Daily BriefsMost Read

Most Read: SK Telecom, Toshiba Corp, Gree Inc, Jardine Matheson Holdings, Ebook Initiative Japan Co Ltd and more

In today’s briefing:

  • SK Telecom (017670 KS): Spin-Off and MSCI/ FTSE / KOSPI200 Index Treatment
  • Toshiba – Elliott Jumps Into The Fray
  • Greeeee… Wheeeee…..!
  • Jardine Matheson’s (JM SP) Turn To Buy Back Shares
  • E-Book Initiative (3658 JP) Tender Offer Takeout – This One Needs Cowbell Too

SK Telecom (017670 KS): Spin-Off and MSCI/ FTSE / KOSPI200 Index Treatment

By Brian Freitas

SK Telecom (017670 KS) shareholders will meet on 12 October to approve the spin-off of SK Square. For each share of SK Telecom (017670 KS) held, shareholders will receive 0.6073625 shares of the new SK Telecom (017670 KS) and 0.39296375 shares of SK Square. There will also be a 5:1 share split.

Trading in SK Telecom (017670 KS) will be halted from 26 October to 26 November and both stocks will resume trading on 29 November.

There are a few big implications of the spin-off (apart from the value unlocking angle):

  • Passive funds benchmarked to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) will need to sell SK Telecom (017670 KS) at the close of trading prior to suspension and buy back the stock at the close on relisting date. However, not all funds trade the same way and some just keep the parent stock.
  • SK Square will be included in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and there will be an extra deletion from the index at the December rebalance
  • SK Square will be included in the MSCI Korea index. That will not bring in any passive flows. But the stock will not be subject to an FOL. The increased FIF of the stock in the index will bring in a lot of passive flow.
  • SK Square will be included in the FTSE All-World index. Again, the increased investability weight of the stock due to lack of an FOL will being in substantial passive inflows.

In this Insight, we take a look at the current state of play in SK Telecom (017670 KS), the spin-off details and the index treatment of the stocks post spin-off. 

Toshiba – Elliott Jumps Into The Fray

By Travis Lundy

Toshiba Corp (6502 JP) has had a tough time of things for years, but they have been problems largely of the company’s own manufacture. 

Ill-fated investments led to accounting mishaps, which led to management and internal control issues, which when cleaned up led to more significant tone at the top issues, and in its zeal to remain listed when it probably should have arranged for a take-private rescue in 2017-2018, it ended up being owned to a level of more than 50% by foreign activist investors. 

The company did a giant buyback, re-upped its dividend, and eventually returned to the TOPIX Index this past spring as it returned to the TSE First Section. But “new management” in the form of Nobuaki Kurumatani, who was looking for something to do after not making the top slot at SMBC, was somewhat autocratic, and eventually that triggered the problems which come when not-as-powerful-as-they’d-like autocrats have to rely on others (in this case, regulators) to do their dirty work for them. About 18 months ago when it looked like the activists might decide to oust Kurumatani from his Board seat (and by default, CEO-ship), the company went into Entrenchment Mode and undertook activity about which some activists eventually complained. An internal investigation by the Parents pretended to look under the bed and decided there were No Monsters There. Activists knew what they had experienced was not reflected in that No Monsters Review and demanded an EGM to call an independent review, which The Parents (management) opposed. They got it, then they got the review, and partway through, Kurumatani-san was running out of internal support, so the Board was apparently going to give him the axe. 

Magically, he found someone – his old shop – to say “hey, we’d like to buy out Toshiba, but only if Kurumatani-san stays” (discussed in Toshiba – The CEO Gets His MBO Bidder and Toshiba Will Get Interestinger and Gaming Out a CVC Bid for Toshiba – The Right Noises, The Wrong Price, and Toast (the first of which, coincidentally, followed on exactly a year after I wrote An MBO for Toshiba? Not As Silly As It Sounds)).  The board looked at that and decided that was a little too coincidental, and Kurumatani-san was gone (discussed in Toshiba – The King Is Dead, Long Live the King). The chatter of an MBO/LBO died down somewhat but did not die as earnings came out, a capital return became possible, then just two weeks before the AGM (one where Kurumatani-san was surely going to have problems if he had stayed) the Independent Report came out (Toshiba’s 2020 AGM Investigative Report Is Damning). The report made it absolutely clear that indeed, there were lots of Monsters Under the Bed, and some of them were actually the Parents themselves, and there were tapes and emails, and a few conveniently destroyed mobile phones. 

In the interim, about 10% of the company had been bought by TOPIX trackers, and that shifted the mix of voting rights for the AGM, but when the damning report came out, some directors were livid because it turned out some directors and old management had effectively lied to them in presenting the first report. It was mayhem. The result? A bunch of directors were ousted and/or not re-elected. Toshiba now has fewer directors than it needed, the former CEO and one-time chairman is back as interim CEO and a search is on for a new CEO and new Chairman, more directors and a Strategic Review for the business is under way. 

There are noises of either an IPO (more likely) or a take-private of the Kioxia (6600 JP) unit, but given global sensitivity to access to semiconductors and memory, I think an IPO much more likely. A couple of weeks ago, Toshiba made a press release regarding the progress the Board was making in its strategic review, saying that any talk of a take-private situation would need to wait until that review was finished. This seemed to upset some investors but it makes utter sense from the standpoint of a Board lacking a full-time CEO, a complete complement of Board members, and a professional Chairman. It also needed some time to deflate expectations and upset on both sides after the Independent Report came out blaming both Toshiba and METI, saying illegality by one or both might have been committed, and METI came out very much defiant because of natsec concerns (which really only affect a small portion of the business). 

Today’s News Is BIG

The FT posted an article this evening Tokyo time, saying that famed US-based activist firm Elliott Management Corp had bought a significant stake in Toshiba and held talks with management and the Board and advisers. “people close to Toshiba said that Elliott’s stake did not exceed 5 per cent.” Bloomberg touched base with Elliott who said that Elliott confirmed they were a “large shareholder.” Generally, in Japan, that means a 5% stake, but we will see. If they are not over 5% in a Large Shareholder Report by next Thursday, then they aren’t a 5% stakeholder today. 

But the FT article is super-interesting, and deserves to be read closely.

And I have some more thoughts about that below the fold.  

Greeeee… Wheeeee…..!

By Travis Lundy

Gree Inc (3632 JP) is an online media business and game developer (Switch and Facebook Messenger) and does a hodgepodge of other businesses. 

It has its good points, but nobody would call it a category killer or call it dominant in any way. And the stock has had a somewhat lacklustre 10 years. 

But it has its strong points, and it announced the exercise of one of those today.

More below the fold.

Jardine Matheson’s (JM SP) Turn To Buy Back Shares

By David Blennerhassett

On the 6th September, Hongkong Land (HKL SP) announced a US$500mn share buyback program, which will run until 31st December 2022. Based on the average daily volume over the last year of US$9-10mn, this buyback is roughly equivalent to ~15% of daily volume through to 2022 year-end. Pretty punchy.

In Hongkong Land’s (HKL SP) Big Buyback, I said the Jardine’s group evidently believes it makes good business sense to buy back its own shares in place of deploying capital into HKL’s investment and development property portfolio.

Now it’s Jardine Matheson Holdings (JM SP)‘s turn to buy back its own shares. 

Yesterday the conglomerate announced a US$250mn buyback which will run through to 30 June next year.

As with HKL, the holding of treasury shares is not permitted in JMH’s constitution, therefore any shares repurchased will be cancelled.

I see JMH’s discount to NAV at ~30%, around its lowest level since taking Jardine Strategic Holdings (JS SP) private.

We now have some indication as to what the Keswick family considers a cheap entry-level. 

More below the fold.

E-Book Initiative (3658 JP) Tender Offer Takeout – This One Needs Cowbell Too

By Travis Lundy

Back in April I discussed how those looking at Softbank Corp (9434 JP) on an EV/EBITDA basis would be measuring the company incorrectly. The insight was Softbank Corp – Accounting for The Accounting Is Complicated.

Yeah… it was an accounting thing. 

When you look at Softbank Corp and its consolidated revenues and EBITDA, you were looking at the parent co business of telecoms, then because Softbank Corp owned 50% of a company which owned 65% of Z Holdings (4689 JP) which itself consolidated Ebook Initiative Japan Co Lt (3658 JP) because of the 43% it held, it meant that Softbank Corp consolidated 100% of the top line but only 14% of the bottom line. 

That is about to get weirder as LINE Digital Frontier has just announced a Tender Offer to take out “minorities” in Ebook Initiative Japan at ¥4750/share. That takeout price is a lifetime high, a 4-bagger since covid-crash lows, 10x book, 550+x EBITDA and one could add more comments that suggest it is a superlative exit for investors. 

Those things are nice, but….

But it is likely to tick off some people. I discuss why in more detail below but a summary can be…

This kind of transaction is yet another situation where the METI Fair M&A Guidelines introduced in summer 2019 have been roundly ignored. There is a lack of good procedure and governance, the valuation is inadequate, the advise provided insufficient, the price manifestly too low, synergies explicitly unaccounted for, no fairness opinion, and the takeover premium is as low as I have seen. 

And other than that Mrs Lincoln, how was the play?

This situation begs for some cowbell (and, obviously, Japan Needs More Cowbell

Much more below the fold. 

Before it’s here, it’s on Smartkarma