Daily BriefsJapan

Japan: Bull Dog Sauce, Kose Corp, Welbe Inc and more

In today’s briefing:

  • TOPIX Inclusion: Bull-Dog Sauce (2804) Is SUPER GREEN
  • Japanese Cosmetics Pair Trade Opportunities As Japan Prepares to Declare a State of Emergency
  • TOPIX Inclusion: Welbe, Inc. (6556 JP)

TOPIX Inclusion: Bull-Dog Sauce (2804) Is SUPER GREEN

By Travis Lundy

A long time ago in a land far, far away, there was a small company which made sauce, which was the subject of a Tender Offer by an activist who had developed something of a reputation for being hostile. To defend itself, the company asked its shareholders to allow it to execute a poison pill and indeed it executed the poison pill which said that all investors other than the activist would get the opportunity to buy three new shares for every one share owned, for 1 yen each, while the activist was given a market price-based cash equivalent for three quarters of the new position. 

The activist, Steel Partners, took it to court trying to get an injunction on the issuance of the warrants. The District Court allowed the issuance to go forward, Steel appealed, and the Tokyo High Court (the middle one in this case) decided Steel Partners was an “abusive acquirer.” In August of 2007, the Supreme Court agreed with the lower courts and decided that the issuance could proceed.

It is generally thought amongst Tokyo legal experts that the case was a triumph for shareholder supremacy because shareholders had voted to create such a warrant system to dilute acquirers which an independent committee had determined to be detrimental or abusive. The conclusion by the company’s board to go ahead with the issuance was at the behest of a process pre-agreed by shareholders. 

The precedents which were seen to have been set in this case were that… 

  • a company could defend itself against a hostile bidder (or perhaps shareholder) if that shareholder’s actions were deemed to be detrimental to the corporate value of the company or to other shareholders. 
  • But that such a defense had to be fair. In this case, Bulldog provided compensation for the share warrants issued to other shareholders.

In hindsight, the result was far better for Steel Partners than for the other shareholders.

On a split-adjusted basis, 13+ years later, the shares have not recouped one-quarter of their price prior to when Steel Partners raised their bid. The fall in share price in the chart below was because of the massive new issuance. The shares should have fallen in price by three quarters to account for the new issuance. Instead, they fell by three quarters then fell by half again to account for the fact there was no more takeover premium. 

At ¥1590 at today’s close, that is ¥6360 pre-dilution. 

So now, some 13 years later, we have a smidgen of good news. 

The Good News

Today, after the close, the company announced (Japanese only) that it had been accepted to move its shares from TSE2 to the TSE’s First Section on 14 January. That means it will be included in TOPIX some 6 weeks later. 

For those who follow the Quiddity TOPIX Inclusion Framework, this inclusion is GREEN.

It is, indeed… 

And as always after that kind of introduction, there is more below the fold.


Japanese Cosmetics Pair Trade Opportunities As Japan Prepares to Declare a State of Emergency

By Oshadhi Kumarasiri

  • Corona virus is rampaging across Japan again. There were 1,591 new COVID cases in Tokyo and over 6,000 nationwide yesterday. Earlier this week, the Japanese government said that they are considering declaring a state of emergency in and around the Tokyo area.
  • Japanese cosmetics underperformed Topix by 10 percentage points during last year as the cosmetics sector earnings declined by 68% due to the ongoing COVID-19 crisis.
  • Following the first round of restrictions in April 2020, Kose Corp (4922 JP)’s share price underperformed Fancl Corp (4921 JP) and Kao Corp (4452 JP) by 49% and 9% respectively in the April-July 2020 period. Since then Kose has outperformed Fancl 31% and Kao by 56%.
  • As Japan prepares for a second round of “soft lockdowns”, we would recommend investors to reposition their investments in Japanese cosmetics to Short Kose and Long Fancl and Kao.

TOPIX Inclusion: Welbe, Inc. (6556 JP)

By Janaghan Jeyakumar, CFA

Today after market close, Welbe Inc (6556 JP) announced they had received approval to move from the MOTHERS Section to the First Section of the Tokyo Stock Exchange as of 14th January 2021.

TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 25th February 2021. 

Welbe, Inc. provides employment support services for people with disabilities. Their services include lifestyle support, skill training, job hunting, and post-employment support. They also provide child development support. They currently have 77 employment transition support offices spread across Japan. 

In this insight, we take a look at the Index Inclusion Parameters and the Fundamentals of the company to evaluate the upside potential of the TOPIX Inclusion Event. 


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