, or regulation against global internet names, or a drop from record multiples of the entire space in the US might lead to less bullishness of a bump.
Hibiki Path Advisors, the largest true minority investor for Accordia Golf Trust (AGT SP) has announced that it is not satisfied with the price offered. They have a number of complaints, and some of them have merit. Not all of them do.
The Nikkei reported that 50.1% owner Itochu Corp (8001 JP) had “decided” today to launch a takeover bid for Familymart to take it private. The Tender Offer has been announced at ¥2300/share. It is less than the ¥2750/share implied by the purchase price in the Tender Offer in 2018 which got Itochu from 41.5% to 50.1%. Travis Lundy expects ‘the market’ will clamour for more, but the shareholder structure on this is no less “interesting” than it was in April 2018 when he wrote about the previous tender, saying Itochu Tender For FamilyMart – Winnie Sees a Hunny Pot But Greedy Bears Get Stuck. Here is the Tender Offer doc.
This deal is highly opportunistic. Because this resembles a situation which would be addressed by the METI Fair M&A Guidelines from a year ago, there could be some noise for a majority of minority or other measures meant to support minority shareholder rights. That support will be limited for structural reasons, which is probably the reason why the minimum threshold for success is not two-thirds, but instead is an additional 50mm shares, which is 10%.
The pricing is low. Very low. The Enterprise Value at TOB Price against Next Year EBITDA is 5+x. It was 11x in the Tender Offer just two years ago. That means the Financial Advisors did not do their job. They said “fair” was a lower price at half the valuation. Plus this time 20% of the equity value of FamilyMart is in other shareholdings. The FamilyMart Special Committee and/or Board DID do their job, but I think less well than they could have. They could have pointed out the halving of the valuation.
Travis expects this deal has a marginally higher probability of failure than of being bumped and becoming successful. But both failure and bump are a higher probability than they would normally be. If it is successful, I would expect the shares to trade just through terms early, then quickly higher, then pause, wait for the bump, maybe trade a bit higher, then deal at the bumped price or not.
Travis does not see tremendous downside post-tender. CVS may be out of fashion, but I do not believe that Itochu will not try to make things work better and smoother than before even if they only own 50.1%. That will mean Itochu will own more of the economics from PB and logistics, but so be it. Also, this event could be the trigger that allows investors to re-assess the value of FamilyMart, or indeed of a well-run CVS business. If the shares trade through terms, and there is no bump, it is unlikely this goes through… unless there is a spoiler, like the Nikkei Inc says that FamilyMart will be deleted from the Nikkei 225 if Itochu only buys 9.9%.
SINA looks sets to join the growing list of Chinese companies seeking to delist in the US and relist, ostensibly in Hong Kong. Yesterday, Sina announced the receipt of a preliminary non-binding “going private” proposal from New Wave – a company controlled by its chairman/CEO Charles Chao – at US$41/share, a ~20% premium to the average closing price during the 30 trading days prior to the announcement.
SINA’s jewel is microblogger Weibo Corp (Adr) (WB US) – China’s Twitter Inc (TWTR US)equivalent – in which it holds a ~45% equity stake but controls ~71% of the vote. However, Weibo is not immune to the impact form COVID-19. In 1Q20, Weibo’s total net revenues was $323.4mn, a 19% decline yoy. Advertising and marketing revenues for 1Q20 was $275.4mn, a decrease of 19% compared to $341.1 million for the same period last year. Weibo’s consensus target price has declined to US$42.09/share, down 14% YTD.
Due diligence still needs to be carried out but such a condition is rudimentary – Chao has been with the company since 1999, and has been the chairman/CEO since 2011. The Board has also formed a special committee consisting of independent directors to evaluate and consider the Proposed Transaction. It is doubtful the Offer won’t be supported.
This appears a highly opportunistic Offer, however, Chao has 58% of the vote in the bag. I would not anticipate a bump – it’s just not how things are usually done for the privatisation of Chinese companies in the US. Shares trade at a tight gross spread of 1.4%. I would not chase it here.
On the 30 June after the close, LINE, Z Holdings, Softbank Corp, and Z Holdings (“the Relevant Parties”) announced that the deal would likely not complete by the originally scheduled October 1st deadline. So while the official word is there is no anticipated change to terms (a reference to the way shares were trading through terms at the time), shares trade higher. The market, at 3.5% through terms, is now betting on a bump to the LINE TOB Price. To make that a decent winning bet, investors have to think there is a greater-than 50% chance of a bump of 10% or more… with no chance of a regulatory block in there.
There is a chance of a regulatory impediment. It could be Korean-Japanese geopolitical issues. It could be Japanese government worries on cashless payment systems. It could be anti-trust regulators inviting comment from competitors and competitors putting a stick in the spokes. I am not overly concerned about Taiwan, Thailand, or Japan, but one wonders if the Korea angle is problematic.
We do not know what LINE H1 earnings will look like. There is a special gain on the sale of a security holding. We do not know what it is or what impact it will have. If LINE H1 earnings and commentary are strikingly positive, that could help a bump argument. I do not know enough about the way things have evolved in Q2 to know whether the improvement in Q1 accelerated to a level which is not already forecast by management and the Street.
THE TRADE: At ¥5380 or just below terms, making the bet on a bump was “easy.” It did not cost much as shareholder approval at Z was already achieved. At ¥5570 Friday, it is substantially less easy. If Travis owned shares in LINE, he would be lightening up here rather than buying more.He would have no qualms about being out completely at this price.He would have no qualms at buying at terms for the minor optionality, but thinks the reward/risk ratio of a bump after buying at terms is not great if the stock is trading at terms when the conditions are met, allowing the Tender Offer to go ahead.
Ahead of MET’s 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/QVPG have pitched a non-binding indicative offer to acquire all MET shares for NZ$6.00/share under a Scheme of Arrangement. This compares to the original Scheme consideration of NZ$7.00 per share in cash. Consequently, the July meeting has been deferred. This would appear a decent compromise for all parties. MET can avoid protracted litigation, which is expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.
Before entering into a new SIA, APVG requires Metlifecare to fully settle the litigation in respect of the SIA dated 29 December 2019. By “fully settle”, this means Metlifecare drops its litigation to enforce the December 2019 SIA. Both sides would agree to walk away wearing their own costs. Though not mentioned in the announcement, APVG’s proposal will require OIO approval. APVG withdrew their original OIO application before securing final approval so they will have to lodge another application. The expectation is that it would be a quick process this time around as the previous application was very close to approval according to my contact at MET.
According to today’s announcement, the Guardians of the New Zealand Superannuation Fund (who I believe still have ~19.8% of shares out, as per the 2019 annual report) is “broadly supportive of Metlifecare urgently progressing APVG’s non-binding indicative offer“.
How is the final dividend treated? The announcement is silent on this, and in my back & forth with MET, it is not yet clear how it will be addressed. MET paid a final dividend (June Y/E) of NZ$0.075/share in FY19. Assuming a firm offer unfolds, one that could complete in 4Q20, I would think to get full shareholder support, the dividend would have to be included. To note, the Offer price under the December SIA was to be reduced by any dividend paid. This is the reason no interim divined was declared for the Dec 19-end interim period.
This remained (at the time of the insight) a pre-event, although one with a very high likelihood of formal offer emerging. For those investors who bundled into MET when it consistently closed below NZ$4/share after EQT announced its intention to terminate the Scheme – I recommended (in Metlifecare: Down But Not Out – Get Long) going long at $4.34/share – I suggest taking profit.
UPDATE: As expected, MET has entered into a new Scheme Implementation Agreement with Asia Pacific Village Group Limited/EQT to acquire all Metlifecare’s shares for NZ$6.00/share.
“The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.“
Hibiki Path Advisors – the second-largest shareholder in AGTand one who has been noisy on behalf of all shareholders – issued a Press Release which stated they were disappointed with the price and that it will be voting against the proposed divestment in the case the price is not revised higher. The easiest points to address for AGT independent board members in requesting Accordia Golf parent to pay a slightly higher price are the idea of there already being a slightly favourable transfer to the parent in the form of high royalty fees as a percent of gross operating profit. The elimination of fees to the Trustee Manager could be deemed to be another “benefit”.
The real question to the buyer and to the IFA is whether the value of the golf courses might be higher if they stopped running it as a golf course business and instead carpeted 100+ golf courses across Japan with solar farms. IF the parent made more money from converting them to solar farms, that would be worthwhile getting a bump. Of course, I expect the parent wouldn’t tell you if that was their plan. If one pushed for a small bump, it might be possible. Otherwise, the relatively low threshold for approving this deal suggests that Hibiki Path may not win unless they put substantially greater pressure on the Trustee Manager. They should probably try to get ISS and SIAS involved.
The shares opened on 30 June at S$0.685 which was too low. They traded lower, only trading higher after a competitor to Smartkarma realized they had left out a S$0.014 payment to be made. The shares traded much of 3 July at S$0.690-0.695. Even at S$0.695 the shares are probably cheap as an arb to defined terms unless you think the contingent claims portion will be stripped out. I would not expect they will be, but one could argue the point.
The letter may mean a jump in price. I think the threat to this deal and the noise made by Hibiki Path so far are unlikely to trigger either an opinion by the IFA that the price is not high enough, nor a serious threat to the deal being completed at proposed terms. However, an honest response by the independent committee could be a way of getting a slightly higher price out of the buyers, ESPECIALLY now that the effects of COVID-19 have been seen to be limited. Travis expects that buying at or below S$0.69 is still a good reward/risk profile to an arb expecting deal completion.
After being suspended the previous Friday morning pursuant to the Code on Takeovers and Mergers. Jingjeng has announced its parent (Beijing energy Holdings “BEH”) has indicated an intention to make a voluntary cash general Offer. No price was mentioned. BEH holds 471.6mn H shares, or around 16.7% of H shares out, therefore the blocking take at a Scheme-like vote would be 8.33% of H-shares out. This would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:
Jingneng is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a Scheme-like vote (≥ 75% for, ≤10% against). Such an Offer may or may not require an additional tendering acceptance condition.
What Price? The average premium for past Merger by Absorption deals is 47%. That backs out a possible fair value of ~$2.30, around a three-year high, with a deal size of $5.4bn. $2.30/share is ~0.75x P/B, which compares with ~0.64x P/B for recent energy privatisations. Shares closed at $2.04 on Friday. There is a clear directive to privatise clean energy plays. Now is the time to run a ruler over other peers (China Datang Corp Renewable Power (1798 HK) ), in addition to other SOE-controlled entities (possibly Asia Satellite Telecom Holdings Ltd (1135 HK), Cosco International Holdings (517 HK) & Tianjin Development Holdings (882 HK)) potentially subject to a delisting proposal.
On the 6 July, O-Net, a leader in the provision of high-technology products and optical networking components, was suspended pursuant to the Code on Takeovers and Mergers. An Offer, by way of a Scheme, has now been announced. The cancellation price is HK$6.50/share, a 23.57% premium to last close. The price will not be increased. Disinterested Shareholders comprise 375.196mn shares, or 44.99% of shares out. Therefore 10% blocking stake is attached to ALL of the Scheme Shares held by the Disinterested Shareholders at the Scheme Meeting is 37.52mn shares or 4.499% of shares out. O-Net is Cayman incorporated therefore the headcount test applies. Assuming the deal gets up, this may be wrapped up by late October.
A condition to the Scheme is that Kaifa’s shareholders approve the acquisition. This should be a simple majority vote. CapIQ has SOE China Electronics Corporation holding a little over 39%. I don’t see the vote as being a risk to the deal. It is currently expected that a shareholders’ meeting will be convened by Kaifa within one month from this Offer announcement.
O-Net should be a key beneficiary from global 5G investment. Applying various metrics and with respect to a global basket of peers, I argued there was potentially 33% upside from the undisturbed price to an Offer price. We got 23.57%. That’s probably going to be enough. Shares were trading around a two-year high and have all but batted away COVID-19.
I see the gross/annualised spread at 3.7%/13.5%, assuming cheques are issued late October. That level looks about right. This is not a slam dunk premium – the average premium for Asia-Pac transactions this year is ~33%. Still, O-Net was up 27% YTD, ahead of the Offer announcement, so optically, the offer is not viewed as opportunistic. All in, this deal should get up.
The Promoters of JBCP announced on 3rd July they had signed an SPA with KKR & Co Inc (KKR US) to sell up to 54% of the company’s total shares from their holdings. Pursuant to SEBI Regulations, this triggered the obligation for the Acquirer to launch a Mandatory Open Offer to buy shares from Public Shareholders at similar Terms. To fulfil this requirement, the Acquirer has launched a Partial Tender Offer to buy up to 26% of the company’s total shares from non-promoter shareholders at a cash price of INR745.00/share. Tender Offers in India have a statutory timeline that requires the settlement to be within 72 business days from the date of the announcement which means the Offer could be completed in the next 4 months.
The Open Offer Quantity will be fixed at 20,093,346 shares (26% of voting capital) and how much the Promoters will get to sell will depend on what portion of the Open Offer Quantity gets filled. If Open Offer gets fully filled (26%), Promoters will be able to sell up to 38.9% in total (so that the Acquirer’s stake does not exceed 64.9%). If no shares are acquired in the Open Offer, the Promoters will be able to sell the entire SPA quantity of 54% (given that Total Foreign Shareholding in the Company remains at or below 74%).
The Open Offer is not conditional upon any minimum level of acceptance. If all non-promoter shareholders (44.09%) tender their shares, 58.97% of the total tendered quantity will be purchased. (Minimum Fill Ratio = 58.97%). If non-promoter shareholders representing less than 26% tender their shares, all shares tendered will be purchased. (Maximum Fill Ratio = 100%).
The upside is ~3.4% to the tender offer price, which is a relatively low annualized return over 4 months. However, on a longer-term basis, expecting growth and a desire by KKR to exit after several years through a sale to someone else, one can expect a Delisting Offer at a higher price could be in the offing. For that, this situation is bullish as the odds are better of a higher price than a lower price. If you trade this situation, the trade is to know you have a put option for 60-75% of your position at a price 3.4% higher than here. Janaghan Jeyakumar thinks a 70-80% pro-ration rate is likely if the shares stay at the current level minus a little bit. If the shares drop to below INR 700 prior to the Tender Offer, that would be a great place to buy.
On 6th July, UK-based independent Oil & Gas company Rockrose made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn. The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash. This all-friendly Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020. The Acquirer has also reserved the right to implement the Acquisition by way of a Takeover Offer.The Offer Price translates to premia of 63.7%, 90.7%, and 68.5% to the stock’s pre-announcement closing price, 3-month VWAP, and 6-month VWAP respectively.
The Scheme will require approval from Target Shareholders representing 75% of votes cast. Irrevocables from Target Shareholders holding 35.3% (4,651,113 shares) have agreed to vote in favour of the Deal. If the second largest shareholder Cavendish Asset Management (1,442,648 shares or ~11% stake). If they also vote in favour, the maximum required approval rate could fall to 45% for the remaining shareholders.
This Deal seems like a rescue. As a publicly-listed company, RockRose was mainly interested in acquisitions in the upstream Oil and Gas sector which they intended to fund through further equity offerings. However, at present, they feel raising further equity capital would be “unduly dilutive” after the drastic decline in stock price in recent months caused by Oil Price Shocks and COVID-19 fears. Given this context, the Offer Terms seem acceptable.
Given the board’s unanimous recommendation and the willingness of insiders to accept the Deal, others might be convinced to sell too. At the time of writing, RockRose shares are trading at GBP18.34 translating to a gross spread of 0.87% with roughly 2 months to completion. Janaghan expects RockRose shares to trade close to terms until completion. This could be a simple and short-dated “rate-of-return” trade. I expect the Deal to complete as-is.
Activist Polygon (1.025% stake in MásMóvil, worth c. EUR 31 mn) has sent a letter to the CNMV (Securities Market National Commission, the Spanish market watchdog) regarding the terms of the Lorca Telecom (KKR, Cinven and Providence funds) voluntary takeover bid for MásMóvil. The letter provides reasons why the current offer (especially the irrevocable undertakings) seems unfair for the minority shareholders
Jesus Rodriguez Aguilar reckons there are three possible scenarios from here: i) a counterbid by other private equity firms, such as Carlyle or CVC (who have mulled a bid for MásMóvil in the past); ii) one of the incumbents —Telefónica, Vodafone or Orange— counteroffers at a higher price. This seems difficult (see further in the note); and iii) :orca Capital does not get the 90% acceptance required to squeeze out and delist MásMóvil, so the current shareholders share in the possible upside of a hypothetical Vodafone Spain acquisition.
Jesus’ recommendation is LONG MásMóvil: the downside risk at the last close (EUR 22.68 vs a bid of EUR 22.50) is low and there are reasons to hold for an improved bid. The Domínguez de Gor family (8% stake) has already said that it will not consider the bid unless there is an improved price of EUR 24 per share. The acceptance period of the Lorca Capital bid should start in September.
In New Rules on Prefs Trading, Listing, & Delisting in Korea, Sanghyun discussed the new rules for the trading, listing, and delisting of the local preferred shares announced by the Korea FSC. The minimum shares out and market cap for new listings are now 1mn shares and ₩5bn, effective October this year. As for delisting, those prefs below 0.2mn shares or ₩2bn market cap will lose their spot, starting October next year with a grace period of one year,
OTHER M&A & EVENT UPDATES
Iberdrola SA (IBE SM)released its Secondary Bidder’s Statement on Infigen Energy (IFN AU) announcing the FIRB condition had been fulfilled. Infigen for its part announced updated Supplementary Target Statements on both the Iberdrola deal … and the UAC Energy deal.
Yixin Group Ltd (2858 HK)‘s Composite Doc has been delayed until the 7 April 2021, to allow time for the satisfaction of all conditions.
Cardinal Resources (CDV AU) has completed the issuance of shares (26mn or A$11.96mn) to Shandong as per the BIA. Difficult to see Norgold coming back into the mix from here. Bidder/Target Statements due out on or before the 22 July.
Golden Meditech Holdings (801 HK)announced that an “application has been made by the Company and the Offeror to the Executive for consent to the extension of the latest date for despatching the Scheme Document from 8 July 2020 to 26 August 2020 and the Executive has granted the consent.” That about 10 days past my initial estimate.
SAIC Motor HK Investment Limited – presumably an entity under SAIC Motor (600104 CH) – will acquire 20.87% of shares out from UCAR, and 14.76% from Amber Gen – both at $3.10/share – taking its take to 28.92%. Car Inc (699 HK) closed at $2.53 yesterday. This will give shares a boost.
Hohsui Corp (1352 JP) was put on notice that it has until 31 March 2021 to lift its market cap in order to stay in the TSE1, or else it will get demoted to the TSE2.
Both Anicom Holdings (8715 JP) and Benefit Japan (3934 JP) announced that the TSE had put each on notice for possible demotion to the TSE2 (from the TSE1) if they do not maintain a shareholder count of 2,000 or more by the end of the grace period (31 March 2021).
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;
* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,
*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.
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.
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.
I have not once in my 20+ year career in Japanese equities looking at takeover documentation seen a tender offer announcement which has been amended so many times.
This one injects text into the document not there when announced which brings new meaning to the minimum tender threshold of 9.9%.
In many places in the Announcement document, the Target Company and Special Committee use words “not considered to be disadvantageous to the minority shareholders.”
The results of their negotiations, and the admissions and statements of the Committee, the Target Board, and Itochu itself, all belie this understanding.
Investors should spend some time considering this.
It is important. And it is the reason why investors have the role they do.
The Amendments and the Special Committee’s View of Disadvantage of Minority Holders
The METI Fair M&A Guidelines published in June 2019 were researched and debated by experts over years to find solutions to issues and weaknesses seen where the existing Takeover law in the Financial Instruments & Exchange Act (as amended), and the Stewardship Code, and The Corporate Governance Code (as amended) did not address the fact that minority shareholders of companies where incumbent owners (parent companies, founding families, etc) who might seek to buy out minorities held a significant informational and structural advantage and abused it. Despite clear demonstrations intent to be fair to minority shareholders in the “TOB Rules” in the FIEA, strong encouragement in the Stewardship Code for investors to make their concerns known, seemingly strong shareholder rights enshrined in the Companies Act, and clear guidance in the Corporate Governance Code, and its subsequent revisions, it was clearly felt at all levels that minority investors are, in such parent company and MBO circumstances, structurally disadvantaged.
On the other hand, it has been observed that in acquisitions of a controlled company by the controlling shareholder, since the controlling shareholder, as the acquiring party, already holds a higher percentage of voting rights before the relevant M&A, the risk that the controlling shareholder will unilaterally determine transaction terms that are advantageous to itself and the interests of general shareholders of a controlled company will be harmed is higher than with MBOs. Therefore, it is necessary to evaluate these transactions more closely than MBOs.
The Guidelines are not legally binding, but they are explicit, and Japan’s lawyers are aware of them, and as shown by the document, the board of FamilyMart and the Special Committee of FamilyMart’s board were also aware of the contents. The document also shows that Itochu was well aware of its contents.
This particular M&A situation sits squarely in the realm of those which were supposed to be addressed by the Guidelines, which, among other measures, include the suggestions that Special Committees of Target Boards…
get a Fairness Opinion (not sought here),
perform a Market Check (not performed here), and
understand that a fair price is one in which general shareholders to be squeezed out enjoy “an appropriate portion” of the benefit of future synergies (p12-13)
ask the Buyer to set a minimum threshold of purchasing a Majority of the Minority (requested in this case by the Target Board but ignored by the Buyer).
The third point and fourth points are key here.
In its response to Itochu’s offer of 26 June which had no minimum, FamilyMart asked Itochu to set a majority of minority as a minimum tender success threshold. It is good that FM requested. However, Itochu did not respond favourably, and renewed its offer document offering instead to set the minimum threshold at 9.9% which would get the buyer to 60.0%.
That implied not a majority of minority but a threshold of 19.8% of minority shares. FamilyMart responded with another demand.
The Target Company, upon receipt of such offer, on June 30, 2020, requested further that, as the Target Company cannot be reasonably certain whether the proposed lower limit reflects the purpose of setting the “majority of minority” threshold (which is to satisfy the majority of shareholders that do not share material interest with the acquirer regarding the terms and conditions of the transaction), the lower limit of the Tender Offer should be set at a number that exceeds two-thirds, which includes the Ownership Ratio of ITOCHU Group.
That two-thirds level is the standard minimum threshold for Tender Offers in Japan aiming at taking a company private. And the Target Board demanded it because it could not be sure that the proposed level of setting the level of <20% of the minority fit the purpose of getting a majority of minority.
And Itochu refused.
So… while believing “Specifically, the Target Company believes that the effects of the COVID-19 infection will be temporary, while ITOCHU and the Tender Offeror believe that the effects will have medium or long term impacts…” and while apparently (or at least they tell you it was) negotiating in good faith for minority shareholders, the Special Committee and Target Board…
asked for, but obtained no minimum threshold of Majority of Minority, or even of two-thirds.
performed no Market Check to see if the price was reasonable.
did not obtain a Fairness Opinion.
noted that the premium offered is inadequate based on historical precedent (and was only a 7.3% premium to the three-week high when proposed)
And noted the “Tender Offer price is below the lower limit of the range of fair value of ¥2,472-3,040 proposed by the Stock Valuation Report obtained from PwC which is the third-party evaluation organisation of the special committee).”
should have understood (because they wrote it in the document) that the same fair value range – of which the Itochu Offer Price does not meet the lower end – DOES NOT INCLUDE ANY ASSUMPTION OF FUTURE SYNERGIES.
Furthermore, FamilyMart “informed ITOCHU and the Tender Offeror that it would be difficult for the Target Company, without a demand or request from other parties, to convene a Special Shareholders’ Meeting whose agenda items included conducting a Share Consolidation of the Target Company Shares and, subject to the effectuation of the Share Consolidation, amending the articles of incorporation to abolish provisions on share unit numbers, or implementing other squeeze-out procedures because it cannot reasonably explain to its shareholders the conditions and reasons for the squeeze-out with the tender offer price (2,300 yen) and the lower limit of shares to be purchased (50,114,060 shares).”
Decoded, this means that on 30 June, FamilyMart told Itochu that they didn’t want to promise to convene an EGM to allow the squeezeout of minorities unless Itochu got to the two-thirds level. And Itochu proposed that FamilyMart convene the EGM at Itochu’s request anyway.
So, with all of this neglect and rejection of what constitutes measures to make a Tender Offer for minorities fair, and taking away the Board’s ability to independently defend minority shareholder’s interests from getting squeezed out at a price that the Target Board does not deem adequate, being a Proposed Tender Offer Price at…. [checks notes]… a four-…. no wait… [checks notes again]… yes… four-month high – itself an 11.5% downgrade of the first Tender Offer Price offered just four days prior to that four-month high – an outside observer would suggest that the proposed bid was one which did not pass muster.
So… eight days after asking for a higher price, and a minimum threshold, and telling the buyer they could not support an EGM because they could not explain the price, a deal is announced where the document says…
Thereafter, on July 8, 2020, the Target Company received a report from the special committee stating that:
it is reasonable for the Target Company’s board of directors to declare an opinion supporting the Tender Offer and to declare an opinion leaving the decision up to the Target Company shareholders as to whether they tender their shares in the Tender Offer; and
(a) it is not considered to be disadvantageous to the Target Company’s general minority shareholders that the Target Company’s board of directors supports the Tender Offer and will leave the decision up to the Target Company shareholders as to whether they tender their shares in the Tender Offer; and (b) it is not considered to be disadvantageous to the Target Company’s minority shareholders for the Target Company’s board of directors to make a decision on taking the Company private through the Share Consolidation after the successful completion of the Tender Offer on the assumption that will be conducted using the method expected in the Transactions.
Read ii(b) carefully.
The Special Committee in its negotiations with Itochu CLEARLY thought at least some of the protections guided in the METI M&A Fair Guidelines were appropriate for minority investors, and clearly thought the final Itochu terms were disadvantageous to minority shareholders in price, and lack of majority of minority or even two-thirds threshold, and clearly said it did not want to convene an EGM if Itochu did not get to two-thirds.
Itochu asked the Committee and the Target Board to support the deal anyway, and they did, and the final comment the Special Committee has is that despite all these terms they seem to have thought disadvantageous to minority investors, the Tender offer “is not considered to be disadvantageous to the Target Company’s minority shareholders” for the Target Board to squeeze out dissenting minorities.
Then we get the Amended announcement which adds the following text…
Further, considering the fact that a minimum number of shares to be purchased has been added to the Tender Offer so that the shareholding ratio of the Tender Offeror and ITOCHU after the Tender Offer will be 60%, and although it is possible the Target Company will not be taken private even if the Tender Offer is successfully completed, the ratio of voting rights at the shareholders meetings of the Target Company in the fiscal year ended February 2019 and the fiscal year ended February 2020, after ITOCHU became the parent company of the Target Company, was 91.85% and 93.67% respectively, so even if the ownership ratio is 60%, ITOCHU holds effectively nearly two- thirds of voting rights of the shareholders in attendance, and the shareholders that have not tendered their shares in the Tender Offer may exercise their voting rights to approve the agenda item (for example, ITOCHU expects that ETFs listed on the TSE and passive index funds other than ETFs listed on the TSE might approve the agenda items of the shareholders meeting for the Share Consolidation even if they do not tender their shares in the Tender Offer), so the Target Company believes that it is unlikely that the Share Consolidation will not be approved and the Target Company will not be taken private. Further, even if the Share Consolidation is not approved and the Target Company is not taken private, ITOCHU and the Target Company will implement the measures aiming at improving the corporate value of the Target Company between the Target Company and ITOCHU, which will continue to be its parent company, as far as they can as independent listed companies.
[my bold]
My first reaction was…
The Special Committee said it “cannot be reasonably certain whether the proposed lower limit reflects the purpose of setting the “majority of minority” threshold” so demanded (with a normative phrase) Itochu raise the minimum to two-thirds, which would be the Japan standard (but still among the weakest thresholds globally).
The new document comes out and tells you they think they can force through a squeezeout by getting only 19.8% of minorities because not everyone votes and in any case, even if they couldn’t quite do so, they’d probably get it because the assumption is that the passive funds will vote for it.
They said the price was not adequate, and it was less than the lower end of the range of their advisors’ fair value estimate, and it did not include any effect of synergies on top of that, was the benefit of no market check or fairness opinion.
And here they say (in bold above) that even if the company is not taken over, Itochu and the Target Company will implement the measures to improve corporate value.
That tells you they do not need to do the transaction to implement the intended restructuring and investments.
Presumably, because the board is controlled by Itochu, and the Board agrees with the business alignment between Itochu and FamilyMart, the board would approve the various changes in personnel and responsibilities so as to enhance cooperation between the two companies.
Itochu could second personnel, or cause to be hired such personnel as required.
And If Itochu needs to invest monies, presumably because the Itochu-controlled board caused FamilyMart to purchase what is now ¥150bn of shares of Pan-Pacific International, Itochu could buy one-third of that from FamilyMart causing a cash injection of ¥50bn into FamilyMart – sufficient to enable FamilyMart to execute the investments required (as described in the document).
My Takeaways
The Special Committee should have paid more attention to the METI M&A Fair Guidelines and made more of their responsibility to make sure.
Asking for minority projections and not getting them does not mean that the Special Committee and Target Board have fulfilled their responsibilities.
Target Boards have a governance responsibility, and Special Committees have a specific directorial responsibility, to protect minority shareholders.
If the would-be acquirer does not want to pay an appropriate price, the Special Committee and Board can reject the bid. Just because the relationship exists does not mean it is the right price. Existing shareholders DO NOT CARE about the “medium-long-term corporate value” of FamilyMart after they are be kicked out. In fact, if it is done at the wrong price, it is an an immediate and permanent impairment to portfolio value for minority shareholders.
If a totally independent buyer – say Aeon, with a similar ability to integrate appropriate logistics and scale in digital capabilities – had offered ¥2300/share, would it have been “supported” and “not disadvantageous”? If not, then the Special Committee should have rejected this deal outright.
Investors should now pay attention to the over-arching problem. Do you want to be kicked out of your investment at ¥2300? If you are happy to sell at that price because it is more than fair value over the next few years, then you should have been out already.
Understand that Itochu and FamilyMart will advance the cause of restructuring and advancement even if the two companies remain listed separately.
In the meantime, make sure you know your rights. Read also about the JCOM decision on appraisal rights.
And understand your obligations under the Stewardship Codes of your jurisdiction and/or Japan. It is OK and even appropriate to say publicly – both to the Board and to other investors – that you have issues with what has happened if indeed you do.
Major passive investors who need to understand that without a vote, they still have stewardship responsibilities. If those responsibilities dictate that the price is inadequate but that the construct of the transaction means it is likely that the minority will lose their rights and their value, it is the responsibility of the Good Steward to engage. With the Company, with the Acquirer, and with Regulators and Authorities.
Regulators, lawyers, and courts need to figure out whether the fact that Boards do this with alarming regularity while paying lip service to minority shareholder rights is appropriate. And investors and lawyers need to figure out how to deal with the fact that the Supreme Court has made an irredeemable mistake in its JCOM decision precedent.
The final recourse of shareholders according to the Companies Act is their appraisal rights. That fundamental right was not erased from the Companies Act with the JCOM decision.
Directors of a target company, ignoring the numbers of their advisors which themselves are based on numbers provided by the captive company, admitting a price is inadequate, and further including no premium as provided for in the METI Fair M&A Guidelines and the fair price to be paid (see footnotes on p13 which also refer to Article 785 Paragraph 1 of the Companies Act) do not constitute the final or even appropriate word on “fairness” of price.
Perhaps an amendment to the Companies Act requiring an appraisal if so requested would be appropriate.
Perhaps an amendment to the legal level at which a squeezeout is possible should be made.
Perhaps a precedent should be set asking for a shareholder resolution to allow directors to approve a squeezeout – one which requires a majority of minority, or even a super-majority of minority – like exists in other jurisdictions. That shareholder resolution could be a condition precedent for proceeding with a Tender Offer. I believe there is no reason why a Board of Directors could not call for one now in order to ensure shareholder support – even passive investor support – for a cash takeover where they would not necessarily participate.
Interestingly, the impact of FamilyMart Co Ltd (8028 JP)‘s shareholder dynamic on price may not be what “smart” active investors think it is. And the results may not be what people think it normally would be. Once again, it is possible that greedy bears get stuck.
Overall, buying LINE Corp (3938 JP) at the current price (JPY 5570/share) seems like an iffy bet. Any injury to global equity markets due to worsening COVID-19 situation, or regulation against global internet names, or a drop from record multiples of the entire space in the US might lead to less bullishness of a bump.
Hibiki Path Advisors, the largest true minority investor for Accordia Golf Trust (AGT SP) has announced that it is not satisfied with the price offered. They have a number of complaints, and some of them have merit. Not all of them do.
The Nikkei reported that 50.1% owner Itochu Corp (8001 JP) had “decided” today to launch a takeover bid for Familymart to take it private. The Tender Offer has been announced at ¥2300/share. It is less than the ¥2750/share implied by the purchase price in the Tender Offer in 2018 which got Itochu from 41.5% to 50.1%. Travis Lundy expects ‘the market’ will clamour for more, but the shareholder structure on this is no less “interesting” than it was in April 2018 when he wrote about the previous tender, saying Itochu Tender For FamilyMart – Winnie Sees a Hunny Pot But Greedy Bears Get Stuck. Here is the Tender Offer doc.
This deal is highly opportunistic. Because this resembles a situation which would be addressed by the METI Fair M&A Guidelines from a year ago, there could be some noise for a majority of minority or other measures meant to support minority shareholder rights. That support will be limited for structural reasons, which is probably the reason why the minimum threshold for success is not two-thirds, but instead is an additional 50mm shares, which is 10%.
The pricing is low. Very low. The Enterprise Value at TOB Price against Next Year EBITDA is 5+x. It was 11x in the Tender Offer just two years ago. That means the Financial Advisors did not do their job. They said “fair” was a lower price at half the valuation. Plus this time 20% of the equity value of FamilyMart is in other shareholdings. The FamilyMart Special Committee and/or Board DID do their job, but I think less well than they could have. They could have pointed out the halving of the valuation.
Travis expects this deal has a marginally higher probability of failure than of being bumped and becoming successful. But both failure and bump are a higher probability than they would normally be. If it is successful, I would expect the shares to trade just through terms early, then quickly higher, then pause, wait for the bump, maybe trade a bit higher, then deal at the bumped price or not.
Travis does not see tremendous downside post-tender. CVS may be out of fashion, but I do not believe that Itochu will not try to make things work better and smoother than before even if they only own 50.1%. That will mean Itochu will own more of the economics from PB and logistics, but so be it. Also, this event could be the trigger that allows investors to re-assess the value of FamilyMart, or indeed of a well-run CVS business. If the shares trade through terms, and there is no bump, it is unlikely this goes through… unless there is a spoiler, like the Nikkei Inc says that FamilyMart will be deleted from the Nikkei 225 if Itochu only buys 9.9%.
SINA looks sets to join the growing list of Chinese companies seeking to delist in the US and relist, ostensibly in Hong Kong. Yesterday, Sina announced the receipt of a preliminary non-binding “going private” proposal from New Wave – a company controlled by its chairman/CEO Charles Chao – at US$41/share, a ~20% premium to the average closing price during the 30 trading days prior to the announcement.
SINA’s jewel is microblogger Weibo Corp (Adr) (WB US) – China’s Twitter Inc (TWTR US)equivalent – in which it holds a ~45% equity stake but controls ~71% of the vote. However, Weibo is not immune to the impact form COVID-19. In 1Q20, Weibo’s total net revenues was $323.4mn, a 19% decline yoy. Advertising and marketing revenues for 1Q20 was $275.4mn, a decrease of 19% compared to $341.1 million for the same period last year. Weibo’s consensus target price has declined to US$42.09/share, down 14% YTD.
Due diligence still needs to be carried out but such a condition is rudimentary – Chao has been with the company since 1999, and has been the chairman/CEO since 2011. The Board has also formed a special committee consisting of independent directors to evaluate and consider the Proposed Transaction. It is doubtful the Offer won’t be supported.
This appears a highly opportunistic Offer, however, Chao has 58% of the vote in the bag. I would not anticipate a bump – it’s just not how things are usually done for the privatisation of Chinese companies in the US. Shares trade at a tight gross spread of 1.4%. I would not chase it here.
On the 30 June after the close, LINE, Z Holdings, Softbank Corp, and Z Holdings (“the Relevant Parties”) announced that the deal would likely not complete by the originally scheduled October 1st deadline. So while the official word is there is no anticipated change to terms (a reference to the way shares were trading through terms at the time), shares trade higher. The market, at 3.5% through terms, is now betting on a bump to the LINE TOB Price. To make that a decent winning bet, investors have to think there is a greater-than 50% chance of a bump of 10% or more… with no chance of a regulatory block in there.
There is a chance of a regulatory impediment. It could be Korean-Japanese geopolitical issues. It could be Japanese government worries on cashless payment systems. It could be anti-trust regulators inviting comment from competitors and competitors putting a stick in the spokes. I am not overly concerned about Taiwan, Thailand, or Japan, but one wonders if the Korea angle is problematic.
We do not know what LINE H1 earnings will look like. There is a special gain on the sale of a security holding. We do not know what it is or what impact it will have. If LINE H1 earnings and commentary are strikingly positive, that could help a bump argument. I do not know enough about the way things have evolved in Q2 to know whether the improvement in Q1 accelerated to a level which is not already forecast by management and the Street.
THE TRADE: At ¥5380 or just below terms, making the bet on a bump was “easy.” It did not cost much as shareholder approval at Z was already achieved. At ¥5570 Friday, it is substantially less easy. If Travis owned shares in LINE, he would be lightening up here rather than buying more.He would have no qualms about being out completely at this price.He would have no qualms at buying at terms for the minor optionality, but thinks the reward/risk ratio of a bump after buying at terms is not great if the stock is trading at terms when the conditions are met, allowing the Tender Offer to go ahead.
Ahead of MET’s 10 July meeting to seek shareholder support to continue litigation against AVPG and EQT over their decision to terminate the original SIA, EQT/QVPG have pitched a non-binding indicative offer to acquire all MET shares for NZ$6.00/share under a Scheme of Arrangement. This compares to the original Scheme consideration of NZ$7.00 per share in cash. Consequently, the July meeting has been deferred. This would appear a decent compromise for all parties. MET can avoid protracted litigation, which is expected to spill over into 1Q21. EQT saves face via reloading an Offer, and one that is 14.3% below its initial bid, and a 25.5% premium to the undisturbed price back in December.
Before entering into a new SIA, APVG requires Metlifecare to fully settle the litigation in respect of the SIA dated 29 December 2019. By “fully settle”, this means Metlifecare drops its litigation to enforce the December 2019 SIA. Both sides would agree to walk away wearing their own costs. Though not mentioned in the announcement, APVG’s proposal will require OIO approval. APVG withdrew their original OIO application before securing final approval so they will have to lodge another application. The expectation is that it would be a quick process this time around as the previous application was very close to approval according to my contact at MET.
According to today’s announcement, the Guardians of the New Zealand Superannuation Fund (who I believe still have ~19.8% of shares out, as per the 2019 annual report) is “broadly supportive of Metlifecare urgently progressing APVG’s non-binding indicative offer“.
How is the final dividend treated? The announcement is silent on this, and in my back & forth with MET, it is not yet clear how it will be addressed. MET paid a final dividend (June Y/E) of NZ$0.075/share in FY19. Assuming a firm offer unfolds, one that could complete in 4Q20, I would think to get full shareholder support, the dividend would have to be included. To note, the Offer price under the December SIA was to be reduced by any dividend paid. This is the reason no interim divined was declared for the Dec 19-end interim period.
This remained (at the time of the insight) a pre-event, although one with a very high likelihood of formal offer emerging. For those investors who bundled into MET when it consistently closed below NZ$4/share after EQT announced its intention to terminate the Scheme – I recommended (in Metlifecare: Down But Not Out – Get Long) going long at $4.34/share – I suggest taking profit.
UPDATE: As expected, MET has entered into a new Scheme Implementation Agreement with Asia Pacific Village Group Limited/EQT to acquire all Metlifecare’s shares for NZ$6.00/share.
“The parties have also agreed to discontinue all litigation and settle all disputes related to the original SIA, with the parties to cover their own costs in relation to the litigation.“
Hibiki Path Advisors – the second-largest shareholder in AGTand one who has been noisy on behalf of all shareholders – issued a Press Release which stated they were disappointed with the price and that it will be voting against the proposed divestment in the case the price is not revised higher. The easiest points to address for AGT independent board members in requesting Accordia Golf parent to pay a slightly higher price are the idea of there already being a slightly favourable transfer to the parent in the form of high royalty fees as a percent of gross operating profit. The elimination of fees to the Trustee Manager could be deemed to be another “benefit”.
The real question to the buyer and to the IFA is whether the value of the golf courses might be higher if they stopped running it as a golf course business and instead carpeted 100+ golf courses across Japan with solar farms. IF the parent made more money from converting them to solar farms, that would be worthwhile getting a bump. Of course, I expect the parent wouldn’t tell you if that was their plan. If one pushed for a small bump, it might be possible. Otherwise, the relatively low threshold for approving this deal suggests that Hibiki Path may not win unless they put substantially greater pressure on the Trustee Manager. They should probably try to get ISS and SIAS involved.
The shares opened on 30 June at S$0.685 which was too low. They traded lower, only trading higher after a competitor to Smartkarma realized they had left out a S$0.014 payment to be made. The shares traded much of 3 July at S$0.690-0.695. Even at S$0.695 the shares are probably cheap as an arb to defined terms unless you think the contingent claims portion will be stripped out. I would not expect they will be, but one could argue the point.
The letter may mean a jump in price. I think the threat to this deal and the noise made by Hibiki Path so far are unlikely to trigger either an opinion by the IFA that the price is not high enough, nor a serious threat to the deal being completed at proposed terms. However, an honest response by the independent committee could be a way of getting a slightly higher price out of the buyers, ESPECIALLY now that the effects of COVID-19 have been seen to be limited. Travis expects that buying at or below S$0.69 is still a good reward/risk profile to an arb expecting deal completion.
After being suspended the previous Friday morning pursuant to the Code on Takeovers and Mergers. Jingjeng has announced its parent (Beijing energy Holdings “BEH”) has indicated an intention to make a voluntary cash general Offer. No price was mentioned. BEH holds 471.6mn H shares, or around 16.7% of H shares out, therefore the blocking take at a Scheme-like vote would be 8.33% of H-shares out. This would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:
Jingneng is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a Scheme-like vote (≥ 75% for, ≤10% against). Such an Offer may or may not require an additional tendering acceptance condition.
What Price? The average premium for past Merger by Absorption deals is 47%. That backs out a possible fair value of ~$2.30, around a three-year high, with a deal size of $5.4bn. $2.30/share is ~0.75x P/B, which compares with ~0.64x P/B for recent energy privatisations. Shares closed at $2.04 on Friday. There is a clear directive to privatise clean energy plays. Now is the time to run a ruler over other peers (China Datang Corp Renewable Power (1798 HK) ), in addition to other SOE-controlled entities (possibly Asia Satellite Telecom Holdings Ltd (1135 HK), Cosco International Holdings (517 HK) & Tianjin Development Holdings (882 HK)) potentially subject to a delisting proposal.
On the 6 July, O-Net, a leader in the provision of high-technology products and optical networking components, was suspended pursuant to the Code on Takeovers and Mergers. An Offer, by way of a Scheme, has now been announced. The cancellation price is HK$6.50/share, a 23.57% premium to last close. The price will not be increased. Disinterested Shareholders comprise 375.196mn shares, or 44.99% of shares out. Therefore 10% blocking stake is attached to ALL of the Scheme Shares held by the Disinterested Shareholders at the Scheme Meeting is 37.52mn shares or 4.499% of shares out. O-Net is Cayman incorporated therefore the headcount test applies. Assuming the deal gets up, this may be wrapped up by late October.
A condition to the Scheme is that Kaifa’s shareholders approve the acquisition. This should be a simple majority vote. CapIQ has SOE China Electronics Corporation holding a little over 39%. I don’t see the vote as being a risk to the deal. It is currently expected that a shareholders’ meeting will be convened by Kaifa within one month from this Offer announcement.
O-Net should be a key beneficiary from global 5G investment. Applying various metrics and with respect to a global basket of peers, I argued there was potentially 33% upside from the undisturbed price to an Offer price. We got 23.57%. That’s probably going to be enough. Shares were trading around a two-year high and have all but batted away COVID-19.
I see the gross/annualised spread at 3.7%/13.5%, assuming cheques are issued late October. That level looks about right. This is not a slam dunk premium – the average premium for Asia-Pac transactions this year is ~33%. Still, O-Net was up 27% YTD, ahead of the Offer announcement, so optically, the offer is not viewed as opportunistic. All in, this deal should get up.
The Promoters of JBCP announced on 3rd July they had signed an SPA with KKR & Co Inc (KKR US) to sell up to 54% of the company’s total shares from their holdings. Pursuant to SEBI Regulations, this triggered the obligation for the Acquirer to launch a Mandatory Open Offer to buy shares from Public Shareholders at similar Terms. To fulfil this requirement, the Acquirer has launched a Partial Tender Offer to buy up to 26% of the company’s total shares from non-promoter shareholders at a cash price of INR745.00/share. Tender Offers in India have a statutory timeline that requires the settlement to be within 72 business days from the date of the announcement which means the Offer could be completed in the next 4 months.
The Open Offer Quantity will be fixed at 20,093,346 shares (26% of voting capital) and how much the Promoters will get to sell will depend on what portion of the Open Offer Quantity gets filled. If Open Offer gets fully filled (26%), Promoters will be able to sell up to 38.9% in total (so that the Acquirer’s stake does not exceed 64.9%). If no shares are acquired in the Open Offer, the Promoters will be able to sell the entire SPA quantity of 54% (given that Total Foreign Shareholding in the Company remains at or below 74%).
The Open Offer is not conditional upon any minimum level of acceptance. If all non-promoter shareholders (44.09%) tender their shares, 58.97% of the total tendered quantity will be purchased. (Minimum Fill Ratio = 58.97%). If non-promoter shareholders representing less than 26% tender their shares, all shares tendered will be purchased. (Maximum Fill Ratio = 100%).
The upside is ~3.4% to the tender offer price, which is a relatively low annualized return over 4 months. However, on a longer-term basis, expecting growth and a desire by KKR to exit after several years through a sale to someone else, one can expect a Delisting Offer at a higher price could be in the offing. For that, this situation is bullish as the odds are better of a higher price than a lower price. If you trade this situation, the trade is to know you have a put option for 60-75% of your position at a price 3.4% higher than here. Janaghan Jeyakumar thinks a 70-80% pro-ration rate is likely if the shares stay at the current level minus a little bit. If the shares drop to below INR 700 prior to the Tender Offer, that would be a great place to buy.
On 6th July, UK-based independent Oil & Gas company Rockrose made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn. The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash. This all-friendly Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020. The Acquirer has also reserved the right to implement the Acquisition by way of a Takeover Offer.The Offer Price translates to premia of 63.7%, 90.7%, and 68.5% to the stock’s pre-announcement closing price, 3-month VWAP, and 6-month VWAP respectively.
The Scheme will require approval from Target Shareholders representing 75% of votes cast. Irrevocables from Target Shareholders holding 35.3% (4,651,113 shares) have agreed to vote in favour of the Deal. If the second largest shareholder Cavendish Asset Management (1,442,648 shares or ~11% stake). If they also vote in favour, the maximum required approval rate could fall to 45% for the remaining shareholders.
This Deal seems like a rescue. As a publicly-listed company, RockRose was mainly interested in acquisitions in the upstream Oil and Gas sector which they intended to fund through further equity offerings. However, at present, they feel raising further equity capital would be “unduly dilutive” after the drastic decline in stock price in recent months caused by Oil Price Shocks and COVID-19 fears. Given this context, the Offer Terms seem acceptable.
Given the board’s unanimous recommendation and the willingness of insiders to accept the Deal, others might be convinced to sell too. At the time of writing, RockRose shares are trading at GBP18.34 translating to a gross spread of 0.87% with roughly 2 months to completion. Janaghan expects RockRose shares to trade close to terms until completion. This could be a simple and short-dated “rate-of-return” trade. I expect the Deal to complete as-is.
Activist Polygon (1.025% stake in MásMóvil, worth c. EUR 31 mn) has sent a letter to the CNMV (Securities Market National Commission, the Spanish market watchdog) regarding the terms of the Lorca Telecom (KKR, Cinven and Providence funds) voluntary takeover bid for MásMóvil. The letter provides reasons why the current offer (especially the irrevocable undertakings) seems unfair for the minority shareholders
Jesus Rodriguez Aguilar reckons there are three possible scenarios from here: i) a counterbid by other private equity firms, such as Carlyle or CVC (who have mulled a bid for MásMóvil in the past); ii) one of the incumbents —Telefónica, Vodafone or Orange— counteroffers at a higher price. This seems difficult (see further in the note); and iii) :orca Capital does not get the 90% acceptance required to squeeze out and delist MásMóvil, so the current shareholders share in the possible upside of a hypothetical Vodafone Spain acquisition.
Jesus’ recommendation is LONG MásMóvil: the downside risk at the last close (EUR 22.68 vs a bid of EUR 22.50) is low and there are reasons to hold for an improved bid. The Domínguez de Gor family (8% stake) has already said that it will not consider the bid unless there is an improved price of EUR 24 per share. The acceptance period of the Lorca Capital bid should start in September.
In New Rules on Prefs Trading, Listing, & Delisting in Korea, Sanghyun discussed the new rules for the trading, listing, and delisting of the local preferred shares announced by the Korea FSC. The minimum shares out and market cap for new listings are now 1mn shares and ₩5bn, effective October this year. As for delisting, those prefs below 0.2mn shares or ₩2bn market cap will lose their spot, starting October next year with a grace period of one year,
OTHER M&A & EVENT UPDATES
Iberdrola SA (IBE SM)released its Secondary Bidder’s Statement on Infigen Energy (IFN AU) announcing the FIRB condition had been fulfilled. Infigen for its part announced updated Supplementary Target Statements on both the Iberdrola deal … and the UAC Energy deal.
Yixin Group Ltd (2858 HK)‘s Composite Doc has been delayed until the 7 April 2021, to allow time for the satisfaction of all conditions.
Cardinal Resources (CDV AU) has completed the issuance of shares (26mn or A$11.96mn) to Shandong as per the BIA. Difficult to see Norgold coming back into the mix from here. Bidder/Target Statements due out on or before the 22 July.
Golden Meditech Holdings (801 HK)announced that an “application has been made by the Company and the Offeror to the Executive for consent to the extension of the latest date for despatching the Scheme Document from 8 July 2020 to 26 August 2020 and the Executive has granted the consent.” That about 10 days past my initial estimate.
SAIC Motor HK Investment Limited – presumably an entity under SAIC Motor (600104 CH) – will acquire 20.87% of shares out from UCAR, and 14.76% from Amber Gen – both at $3.10/share – taking its take to 28.92%. Car Inc (699 HK) closed at $2.53 yesterday. This will give shares a boost.
Hohsui Corp (1352 JP) was put on notice that it has until 31 March 2021 to lift its market cap in order to stay in the TSE1, or else it will get demoted to the TSE2.
Both Anicom Holdings (8715 JP) and Benefit Japan (3934 JP) announced that the TSE had put each on notice for possible demotion to the TSE2 (from the TSE1) if they do not maintain a shareholder count of 2,000 or more by the end of the grace period (31 March 2021).
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.
Short Interest in Korea decreased in almost all industry groups led by Media & Entertainment, Pharmaceuticals, Technology Hardware and Materials.
Short Interest in Taiwan decreased in almost all industry groups led by Technology Hardware, Semiconductors, Capital Goods and Telecommunication Services while shorts increased in Banks and Automobiles.
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STRESS TESTS – This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. Part 1 looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the ‘lifeblood’ of all businesses – Operating Cash Flow.
ACCRUAL ACCOUNTING – Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, “Accrual accounting brings the future forward in time and anticipates future cash flows.” Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. Nissan Motor (7201 JP)’s Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company’s Relative Price Score over the last thirty years. Further Insights in this series will continue to ‘mine’ the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS – Our Operating Cash Flow calculation is derived from each company’s Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows. Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders’ Equity.
UNIVERSE – The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data. Five non-financial companies, which have significant financial subsidiaries (Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)), have been excluded from this analysis.
Japanese consumer goods company Meiji Holdings (2269 JP) issued a press release on Friday (12th June 2020) stating that the company is considering a stock split to boost liquidity and capital injection by investors.
The company previously conducted a two for one stock split on 1st October 2015. The share price rallied as much as 17.9% in the two days following Meiji’s announcement of its 2015 stock split.
We believe Meiji had genuine reasons for its previous stock split, whereas the explanation for the current considering stock split is not convincing. We explain our reasons below.
Japan’s major apparel firms are in trouble as Onward Holding (8016 JP)’s decision to slash 50% of its stores and Sanyo Shokai (8011 JP)’s fight with activist shareholders both demonstrate.
For nearly 30 years, Renown (3606 JP) was the worst of the bunch but it has at last been forced to file for bankruptcy protection, with wider implications for the apparel and department store sectors. Other apparel firms like Sanyo Shokai also look to be in trouble.
In the end, the crisis in the big apparel firms is also a crisis for department store apparel floors. Given that 30% of department store sales come from apparel and, other than cosmetics and jewellery, what profit there is in department stores also comes from clothing, this remains a serious problem. When Onward, Renown, Sanyo Shokai and others close down so many brands in so many department stores, the buildings themselves lose even more lustre, making it harder to find new tenants or wholesale suppliers. More closures and mergers may be on the cards (for details see below).
The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.
Short Interest in Korea decreased led by Information Technology and Health Care.
Shorts in Taiwan were covered in almost all industry groups led by Technology Hardware, Semiconductors and Consumer Durables.
Short Interest decreased in all four markets covered as markets continued to run up. This has likely left investors underhedged in the market drop and we could see increased short activity over the next week.
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