Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

Kinugawa Rubber Industrial / Event-Driven

One Friday a bit over four months ago the Nikkei newspaper carried an <a href="http://asia.nikkei.com/Business/Deals/Kinugawa-Rubber-to-go-private-via-tender-offer-by-DBJ" target="_blank">article</a> saying <a href="https://www.smartkarma.com/entities/14988" target="_blank" data-smartkarma-citation="entities:14988:1">Kinugawa Rubber Industrial</a> would be taken private through a tender offer by the government-owned <a href="http://www.dbj.jp/en/" target="_blank">Development Bank of Japan</a> at "around 50bn yen." I wrote about it in <a href="https://www.smartkarma.com/insights/kinugawa-rubber-unfortunate-deal" target="_blank" data-smartkarma-citation="insights:3021">Kinugawa Rubber:  Unfortunate Deal</a> noting that it was normal that Nissan be a seller, that the headline EV/EBITDA number of 5.5x was flattered because it ignored capex (which would put the price at 10x EBITDA) and that it was an otherwise normal deal…

One Friday a bit over four months ago the Nikkei newspaper carried an article saying Kinugawa Rubber Industrial would be taken private through a tender offer by the government-owned Development Bank of Japan at "around 50bn yen." I wrote about it in Kinugawa Rubber:  Unfortunate Deal noting that it was normal that Nissan be a seller, that the headline EV/EBITDA number of 5.5x was flattered because it ignored capex (which would put the price at 10x EBITDA) and that it was an otherwise normal deal…

The Nikkei newspaper carried an <a href="http://asia.nikkei.com/Business/Deals/Kinugawa-Rubber-to-go-private-via-tender-offer-by-DBJ" target="_blank">article</a> Friday morning telling the world <a href="https://www.smartkarma.com/entities/14988" target="_blank" data-smartkarma-citation="entities:14988">Kinugawa Rubber Industrial</a>  would be taken private through a tender offer the government-owned <a href="http://www.dbj.jp/en/" target="_blank">Development Bank of Japan</a> at "around 50 billion yen." The company responded with a confirmation that talks were being held and a board meeting would be held later in the day. The stock was limit up. After the close, Kinugawa confirmed the deal. The stated goal of DBJ's takeover is to help Kinugawa Rubber diversify its customer base. There may be some truth to this. Kinugawa gets more than half its sales from <a href="https://www.smartkarma.com/entities/72" target="_blank" data-smartkarma-citation="entities:72">Nissan</a>  and its subsidiaries (~55% in FY2015) and sales to partner <a href="https://www.smartkarma.com/entities/15064" target="_blank" data-smartkarma-citation="entities:15064">Toyo Tire &amp; Rubber</a> at 14.7% of total (possibly not including some of Toyo Rubber's subsidiaries) mean that sales are quite concentrated. But I expect there is some reading-between-the-lines to be done.A few things strike me about this deal.<ol><li>Outside observers will note Nissan is ridding itself of one of its last remaining parts supplier cross-holding relationships. There is actually less to this than it seems.</li><li>The deal is being done at 5.5x trailing 12-month EBITDA, which is not exactly expensive in the grand scheme of things, but it ignores capex. Including capex, the EV/EBITDA+capex is more like 10x.</li><li>At low rates for a long time, decent cashflow is its own reward, and no matter whether cars become electric, hybrid, wind- or pedal-assist powered, closed vehicles will continue to require weatherstripping, bushings, internal bumpers, gaskets, spring coil protection, air-con hoses, pedals for the car, and brake and brake lining parts.</li><li>The deal is being done by a Japanese government-owned entity - one which has been the instrument of policy support measures in the past. This is the first time it is being done on a listed company (though JDB has funded other take-private or rescue situations in the past). This may affect the timetable. And possibly the deal itself.</li><li>Kinugawa Rubber was the 9th-ranked non-tire rubber company in Japan ranked by 2015 revenues (and 33rd globally) according to one report available online but one of the higher OPM companies in the sector globally. One wonders why another company is not the acquiror...</li><li>There is possibly some optionality for arbitrageurs, but there are caveats.</li></ol> More below the fold for subscribers...

The Nikkei newspaper carried an article Friday morning telling the world Kinugawa Rubber Industrial  would be taken private through a tender offer the government-owned Development Bank of Japan at "around 50 billion yen." The company responded with a confirmation that talks were being held and a board meeting would be held later in the day. The stock was limit up. After the close, Kinugawa confirmed the deal. The stated goal of DBJ's takeover is to help Kinugawa Rubber diversify its customer base. There may be some truth to this. Kinugawa gets more than half its sales from Nissan  and its subsidiaries (~55% in FY2015) and sales to partner Toyo Tire &amp; Rubber at 14.7% of total (possibly not including some of Toyo Rubber's subsidiaries) mean that sales are quite concentrated. But I expect there is some reading-between-the-lines to be done.A few things strike me about this deal.Outside observers will note Nissan is ridding itself of one of its last remaining parts supplier cross-holding relationships. There is actually less to this than it seems.The deal is being done at 5.5x trailing 12-month EBITDA, which is not exactly expensive in the grand scheme of things, but it ignores capex. Including capex, the EV/EBITDA+capex is more like 10x.At low rates for a long time, decent cashflow is its own reward, and no matter whether cars become electric, hybrid, wind- or pedal-assist powered, closed vehicles will continue to require weatherstripping, bushings, internal bumpers, gaskets, spring coil protection, air-con hoses, pedals for the car, and brake and brake lining parts.The deal is being done by a Japanese government-owned entity - one which has been the instrument of policy support measures in the past. This is the first time it is being done on a listed company (though JDB has funded other take-private or rescue situations in the past). This may affect the timetable. And possibly the deal itself.Kinugawa Rubber was the 9th-ranked non-tire rubber company in Japan ranked by 2015 revenues (and 33rd globally) according to one report available online but one of the higher OPM companies in the sector globally. One wonders why another company is not the acquiror...There is possibly some optionality for arbitrageurs, but there are caveats. More below the fold for subscribers...

Japan

KINUGAWA RUBBER INDUSTRIAL CO., LTD. is a rubber/resin processor, primarily manufacturing rubber/resin parts for automobiles.  The Company produces antivibration rubber parts such as engine mountings, and other various rubber/resin parts for automobile bodies and brakes.  Kinugawa also operates overseas including the US and China.

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Kinugawa Rubber Industrial (5196 JP)

Kinugawa Rubber: TOB Launch

One Friday a bit over four months ago the Nikkei newspaper carried an article saying Kinugawa Rubber Industrial would be taken private through a...

Travis Lundy

Kinugawa Rubber: Unfortunate Deal

The Nikkei newspaper carried an article Friday morning telling the world Kinugawa Rubber Industrial would be taken private through a tender...

Travis Lundy

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