Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

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Equity Bottom-Up

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

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

Toshiba Corp (6502 JP) Chapter 1: CEO Out, Activists up the Game

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

That famous phrase is not internally contradictory. It announces the death of the late monarch, and announces the ascension of the new monarch to replace him. A flurry of articles late last night Japan time - some of them referenced in a few discussion points posted to the most recent insight <a href="https://www.smartkarma.com/insights/gaming-out-a-cvc-bid-for-toshiba-the-right-noises-the-wrong-price-and-toast" target="_blank" data-smartkarma-citation="insights:50229" rel="noopener">Gaming Out a CVC Bid for Toshiba - The Right Noises, The Wrong Price, and Toast</a> and others said that Kurumatani-san was going to be dismissed, or resign, at an extraordinary board meeting to be held on the 14th of April. The various articles were more or less revealing depending on how much the masthead represents Japan as Japan Inc would have itself represented. Articles from institutions with a more neutral/critical eye were more forthcoming about the turmoil under the surface. The phrases from the former were on the order of "it became inevitable that Kurumatani-san would have to resign." The FT <a href="https://www.ft.com/content/65a3b3b0-c68e-4312-a29b-d0b90d8cf011?accessToken=zwAAAXjMEoyYkc9lo7Owxo5DEtOim9C5DYzwEQ.MEYCIQC4LeQUZlpxHrSPbzJTDZ61ShI44C3oiJbgokufB8UoBwIhANeoOL0qqwn55uqeZ8S1dfICiwDimLC64-ywWZ507TTe&amp;sharetype=gift?token=5fa2425a-19d9-4c96-b0f6-a2318b638d3b" target="_blank" rel="noopener">suggested</a> one board member would put forth a motion to dismiss him after the CVC approach last week threw senior management into "civil war."Later versions suggested Kurumatani-san would himself resign at the beginning of a meeting, which would forestall an effort to boot him (The King is Dead). Toshiba's exchange release this morning in response to press coverage all but confirms it.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/200/472/original/Screenshot+2021-04-14+at+9.22.08+AM.png?1618363354" class="editor-image img-responsive" data-smartkarma-image-id="200472"></figure></section>If Kurumatani-san is going to fall on his sword because of the CVC conflict (and the idea that by getting CVC to bid to distract from the other things going on, he was somehow entrenching himself in ways not befitting Toshiba adherence to the spirit of the Corporate Governance Code), one would expect Fujimori-san may resign as well. All the stories suggest the current Chairman and former CEO Tsunakawa-san would take the reins (Long Live the King!) but despite Tsunakawa-san being on friendlier terms with some of the activists, the Board needs to find someone else. I expect there would be shareholder pressure to have that person come from without, but Toshiba is a sensitive asset and there could be considerable pressure to have that person come from within, or if from without, from within the Keidanren. I think investors need to prepare themselves for the possibility that the replacement for Tsunakawa-san may not be the CEO Toshiba needs either, but that may be jumping the gun.The result is not dissimilar to what <a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a> and I had suggested was inevitable, but the speed of the unwind may catch people by surprise. I expect that the news reports of the internal survey conducted by the Nomination Committee which showed a majority of senior executives distrusted Kurumatani-san will be viewed as the tipping point...But investors should note that the results of that survey were known in March, conveyed to Kurumatani-san at end-March, and the Board knew it at end-March - before the CVC bid. The results of that survey were not enough to ask for his head at the time unless the CVC bid was well-and-truly concocted by CVC and Kurumatani-san himself as a way to maintain power. If that is the case, CVC needs to get out in front of it, by being very public in refuting that, and continuing with a bid, even if they bid to lose. This whole situation, as I suggested last week, is getting interestinger. And we have toast. Officially, before I even finished this piece, Toshiba is out with a <a href="https://www.toshiba.co.jp/about/ir/en/news/20210414_2.pdf" target="_blank" rel="noopener">press release</a> saying Kurumatani-san is out and Tsunakawa-san is in. It's pretty spare, but there is a news conference after the close.NOW we look at what comes next. With KKR and Brookfield potential bids, and more details about CVC intentions overnight, it's worth looking at structure. So there's more below the fold.

That famous phrase is not internally contradictory. It announces the death of the late monarch, and announces the ascension of the new monarch to replace him. A flurry of articles late last night Japan time - some of them referenced in a few discussion points posted to the most recent insight Gaming Out a CVC Bid for Toshiba - The Right Noises, The Wrong Price, and Toast and others said that Kurumatani-san was going to be dismissed, or resign, at an extraordinary board meeting to be held on the 14th of April. The various articles were more or less revealing depending on how much the masthead represents Japan as Japan Inc would have itself represented. Articles from institutions with a more neutral/critical eye were more forthcoming about the turmoil under the surface. The phrases from the former were on the order of "it became inevitable that Kurumatani-san would have to resign." The FT suggested one board member would put forth a motion to dismiss him after the CVC approach last week threw senior management into "civil war."Later versions suggested Kurumatani-san would himself resign at the beginning of a meeting, which would forestall an effort to boot him (The King is Dead). Toshiba's exchange release this morning in response to press coverage all but confirms it.If Kurumatani-san is going to fall on his sword because of the CVC conflict (and the idea that by getting CVC to bid to distract from the other things going on, he was somehow entrenching himself in ways not befitting Toshiba adherence to the spirit of the Corporate Governance Code), one would expect Fujimori-san may resign as well. All the stories suggest the current Chairman and former CEO Tsunakawa-san would take the reins (Long Live the King!) but despite Tsunakawa-san being on friendlier terms with some of the activists, the Board needs to find someone else. I expect there would be shareholder pressure to have that person come from without, but Toshiba is a sensitive asset and there could be considerable pressure to have that person come from within, or if from without, from within the Keidanren. I think investors need to prepare themselves for the possibility that the replacement for Tsunakawa-san may not be the CEO Toshiba needs either, but that may be jumping the gun.The result is not dissimilar to what Mio Kato and I had suggested was inevitable, but the speed of the unwind may catch people by surprise. I expect that the news reports of the internal survey conducted by the Nomination Committee which showed a majority of senior executives distrusted Kurumatani-san will be viewed as the tipping point...But investors should note that the results of that survey were known in March, conveyed to Kurumatani-san at end-March, and the Board knew it at end-March - before the CVC bid. The results of that survey were not enough to ask for his head at the time unless the CVC bid was well-and-truly concocted by CVC and Kurumatani-san himself as a way to maintain power. If that is the case, CVC needs to get out in front of it, by being very public in refuting that, and continuing with a bid, even if they bid to lose. This whole situation, as I suggested last week, is getting interestinger. And we have toast. Officially, before I even finished this piece, Toshiba is out with a press release saying Kurumatani-san is out and Tsunakawa-san is in. It's pretty spare, but there is a news conference after the close.NOW we look at what comes next. With KKR and Brookfield potential bids, and more details about CVC intentions overnight, it's worth looking at structure. So there's more below the fold.

Toshiba - The King Is Dead, Long Live the King

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

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

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

Toshiba – How the Kurumatani Resignation and KKR or Brookfield Bids Could Change Things

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

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

Toshiba Corp (6502 JP) – And so It Begins

Things are heating up.Some might say after today that Kurumatani-san is on the hot seat feeling considerably toasty.Over the weekend, there were more noises as the Nikkei reported that Toshiba would "take the CVC bid seriously", had set up an internal review committee to be chaired by a Vice President, and that the approvals would be expected by early summer, a Tender Offer would start in July, and if successful, Toshiba would be delisted in October. This morning there is a <a href="https://www.nikkei.com/article/DGXZQOUB1117Z0R10C21A4000000/?unlock=1" target="_blank" rel="noopener">report</a> that the large increase in position by Singapore-based (and as the Nikkei describes them "noisy shareholder" 3D Investment Partners reported in the previous insight was in fact 3D purchasing the stake from Harvard Investment Management. This is important because 3D voted against Kurumatani-san last year as director and later asked the firm to investigate vote-counting irregularities. Harvard,  with 4.7%, abstained, reportedly after former GPIF CIO Hiromichi Mizuno - champion of governance and stewardship while at GPIF and then-special advisor to METI - communicated with Harvard and voiced the possibility that if they voted against Kurumatani-san there could be a probe based on the idea that if shareholders coordinate to vote without declaring joint ownership, there can be issues (Reuters <a href="https://www.reuters.com/article/toshiba-board-idUSKBN28X0O6" target="_blank" rel="noopener">report</a>, FT <a href="https://www.ft.com/content/bdfff63b-93a4-451c-a98f-a22548106327" target="_blank" rel="noopener">article</a>).Now there appears to be no issue of a Harvard abstention and clear increase in voting power for shares held by those who would challenge management (with or without Kurumatani-san) on capital and management policy, but to be clear, votes FOR are measured as a percentage of votes PLUS active abstentions. If Harvard actively abstained (rather than passively not voting), then this won't change the support ratio (it would just change the optics). IF the 21.4mm share position moved from passive abstention to active opposition, it would have lowered the votes FOR from 57.98% to 54.46%, but Kurumatani-san would have squeaked through still. The entire situation is great fun. The situation of Toshiba governance has become something of a governance nightmare and with national security issues at stake for a minority of the business, a potential bureaucratic quagmire. But the company is doing decently well, and is long a desirable asset, and there are LOTS of shareholders who are heavily vested in seeing this through. And it appears with the March EGM result that they have a majority. Sitting in the audience, it makes me want to have a squirt gun, rubber gloves, rice, newspaper, and toast. Gotta have toast.

Things are heating up.Some might say after today that Kurumatani-san is on the hot seat feeling considerably toasty.Over the weekend, there were more noises as the Nikkei reported that Toshiba would "take the CVC bid seriously", had set up an internal review committee to be chaired by a Vice President, and that the approvals would be expected by early summer, a Tender Offer would start in July, and if successful, Toshiba would be delisted in October. This morning there is a report that the large increase in position by Singapore-based (and as the Nikkei describes them "noisy shareholder" 3D Investment Partners reported in the previous insight was in fact 3D purchasing the stake from Harvard Investment Management. This is important because 3D voted against Kurumatani-san last year as director and later asked the firm to investigate vote-counting irregularities. Harvard,  with 4.7%, abstained, reportedly after former GPIF CIO Hiromichi Mizuno - champion of governance and stewardship while at GPIF and then-special advisor to METI - communicated with Harvard and voiced the possibility that if they voted against Kurumatani-san there could be a probe based on the idea that if shareholders coordinate to vote without declaring joint ownership, there can be issues (Reuters report, FT article).Now there appears to be no issue of a Harvard abstention and clear increase in voting power for shares held by those who would challenge management (with or without Kurumatani-san) on capital and management policy, but to be clear, votes FOR are measured as a percentage of votes PLUS active abstentions. If Harvard actively abstained (rather than passively not voting), then this won't change the support ratio (it would just change the optics). IF the 21.4mm share position moved from passive abstention to active opposition, it would have lowered the votes FOR from 57.98% to 54.46%, but Kurumatani-san would have squeaked through still. The entire situation is great fun. The situation of Toshiba governance has become something of a governance nightmare and with national security issues at stake for a minority of the business, a potential bureaucratic quagmire. But the company is doing decently well, and is long a desirable asset, and there are LOTS of shareholders who are heavily vested in seeing this through. And it appears with the March EGM result that they have a majority. Sitting in the audience, it makes me want to have a squirt gun, rubber gloves, rice, newspaper, and toast. Gotta have toast. 

Gaming Out a CVC Bid for Toshiba - The Right Noises, The Wrong Price, and Toast

Japan

Toshiba Corporation manufactures and markets electrical and electronic products. The Company's products include digital products such as PCs and televisions, NAND flash memories, and system LSIs (large-scale integrated), as well as social infrastructures such as power generators, medical equipment, and home appliances.

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Toshiba Corp (6502 JP)