Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>UK-Based Japanese share activist AVI said publicly yesterday that the price Mitsui OSK announced to take out minorities in <a href="https://www.smartkarma.com/entities/daibiru-corp" target="_blank" data-smartkarma-citation="entities:19065:1" rel="noopener">Daibiru Corp (8806 JP)</a> should be ¥3,000/share not ¥2,200/share.</li>
<li>Today AVI launched a website at <a href="https://www.assetvalueinvestors.com/stopexploitingdaibiru/" target="_blank" rel="noopener">https://www.assetvalueinvestors.com/stopexploitingdaibiru/</a> in which they make their <a href="https://www.assetvalueinvestors.com/content/uploads/2021/12/Daibiru-Public-Presentation_202112_ENG_vF.pdf" target="_blank" rel="noopener">case</a>. </li>
<li>They've got a point. And it is definitely a good point. But the shareholder structure means this is a short-gamma situation for bumpitrageurs.</li>
</ul>


UK-Based Japanese share activist AVI said publicly yesterday that the price Mitsui OSK announced to take out minorities in Daibiru Corp (8806 JP) should be ¥3,000/share not ¥2,200/share.
Today AVI launched a website at https://www.assetvalueinvestors.com/stopexploitingdaibiru/ in which they make their case. 
They've got a point. And it is definitely a good point. But the shareholder structure means this is a short-gamma situation for bumpitrageurs.


Mitsui OSK TOB for Daibiru (8806) Gets Loose from Its Mooring

<h3>The Idemitsu bid for Toa Oil looks bumpity. It is a weird situation though.</h3><p>In mid-December, <a href="https://www.smartkarma.com/entities/idemitsu-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:109:1" rel="noopener">Idemitsu Kosan (5019 JP)</a> - one of the two large refinery groups in Japan, formed from the merger of Idemitsu Kosan and Showa Shell Oil KK (the other large one being <a href="https://www.smartkarma.com/entities/eneos-holdings-inc" target="_blank" data-smartkarma-citation="entities:638:1" rel="noopener">ENEOS Holdings (5020 JP)</a> formed from JX and Tonen General) - announced a Tender Offer for the minority portion of <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a>.</p><p>Idemitsu had "inherited" the majority portion in the acquisition of Showa Shell a couple years ago, and had not wrapped it up yet. </p><p>Toa Oil has for years been considered a jewel of an asset because of its extraordinarily high Nelson Complexity Index among refineries in Japan. This allows the company to get more, and more interesting products, out of every barrel of oil put in, and it allows the use of very heavy oil which is less expensive. </p><p>Because the company gets 90% of its revenue acting as an outsourced refinery for Idemitsu's raw materials and output, it carries little inventory and earns a tolling spread, which normally would be negotiated on an arms' length basis. Given the replacement value of the asset, and the market value of the use of the asset, it would appear that the current agreement with the current level of income it affords Toa is not quite arms' length. That would be a good reason to object to the pricing of the deal. If the refinery asset were sold on the open market in an auction, it would likely fetch a higher price for shareholders, including Idemitsu. </p><p>The original deal and all its parameters was discussed in <a href="https://www.smartkarma.com/insights/idemitsu-launches-lowball-tender-offer-for-subsidiary-toa-oil-5008" target="_blank" data-smartkarma-citation="insights:46384" rel="noopener">Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)</a> and was updated in <a href="https://www.smartkarma.com/insights/toa-oil-5008-tender-offer-update-looks-bumpity" target="_blank" data-smartkarma-citation="insights:46996" rel="noopener">Toa Oil (5008) Tender Offer Update - Looks Bumpity.</a> </p><h2>The NEW News</h2><ul>
<li>On 20 January, Toa Oil announced the record date for the EGM to be 10 February.</li>
<li>Since I last wrote, the largest shareholder has gotten larger, adding 2% to its position as of 21 January (and reported 28 January) and they now hold 22.98%. </li>
<li>On Friday 29 January, Toa Oil reported its <a href="https://www.toaoil.co.jp/investor/pdf/settlement_report_202103_3.pdf" target="_blank" rel="noopener">Q3 earnings</a>.</li>
<li>Toa Oil also announced a revision to its <a href="https://www.toaoil.co.jp/investor/pdf/20210129_gyousekiyosou_shusei.pdf" target="_blank" rel="noopener">full-year forecasts</a>.  The revenue forecast was revised by +7.7%. OP was revised by +509.8%. Net Profit was revised by +418.9%. Those are very big numbers. </li>
<li>Based on that revision, Toa Oil had to revise its <a href="https://www.toaoil.co.jp/investor/pdf/20210129_ikenhyoumei_henkou_english.pdf" target="_blank" rel="noopener">Target Opinion Statement</a>.</li>
<li>And because Toa Oil revised its Target Opinion Statement, pursuant to Article 27-8 Para 8 of the Financial Instruments and Exchange Act, Idemitsu had to <a href="https://ssl4.eir-parts.net/doc/5019/ir_material9/153752/00.pdf" target="_blank" rel="noopener">extend the Tender Offer</a> so there were 10 business days between the announcement and the tender close. The old close was 2 February. The new close is 15 February. </li>
<li>I expect that means Toa Oil will amend the record date for the EGM because Toa and Idemitsu would not want the EGM record date to be before Idemitsu had secured the extra shares.</li>
</ul><p>The quantum of the net change in the revision in earnings forecast should merit a little complaint by shareholders. The <em>change</em> in net income this year alone vs forecast is 5.1% of the Tender Offer Price Market Cap. Even if there is no change to future earnings EVER, that is 5.1% more. </p><p>Given that the Tender Offer Price was the wrong price in the first place, I imagine shareholders who have seen the price trade above the Tender Offer Price every day since the shares were free to trade (on the first day after the announcement, the shares closed limit up but below the tender offer price), will be even less inclined to accept a low-ball price. </p><p>More discussion below.</p>

The Idemitsu bid for Toa Oil looks bumpity. It is a weird situation though.In mid-December, Idemitsu Kosan (5019 JP) - one of the two large refinery groups in Japan, formed from the merger of Idemitsu Kosan and Showa Shell Oil KK (the other large one being ENEOS Holdings (5020 JP) formed from JX and Tonen General) - announced a Tender Offer for the minority portion of Toa Oil Co Ltd (5008 JP).Idemitsu had "inherited" the majority portion in the acquisition of Showa Shell a couple years ago, and had not wrapped it up yet. Toa Oil has for years been considered a jewel of an asset because of its extraordinarily high Nelson Complexity Index among refineries in Japan. This allows the company to get more, and more interesting products, out of every barrel of oil put in, and it allows the use of very heavy oil which is less expensive. Because the company gets 90% of its revenue acting as an outsourced refinery for Idemitsu's raw materials and output, it carries little inventory and earns a tolling spread, which normally would be negotiated on an arms' length basis. Given the replacement value of the asset, and the market value of the use of the asset, it would appear that the current agreement with the current level of income it affords Toa is not quite arms' length. That would be a good reason to object to the pricing of the deal. If the refinery asset were sold on the open market in an auction, it would likely fetch a higher price for shareholders, including Idemitsu. The original deal and all its parameters was discussed in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008) and was updated in Toa Oil (5008) Tender Offer Update - Looks Bumpity. The NEW News
On 20 January, Toa Oil announced the record date for the EGM to be 10 February.
Since I last wrote, the largest shareholder has gotten larger, adding 2% to its position as of 21 January (and reported 28 January) and they now hold 22.98%. 
On Friday 29 January, Toa Oil reported its Q3 earnings.
Toa Oil also announced a revision to its full-year forecasts.  The revenue forecast was revised by +7.7%. OP was revised by +509.8%. Net Profit was revised by +418.9%. Those are very big numbers. 
Based on that revision, Toa Oil had to revise its Target Opinion Statement.
And because Toa Oil revised its Target Opinion Statement, pursuant to Article 27-8 Para 8 of the Financial Instruments and Exchange Act, Idemitsu had to extend the Tender Offer so there were 10 business days between the announcement and the tender close. The old close was 2 February. The new close is 15 February. 
I expect that means Toa Oil will amend the record date for the EGM because Toa and Idemitsu would not want the EGM record date to be before Idemitsu had secured the extra shares.
The quantum of the net change in the revision in earnings forecast should merit a little complaint by shareholders. The change in net income this year alone vs forecast is 5.1% of the Tender Offer Price Market Cap. Even if there is no change to future earnings EVER, that is 5.1% more. Given that the Tender Offer Price was the wrong price in the first place, I imagine shareholders who have seen the price trade above the Tender Offer Price every day since the shares were free to trade (on the first day after the announcement, the shares closed limit up but below the tender offer price), will be even less inclined to accept a low-ball price. More discussion below.

Toa Oil (5008) Tender Offer Updated Update - STILL Looks Bumpity

David Blennerhassett

Last Week in Event SPACE:  Bingo Ind., Tokyo Rope, Pressance, Engineers India, Kuaishou Tech, SPACs

<p>In late November 2020, the Chairman and a senior executive of <a href="https://www.smartkarma.com/entities/joban-kaihatsu-co-ltd" target="_blank" data-smartkarma-citation="entities:14588:1" rel="noopener">Joban Kaihatsu (1782 JP)</a>  - a smallcap regional construction company with lots of government contracts - announced a Tender Offer to buy out the company. This happens all the time. </p><p>While it happens less often - though still with disturbing regularity - the more disturbing part of this is that he essentially tried to do it for free. </p><p>As discussed in <a href="https://www.smartkarma.com/insights/smallcap-joban-kaihatsu-founder-tries-a-free-mbo" target="_blank" data-smartkarma-citation="insights:45515" rel="noopener">SmallCap Joban Kaihatsu Founder Tries a Free MBO</a>, the Tender Offer Price of ¥7,800/share was less than the value of the net cash + securities positions as of end-September 2020 (the most recent accounting period pre-Tender Offer). The value of net cash + securities was ¥8,933/share. Tangible Book Value per share was ¥12,233/share. </p><p>The "management forecast" on which the "fair value" DCF was built was for higher revenues in the years ahead compared to years past, but also a reduction in profitability of 70%, which would continue for seven years. Even then, the average EBITDA (very little actual depreciation or amortization) for the next seven years was about US$8mm a year (so much lower FCF effectively hides future expensing of capital goods) and so.. obviously... the DCF of that EBITDA was worth... less than zero. </p><p>Shareholders weren't having it. Shares started trading above terms, and haven't traded lower than terms since they started trading in the auction market (after two days of limit up (and the second day was above terms too)).</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/184/185/original/Screenshot+2021-01-23+at+11.45.31+AM.png?1611373555" class="editor-image img-responsive" data-smartkarma-image-id="184185"></figure></section><p>Now we have new news. </p><p>Just before the close yesterday, the bidder raised its bid to ¥9,000/share, and extended the Tender Offer another 11 days to 9 February (they extended it in December from 28 Dec to 25 Jan). </p><p>I think the answer here is still going to be... we'll see.</p><div class="content-remarks"><p><em>[yes, the title is a semi-oblique reference to a large owner of the shares who has purchased its stake since the Tender Offer was launched, but I have no understanding of their intentions.]</em></p></div>

In late November 2020, the Chairman and a senior executive of Joban Kaihatsu (1782 JP)  - a smallcap regional construction company with lots of government contracts - announced a Tender Offer to buy out the company. This happens all the time. While it happens less often - though still with disturbing regularity - the more disturbing part of this is that he essentially tried to do it for free. As discussed in SmallCap Joban Kaihatsu Founder Tries a Free MBO, the Tender Offer Price of ¥7,800/share was less than the value of the net cash + securities positions as of end-September 2020 (the most recent accounting period pre-Tender Offer). The value of net cash + securities was ¥8,933/share. Tangible Book Value per share was ¥12,233/share. The "management forecast" on which the "fair value" DCF was built was for higher revenues in the years ahead compared to years past, but also a reduction in profitability of 70%, which would continue for seven years. Even then, the average EBITDA (very little actual depreciation or amortization) for the next seven years was about US$8mm a year (so much lower FCF effectively hides future expensing of capital goods) and so.. obviously... the DCF of that EBITDA was worth... less than zero. Shareholders weren't having it. Shares started trading above terms, and haven't traded lower than terms since they started trading in the auction market (after two days of limit up (and the second day was above terms too)).Now we have new news. Just before the close yesterday, the bidder raised its bid to ¥9,000/share, and extended the Tender Offer another 11 days to 9 February (they extended it in December from 28 Dec to 25 Jan). I think the answer here is still going to be... we'll see.[yes, the title is a semi-oblique reference to a large owner of the shares who has purchased its stake since the Tender Offer was launched, but I have no understanding of their intentions.]

Joban Kaihatsu MBO Price Bumped, Tender Extended: Still Not Rolling In Clover

<p><a href="https://www.smartkarma.com/entities/joban-kaihatsu-co-ltd" target="_blank" data-smartkarma-citation="entities:14588:1" rel="noopener">Joban Kaihatsu (1782 JP)</a> is a small cap construction/development company based in Fukushima which has run about US$150mm of revenue per year for the last five years, with semi-large <a href="http://www.jobankaihatsu.co.jp/work/building/results.html" target="_blank" rel="noopener">public and private construction projects</a> in and around Iwaki-City. They also do medium-scale public works projects in the area, including highways, bridges/overpasses, riverbeds, tunnels, slope management, etc. They also do environmental analysis. A lot of their work appears to be public sector work. </p><p>It is all-in-all a decent little contracting business with it appears, good OP Margin and Net Profit Margin on relatively little in the way of hard assets. For the last five years, they have averaged net profit of about ¥1.2bn a year. </p><p>A week ago, it was announced that Chairman Sagawa had proposed a Management Buyout at ¥7800/share and the Board had decided to accept and support the buyout. Like most MBOs, the goal is to "streamline management" and "create a system not bound by short-term results" and to promote "drastic structural reforms."</p><p>Most MBOs involve existing owners with significant stakes trying to get rid of meddlesome minorities.  This one involves Mr Sagawa, who owns 0.5% of shares out and has launched the bid, and the number one shareholder <a href="https://www.smartkarma.com/entities/joban-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:2826:1" rel="noopener">Joban Kosan (9675 JP)</a> (note the similarity of the name) which owns 12.8% and who has agreed to tender. Mr. Sagawa will own 90% and a director, Mr. Shinohara, will also stay on in management and will own 10%. </p><div class="content-highlight">
<p>That is a little unusual.</p>
<p>What is MORE unusual is that the Tender Offer Price values the entire company at ¥6.115bn while the company has a portfolio of net cash + securities of ¥7.00bn as of end-September.*</p>
<p>¥7bn of net cash + securities comes to ¥8,933/share. </p>
<p>Tangible Book Value Per Share is ¥12,233.</p>
</div><div class="content-remarks"><p>*All other Current Assets against all other liabilities comes out to be -¥300mm. The other LT Assets are an additional ¥2.5bn.</p></div><p>The company's recent 5-year history has seen an average of ¥16.4bn of revenue a year and roughly ¥1.84bn a year in OP - about 11% OP Margins. Despite the promised worsening revenue outlook, the management forecast used to calculate fair value is to see every year in the next six with revenue a <em>minimum</em><em>of ¥1bn higher than the average of the last five years</em>. Operating Profit, however, is scheduled to average 66% <em>lower</em> than the average of the past five years.</p><p>Nonetheless, despite margins dropping by 70% to 3.5% - lower than any SINGLE year since 2012, there is still positive value there and positive free cashflow. </p><p>Unfortunately, the "Independent Financial Advisor" looked at the DCF of this company with ¥8,933/share of net cash+securities and decided that the DCF value of the Company ranged from ¥7,149 to ¥8,520/share. They compared the company to four similar-sized construction and civil engineering companies (Tokura Corp, Moriya Corporation, Kaneshita Construction, and Sata Construction) to come up with a "similar company comparison method" which suggested a share price valuation of ¥6,812 - 8,458/share. <em>What the explanation does not tell you is that every single one of those four companies ALSO trades at a negative Enterprise Value when counting net cash + financial investments. Every single one. </em></p><div class="content-highlight">
<p>In effect, the Chairman is trying to buy the company at a discount to net cash + securities and take away the other net assets and the somewhat long-dated and visible cashflow for free.</p>
<p>And after reviewing the numbers the Board agreed (after getting the bidder to raise his bid four times from the original bid of ¥7,200/share).</p>
<p>There was zero effort to find a competing bid (it is not as if the Chairman with 0.5% was going to block) or obtain more value by selling securities and dividending out cash. </p>
<p>This is too small a situation for most people to care. It is almost comically illiquid for a tiny-cap with relatively high float. But it matters. Every situation that gets pushed through like this cements precedent that says it is OK to abuse shareholders.</p>
</div><div><p>As I suggested in <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a>...</p></div><div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/172/725/original/image?1605806166" class="editor-image img-responsive" data-smartkarma-image-id="172725"></figure></div><div><div>
<p></p>
<p>Independent shareholders need to speak up. If you do not, you tacitly approve.</p>
<p>More below the fold.</p>
</div></div>

Joban Kaihatsu (1782 JP) is a small cap construction/development company based in Fukushima which has run about US$150mm of revenue per year for the last five years, with semi-large public and private construction projects in and around Iwaki-City. They also do medium-scale public works projects in the area, including highways, bridges/overpasses, riverbeds, tunnels, slope management, etc. They also do environmental analysis. A lot of their work appears to be public sector work. It is all-in-all a decent little contracting business with it appears, good OP Margin and Net Profit Margin on relatively little in the way of hard assets. For the last five years, they have averaged net profit of about ¥1.2bn a year. A week ago, it was announced that Chairman Sagawa had proposed a Management Buyout at ¥7800/share and the Board had decided to accept and support the buyout. Like most MBOs, the goal is to "streamline management" and "create a system not bound by short-term results" and to promote "drastic structural reforms."Most MBOs involve existing owners with significant stakes trying to get rid of meddlesome minorities.  This one involves Mr Sagawa, who owns 0.5% of shares out and has launched the bid, and the number one shareholder Joban Kosan (9675 JP) (note the similarity of the name) which owns 12.8% and who has agreed to tender. Mr. Sagawa will own 90% and a director, Mr. Shinohara, will also stay on in management and will own 10%. 
That is a little unusual.
What is MORE unusual is that the Tender Offer Price values the entire company at ¥6.115bn while the company has a portfolio of net cash + securities of ¥7.00bn as of end-September.*
¥7bn of net cash + securities comes to ¥8,933/share. 
Tangible Book Value Per Share is ¥12,233.
*All other Current Assets against all other liabilities comes out to be -¥300mm. The other LT Assets are an additional ¥2.5bn.The company's recent 5-year history has seen an average of ¥16.4bn of revenue a year and roughly ¥1.84bn a year in OP - about 11% OP Margins. Despite the promised worsening revenue outlook, the management forecast used to calculate fair value is to see every year in the next six with revenue a minimumof ¥1bn higher than the average of the last five years. Operating Profit, however, is scheduled to average 66% lower than the average of the past five years.Nonetheless, despite margins dropping by 70% to 3.5% - lower than any SINGLE year since 2012, there is still positive value there and positive free cashflow. Unfortunately, the "Independent Financial Advisor" looked at the DCF of this company with ¥8,933/share of net cash+securities and decided that the DCF value of the Company ranged from ¥7,149 to ¥8,520/share. They compared the company to four similar-sized construction and civil engineering companies (Tokura Corp, Moriya Corporation, Kaneshita Construction, and Sata Construction) to come up with a "similar company comparison method" which suggested a share price valuation of ¥6,812 - 8,458/share. What the explanation does not tell you is that every single one of those four companies ALSO trades at a negative Enterprise Value when counting net cash + financial investments. Every single one. 
In effect, the Chairman is trying to buy the company at a discount to net cash + securities and take away the other net assets and the somewhat long-dated and visible cashflow for free.
And after reviewing the numbers the Board agreed (after getting the bidder to raise his bid four times from the original bid of ¥7,200/share).
There was zero effort to find a competing bid (it is not as if the Chairman with 0.5% was going to block) or obtain more value by selling securities and dividending out cash. 
This is too small a situation for most people to care. It is almost comically illiquid for a tiny-cap with relatively high float. But it matters. Every situation that gets pushed through like this cements precedent that says it is OK to abuse shareholders.
As I suggested in Japan Needs More Cowbell...

Independent shareholders need to speak up. If you do not, you tacitly approve.
More below the fold.


SmallCap Joban Kaihatsu Founder Tries a Free MBO

Japan

Joban Kaihatsu Co., Ltd. is a general contractor based in Fukushima Prefecture. The Company constructs commercial, industrial, and institutional buildings. Joban, a member of Joban Kosan Group, also performs civil engineering works. Additionally, the Company operates real estate management, environmental pollution analysis, and waste management businesses.

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Joban Kaihatsu (1782 JP)

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SmallCap Joban Kaihatsu Founder Tries a Free MBO

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