Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

Kinugawa Rubber Industrial / Event-Driven

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

NISHIKAWA RUBBER COMPANY LTD. manufactures and sells various kinds of rubber products for industrial uses.  The Company's products include weather stripping for automobiles, and other rubber products for construction and cosmetics.

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Nishikawa Rubber (5161 JP)

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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