Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

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Equity Bottom-Up

NTT (Nippon Telegraph & Telephone) / Equity Bottom-Up

<p>In our latest Smartkarma Webinar, we are joined by Insight Provider <a href="https://www.smartkarma.com/profiles/kirk-boodry" target="_blank" data-smartkarma-citation="accounts:1920" rel="noopener">Kirk Boodry</a> to discuss the shock announcement from <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a>  that it will buy in the 34% minority stake in DoCoMo for almost ¥4 trillion, taking the mobile unit private in what's expected to be the largest domestic tender offer for a Japanese company.</p><div><h3>The webinar will be hosted on Wednesday, 30/September/2020, 5.00pm SGT/HKT.</h3></div><div>
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<div class="content-highlight"><h2><a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=87999858837" target="_blank" rel="noopener">Register for the Webinar here</a></h2></div>
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<p>Kirk Boodry has over 20 years experience including time in NY, Tokyo, London, and Singapore. He first started covering Japanese equities in 2000 and Chinese equities in 2014.</p>
<p>His firm, Redex Holdings, is a Tokyo-based company providing independent equity research and consulting services. Outside of finance, the company is developing Internet media applications and content.</p>
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In our latest Smartkarma Webinar, we are joined by Insight Provider Kirk Boodry to discuss the shock announcement from NTT (Nippon Telegraph &amp; Telephone) (9432 JP)  that it will buy in the 34% minority stake in DoCoMo for almost ¥4 trillion, taking the mobile unit private in what's expected to be the largest domestic tender offer for a Japanese company.The webinar will be hosted on Wednesday, 30/September/2020, 5.00pm SGT/HKT.

Register for the Webinar here


Kirk Boodry has over 20 years experience including time in NY, Tokyo, London, and Singapore. He first started covering Japanese equities in 2000 and Chinese equities in 2014.
His firm, Redex Holdings, is a Tokyo-based company providing independent equity research and consulting services. Outside of finance, the company is developing Internet media applications and content.


Smartkarma Webinar | NTT's DoCoMo Privatisation - A Long-Term Win?

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.

Event-Driven

NTT (Nippon Telegraph & Telephone) / Event-Driven

<p>The Nikkei article regarding NTT buying out Docomo comes out of the blue and seems to have blindsided almost everybody. This is the first really big move following Suga’s ascendance to the Prime Ministership and in our opinion, it signals that things are going to get increasingly tough for Softbank Corp and probably for KDDI. We discuss our reasoning below.</p>

The Nikkei article regarding NTT buying out Docomo comes out of the blue and seems to have blindsided almost everybody. This is the first really big move following Suga’s ascendance to the Prime Ministership and in our opinion, it signals that things are going to get increasingly tough for Softbank Corp and probably for KDDI. We discuss our reasoning below.

NTT – Initial Thoughts Reading Through the Lines of the Shock News

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

<p>Late last evening, Nikkei published an <a href="https://asia.nikkei.com/Business/Business-deals/NTT-to-take-over-wireless-unit-Docomo-for-38bn" target="_blank" rel="noopener">article</a> that <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> was looking to take full control of <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> in a deal that could be worth around  ¥4 trillion (US$38bn) based on a 30% premium to the last close.</p><p><a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> is trading 2.4% lower today while <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> is still untraded on a glut of buy orders. The ADR closed 30% higher overnight.</p><p>A second order effect of the buyout is that it would open up a slot in the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a> that would need to be filled. <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> belongs to the Technology sector and the replacement will most likely be a stock from the same sector.</p><p>We see <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a>, <a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" data-smartkarma-citation="entities:15933:1" rel="noopener">Renesas Electronics (6723 JP)</a> and <a href="https://www.smartkarma.com/entities/sharp-corp" target="_blank" data-smartkarma-citation="entities:391:1" rel="noopener">Sharp Corp (6753 JP)</a> as the most likely candidates to replace <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a>. There is a lower probability of <a href="https://www.smartkarma.com/entities/rohm-co-ltd" target="_blank" data-smartkarma-citation="entities:2953:1" rel="noopener">ROHM Co Ltd (6963 JP)</a> or <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" data-smartkarma-citation="entities:3700:1" rel="noopener">Anritsu Corp (6754 JP)</a> being included in the index.</p>

Late last evening, Nikkei published an article that NTT (Nippon Telegraph &amp; Telephone) (9432 JP) was looking to take full control of NTT Docomo Inc (9437 JP) in a deal that could be worth around  ¥4 trillion (US$38bn) based on a 30% premium to the last close.NTT (Nippon Telegraph &amp; Telephone) (9432 JP) is trading 2.4% lower today while NTT Docomo Inc (9437 JP) is still untraded on a glut of buy orders. The ADR closed 30% higher overnight.A second order effect of the buyout is that it would open up a slot in the Nikkei 225 (NKY INDEX) that would need to be filled. NTT Docomo Inc (9437 JP) belongs to the Technology sector and the replacement will most likely be a stock from the same sector.We see Murata Manufacturing (6981 JP), Renesas Electronics (6723 JP) and Sharp Corp (6753 JP) as the most likely candidates to replace NTT Docomo Inc (9437 JP). There is a lower probability of ROHM Co Ltd (6963 JP) or Anritsu Corp (6754 JP) being included in the index.

Nikkei 225 Index Rebalance: Likely Candidates to Replace NTT Docomo

Telco/Internet specialist

Kirk Boodry

Redex Research

<p style="text-align: justify;"><strong>NTT has confirmed it is considering a bid for the 34% of DoCoMo it does not own in a deal that could be worth ¥3.9 trillion ($37bn).  Press reports cite recent regulatory pressure as a driver but a deal like this is not put together overnight and we think this is secondary to its intention to push more aggressively on 5G and IoT. NTT is paying above the odds, but the strategic rationale makes more sense than investing in ICT/cloud companies outside Japan.  DoCoMo shareholders obviously win here as the expected price is likely to be the highest in 20 years.  Concerns that DoCoMo will have flexibility to price more aggressively will be a drag on KDDI, Softbank and Rakuten although we think those worries are overdone.  Of that group, Softbank (9434) has the strongest support from returns to shareholders with a 7% dividend yield whilst KDDI currently yields 4%. </strong></p>

NTT has confirmed it is considering a bid for the 34% of DoCoMo it does not own in a deal that could be worth ¥3.9 trillion ($37bn).  Press reports cite recent regulatory pressure as a driver but a deal like this is not put together overnight and we think this is secondary to its intention to push more aggressively on 5G and IoT. NTT is paying above the odds, but the strategic rationale makes more sense than investing in ICT/cloud companies outside Japan.  DoCoMo shareholders obviously win here as the expected price is likely to be the highest in 20 years.  Concerns that DoCoMo will have flexibility to price more aggressively will be a drag on KDDI, Softbank and Rakuten although we think those worries are overdone.  Of that group, Softbank (9434) has the strongest support from returns to shareholders with a 7% dividend yield whilst KDDI currently yields 4%. 

Japan Telecom Sector: NTT’s Privatization of DoCoMo Could Be a Long-Term Win

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

<p>The Nikkei came out with an article (Japanese, English) at midnight local time last night saying that <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> would seek to buy minorities in subsidiary <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> in order to invest for growth and streamline management ("speed up decision-making" in Japanese corporate-speak) in the face of the possibility of forced reduction in mobile phone charges at the behest of new Prime Minister Yoshihide Suga. The Nikkei said that it would be announced soon, and if NTT paid a 30% premium to last price, buying out the remaining 34% would come to JPY 4 trillion or more.</p>
<p>By strengthening links with the rest of NTT and streamlining 5G and IoT investments, the apparent hope is that cost cuts will fund price cuts which might lower profits. It would also reduce the "conflict of interest" between shareholders of the parent and shareholders of the subsidiary.</p>
<p>These are all the right words to say. I expect that this may be driven by the goal to provide some measure of satisfaction to Prime Minister Suga without driving the value of Docomo into the ground. Shares in Docomo are already down 9% since PM Abe resigned.  If indeed the level of pricing cuts at mobile carriers desired by PM Suga is the driving force behind this move, that is bearish for everyone, but among carriers, NTT probably comes out OK. I would think Softbank Corp is at some risk. </p>
<p><strong>As a reminder...</strong> when new PM Suga took office, one of his first acts was to instruct Minister of Internal Affairs and Communications Takeda to advance reforms to realize a tariff reduction. The head of KDDI at an event to introduce a new product last Friday said "We are taking the request from the government seriously. There is a request to take into consideration international comparisons. We'd like to respond to the request on the basis of maintaining sustainable growth, working towards future reductions in price. Later in the day, in his afternoon press briefing, Chief Cabinet Secretary said... </p>
<blockquote>
<p>国際的な料金水準なども参考にしながら、各社において積極的に検討を進めていくことを期待したい。事業者間の健全な競争が働く環境で、納得感のある料金サービスの早期実現に向けての道筋がつけられていくことが大事だ。国民の関心が大変高い事項でもあるので、それを踏まえてできるだけ早期に成果が出るよう努力してほしい.</p>
<p>I hope that each company will actively consider the issue while taking into consideration international tariff levels. We'd like to see them pave a way to a new lower price with an early establishment of a lower fee. It is of great interest to the public. </p>
</blockquote>
<hr>
<p>Overnight, NTT Docomo ADRs jumped as much as 29% while NTT shares fell in New York. Limit up in Docomo shares in Japan today is +18%. </p>
<p>If indeed the government is about to force NTT Docomo into a decade of lost growth, it is possible that the "right" price here is less than 30% up. NTT already owns 66.2%. Getting to 66.7% to squeeze out minorities would not take a great deal of effort at all. </p>
<p><strong>This all seems like a leak too early.</strong> The quarter is not even over, Docomo doesn't release H1 for a month, and I expect the impact of NTT Docomo having to suffer further at the hands of PM Suga's passion for lower telecom charges is still being calculated in pencil, not pen. </p>
<p>This will, however, catch off-guard others than just I. The long NTT short NTT Docomo trade is well-known and well-promoted (including by yours truly) over the past few years, and if you buy the trade, you buy it at the bottom of the range, not the top, and we are near the bottom of the range of the NTT/Docomo ratio. Furthermore, some investors may have shorted or sold Docomo to make room to buy the offering in Softbank Corp (9434) just completed. This will tick some people off.</p>
<div class="content-highlight">
<p>Why doesn't NTT just try to execute a scrip merger? </p>
<p>BECAUSE THEY CAN'T.</p>
<p>Why then pay a 30% premium for a stock which is on the cusp of being hammered by autocratic decision-making by a new Prime Minister?  We don't yet know it will be 30%. But even if it is, it is not a huge thing given the overall size and existing high level of ownership. +30% would be very generous.</p>
<p>There is a lot we don't know - like almost everything - but by looking at the possibilities and parameters we may be able to prepare ourselves for what may come.</p>
</div>
<p>More below the fold. </p>

The Nikkei came out with an article (Japanese, English) at midnight local time last night saying that NTT (Nippon Telegraph &amp; Telephone) (9432 JP) would seek to buy minorities in subsidiary NTT Docomo Inc (9437 JP) in order to invest for growth and streamline management ("speed up decision-making" in Japanese corporate-speak) in the face of the possibility of forced reduction in mobile phone charges at the behest of new Prime Minister Yoshihide Suga. The Nikkei said that it would be announced soon, and if NTT paid a 30% premium to last price, buying out the remaining 34% would come to JPY 4 trillion or more.
By strengthening links with the rest of NTT and streamlining 5G and IoT investments, the apparent hope is that cost cuts will fund price cuts which might lower profits. It would also reduce the "conflict of interest" between shareholders of the parent and shareholders of the subsidiary.
These are all the right words to say. I expect that this may be driven by the goal to provide some measure of satisfaction to Prime Minister Suga without driving the value of Docomo into the ground. Shares in Docomo are already down 9% since PM Abe resigned.  If indeed the level of pricing cuts at mobile carriers desired by PM Suga is the driving force behind this move, that is bearish for everyone, but among carriers, NTT probably comes out OK. I would think Softbank Corp is at some risk. 
As a reminder... when new PM Suga took office, one of his first acts was to instruct Minister of Internal Affairs and Communications Takeda to advance reforms to realize a tariff reduction. The head of KDDI at an event to introduce a new product last Friday said "We are taking the request from the government seriously. There is a request to take into consideration international comparisons. We'd like to respond to the request on the basis of maintaining sustainable growth, working towards future reductions in price. Later in the day, in his afternoon press briefing, Chief Cabinet Secretary said... 

国際的な料金水準なども参考にしながら、各社において積極的に検討を進めていくことを期待したい。事業者間の健全な競争が働く環境で、納得感のある料金サービスの早期実現に向けての道筋がつけられていくことが大事だ。国民の関心が大変高い事項でもあるので、それを踏まえてできるだけ早期に成果が出るよう努力してほしい.
I hope that each company will actively consider the issue while taking into consideration international tariff levels. We'd like to see them pave a way to a new lower price with an early establishment of a lower fee. It is of great interest to the public. 


Overnight, NTT Docomo ADRs jumped as much as 29% while NTT shares fell in New York. Limit up in Docomo shares in Japan today is +18%. 
If indeed the government is about to force NTT Docomo into a decade of lost growth, it is possible that the "right" price here is less than 30% up. NTT already owns 66.2%. Getting to 66.7% to squeeze out minorities would not take a great deal of effort at all. 
This all seems like a leak too early. The quarter is not even over, Docomo doesn't release H1 for a month, and I expect the impact of NTT Docomo having to suffer further at the hands of PM Suga's passion for lower telecom charges is still being calculated in pencil, not pen. 
This will, however, catch off-guard others than just I. The long NTT short NTT Docomo trade is well-known and well-promoted (including by yours truly) over the past few years, and if you buy the trade, you buy it at the bottom of the range, not the top, and we are near the bottom of the range of the NTT/Docomo ratio. Furthermore, some investors may have shorted or sold Docomo to make room to buy the offering in Softbank Corp (9434) just completed. This will tick some people off.

Why doesn't NTT just try to execute a scrip merger? 
BECAUSE THEY CAN'T.
Why then pay a 30% premium for a stock which is on the cusp of being hammered by autocratic decision-making by a new Prime Minister?  We don't yet know it will be 30%. But even if it is, it is not a huge thing given the overall size and existing high level of ownership. +30% would be very generous.
There is a lot we don't know - like almost everything - but by looking at the possibilities and parameters we may be able to prepare ourselves for what may come.

More below the fold. 

NTT Docomo SHOCKER - Nikkei Says Parent NTT To Buy Out Docomo Minorities

Japan

NTT DOCOMO, INC. provides various types of telecommunication services including cellular phones, satellite mobile communication, and wireless LAN Network. The Company also sells cellular phones, and other equipment.

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NTT Docomo Inc Spon Adr (DCM US)

Smartkarma Webinar | NTT's DoCoMo Privatisation - A Long-Term Win?

In our latest Smar

Smartkarma Research

NTT – Initial Thoughts Reading Through the Lines of the Shock News

The Nikkei article regarding NTT buying out Docomo comes out of the blue and seems to have blindsided almost everybody. This is the first really...

Mio Kato

Nikkei 225 Index Rebalance: Likely Candidates to Replace NTT Docomo

Late last evening, Nikkei published an article

Brian Freitas

Japan Telecom Sector: NTT’s Privatization of DoCoMo Could Be a Long-Term Win

NTT has confirmed it is considering a bid for the 34% of DoCoMo it does not own in a deal that could be worth ¥3.9 trillion ($37bn). Press reports...

Kirk Boodry

NTT Docomo SHOCKER - Nikkei Says Parent NTT To Buy Out Docomo Minorities

The Nikkei came out with an article at midnight local time last night saying that NTT (Nippon Telegraph Telephone) (9432 JP) would seee

Travis Lundy

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