Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p><a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">SBI Holdings (8473 JP)</a> launched a surprise <em>hostile</em>-<em>ish</em> Tender Offer on <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> about 6 weeks ago, and that has now officially become HOSTILE.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/236/716/original/Screenshot+2021-10-21+at+11.40.17+PM.png?1634830918" class="editor-image img-responsive" data-smartkarma-image-id="236716"></figure></section><p></p><p>Shares traded up originally, then down below ¥1,900/share, then near ¥1,900/share, and today, after a delay, which followed an extension, or vice versa, <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> finally came out with their <strong>Target Opinion</strong> of the <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">SBI Holdings (8473 JP)</a> Tender Offer to purchase an additional 27.68% of Shinsei Bank at ¥2,000/share which would get them to 48% ownership. </p><p>The Contents of the <a href="https://sp.shinseibank.com/corporate/en/news/pdf/pdf2021/211021_announcement1_e.pdf" target="_blank" rel="noopener">The Opinion</a> were leaked by the Nikkei overnight, and indeed, the Opinion is AGAINST. This bit is not at all surprising. The arguments presented are indeed almost exactly what one would expect. </p><p>It is, however, a nuanced CONDITIONAL AGAINST. And that is where it is gets interesting.</p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/236/664/original/Screenshot+2021-10-21+at+4.57.07+PM.png?1634806642" class="editor-image img-responsive" data-smartkarma-image-id="236664"></figure></section></section><div class="content-highlight">
<p>The main two complaints are that..</p>
<ol>
<li>it does not offer minorities a way out of their shares because it is only a partial tender, but it effectively gives control to SBI. </li>
<li>the price is not sufficiently high, and the premium is not high when applied to the whole minority share base (a 37% premium applied to only 27.68% shares which is about one-third of the shares SBI doesn't own suggests a 13% effective premium for all the minority shares - which is inadequate.</li>
</ol>
</div><p>Shinsei Bank is, of course, right on both counts. </p><ol>
<li>SBI, by getting to 48%, can effectively control the Board because to block a full SBI slate would require that more than 96% of shareholders show up to a shareholder meeting and that is unlikely (no meeting in five years has gotten measurably above 91%), and because they cannot act in contravention of the Rehabilitation/Revitalisation Plan, and the government owns 20%, the combination of the government and SBI would own a super-majority, and even if the government were to abstain from such a vote, SBI would have 60%  of the other shares, at a minimum. And if 10% of the non-government holders were to not show up for a vote and the govt were to abstain, SBI's 48% would be more than two-thirds. <ul><li>The objection is to the idea of a "Coercive Tender" which is called that because it has few enough limits and while possibly short-term beneficial to shareholders prior to the announcement, even shareholders who do not want to tender may feel obliged to do so because their "minority" interest may lose value after the Tender Offer because of the control gained by the Tender Offeror and resulting conflict of interest.</li></ul>
</li>
<li>The price of ¥2,000/share is likely to be about 0.45x book value per share as of 30 Sep 2021. Combined with their average in-price of about ¥1480/share for their existing 20.32% means a combined average purchase price for control of approximately ¥1,780/share or about 0.40x book (though when they first purchased shares, BVPS was lower).</li>
</ol><p style="padding-left: 25px;">The "average weighted premium" argument is unusual. I personally have never seen a company defend itself with that, though those objecting to tender offers have used the argument before, and like the "coercion" argument, it relies on the weighted average benefit being low, which it is. This tender offer is being conducted at too low a price.</p><div class="content-highlight"><p>However, Shinsei says that SBI can gain Shinsei's approval by meeting the conditions which are <strong>Requirements for Support</strong>.</p></div><ol>
<li>Either remove the upper limit for shares tendered, or conduct a Second TOB by 8 June 2022 which has no upper limit on shares tendered.</li>
<li>Raise the Tender Offer Price by negotiation with Shinsei.</li>
</ol><p>If SBI complies with these Requirements for Support by 19 November 2021 - three business days prior to the EGM intended to gauge shareholder support for the Poison Pill - by agreeing and signing an MOU, Shinsei will withdraw the proposal for the Poison Pill and cancel the EGM. It will release data and materials which would allow SBI to conduct reasonable due diligence. </p><p>Shinsei proposes that Shinsei and SBI HDS enter discussions immediately. </p><p>Separately, Shinsei said that it is conducting discussions with potential partners regarding capital and business alliances, and will do so even after the Tender Offer if it is not successful (this is tough - there is no minimum). </p><h3><strong>A First Impression: </strong></h3><ul>
<li>I am normally quite skeptical of Target Opinions which are AGAINST because they tend to be totally self-serving and management entrenching.</li>
<li>But this is remarkably different than what would normally come from a Japanese company. </li>
<li>
<em><strong>This is really quite well done by Shinsei.</strong></em> There may be places to nitpick, and Shinsei should have proposed one more measure to make sure that SBI didn't just decide to take the run and ignore Shinsei's concerns.</li>
</ul><p>Shinsei may still have room to do that thing, and if done right, that could prove devastating to SBI's near-term plans. But the window to act on that is probably pretty small, unless there is another delay in the EGM, which would be possible. </p><p><em><strong>Or unless SBI rejects Shinsei's proposals out of hand.  Which it <a href="https://www.sbigroup.co.jp/news/2021/1021_12711.html" target="_blank" rel="noopener">just did</a>. </strong></em></p><p>The situation is now more complicated than before, so I take a little more time to discuss it below.</p>

SBI Holdings (8473 JP) launched a surprise hostile-ish Tender Offer on Shinsei Bank (8303 JP) about 6 weeks ago, and that has now officially become HOSTILE.Shares traded up originally, then down below ¥1,900/share, then near ¥1,900/share, and today, after a delay, which followed an extension, or vice versa, Shinsei Bank (8303 JP) finally came out with their Target Opinion of the SBI Holdings (8473 JP) Tender Offer to purchase an additional 27.68% of Shinsei Bank at ¥2,000/share which would get them to 48% ownership. The Contents of the The Opinion were leaked by the Nikkei overnight, and indeed, the Opinion is AGAINST. This bit is not at all surprising. The arguments presented are indeed almost exactly what one would expect. It is, however, a nuanced CONDITIONAL AGAINST. And that is where it is gets interesting.
The main two complaints are that..

it does not offer minorities a way out of their shares because it is only a partial tender, but it effectively gives control to SBI. 
the price is not sufficiently high, and the premium is not high when applied to the whole minority share base (a 37% premium applied to only 27.68% shares which is about one-third of the shares SBI doesn't own suggests a 13% effective premium for all the minority shares - which is inadequate.

Shinsei Bank is, of course, right on both counts. 
SBI, by getting to 48%, can effectively control the Board because to block a full SBI slate would require that more than 96% of shareholders show up to a shareholder meeting and that is unlikely (no meeting in five years has gotten measurably above 91%), and because they cannot act in contravention of the Rehabilitation/Revitalisation Plan, and the government owns 20%, the combination of the government and SBI would own a super-majority, and even if the government were to abstain from such a vote, SBI would have 60%  of the other shares, at a minimum. And if 10% of the non-government holders were to not show up for a vote and the govt were to abstain, SBI's 48% would be more than two-thirds. The objection is to the idea of a "Coercive Tender" which is called that because it has few enough limits and while possibly short-term beneficial to shareholders prior to the announcement, even shareholders who do not want to tender may feel obliged to do so because their "minority" interest may lose value after the Tender Offer because of the control gained by the Tender Offeror and resulting conflict of interest.

The price of ¥2,000/share is likely to be about 0.45x book value per share as of 30 Sep 2021. Combined with their average in-price of about ¥1480/share for their existing 20.32% means a combined average purchase price for control of approximately ¥1,780/share or about 0.40x book (though when they first purchased shares, BVPS was lower).
The "average weighted premium" argument is unusual. I personally have never seen a company defend itself with that, though those objecting to tender offers have used the argument before, and like the "coercion" argument, it relies on the weighted average benefit being low, which it is. This tender offer is being conducted at too low a price.However, Shinsei says that SBI can gain Shinsei's approval by meeting the conditions which are Requirements for Support.
Either remove the upper limit for shares tendered, or conduct a Second TOB by 8 June 2022 which has no upper limit on shares tendered.
Raise the Tender Offer Price by negotiation with Shinsei.
If SBI complies with these Requirements for Support by 19 November 2021 - three business days prior to the EGM intended to gauge shareholder support for the Poison Pill - by agreeing and signing an MOU, Shinsei will withdraw the proposal for the Poison Pill and cancel the EGM. It will release data and materials which would allow SBI to conduct reasonable due diligence. Shinsei proposes that Shinsei and SBI HDS enter discussions immediately. Separately, Shinsei said that it is conducting discussions with potential partners regarding capital and business alliances, and will do so even after the Tender Offer if it is not successful (this is tough - there is no minimum). A First Impression: 
I am normally quite skeptical of Target Opinions which are AGAINST because they tend to be totally self-serving and management entrenching.
But this is remarkably different than what would normally come from a Japanese company. 

This is really quite well done by Shinsei. There may be places to nitpick, and Shinsei should have proposed one more measure to make sure that SBI didn't just decide to take the run and ignore Shinsei's concerns.
Shinsei may still have room to do that thing, and if done right, that could prove devastating to SBI's near-term plans. But the window to act on that is probably pretty small, unless there is another delay in the EGM, which would be possible. Or unless SBI rejects Shinsei's proposals out of hand.  Which it just did. The situation is now more complicated than before, so I take a little more time to discuss it below.

Shinsei Objects to SBI Tender - Offers "Requirements" To Approve

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Thematic (Sector/Industry)

<p>FY2020 was clearly a year when department store executives would have been better to live in an induced coma. Big city stores suffered especially because inbound tourists, their main growth driver of the past few years, disappeared and local shoppers stayed away, although some stores did manage to harness support from Japan’s expanding wealth market to offset the rout a little bit. The good news is that executives pushing for change in the last five years in the face of perennial intransigence are increasingly taking charge and the result should be a leaner, smaller and more clearly defined format that is more overtly upscale.</p>

FY2020 was clearly a year when department store executives would have been better to live in an induced coma. Big city stores suffered especially because inbound tourists, their main growth driver of the past few years, disappeared and local shoppers stayed away, although some stores did manage to harness support from Japan’s expanding wealth market to offset the rout a little bit. The good news is that executives pushing for change in the last five years in the face of perennial intransigence are increasingly taking charge and the result should be a leaner, smaller and more clearly defined format that is more overtly upscale.

Japan's Department Stores: Radical Contraction Still to Come if Sector Is to Survive

Equity Bottom-Up

Pan Pacific International Holdings / Equity Bottom-Up

<p>The pandemic led to slower growth at <a href="https://www.smartkarma.com/entities/pan-pacific-international-holdings-corporation" target="_blank" data-smartkarma-citation="entities:13475:1" rel="noopener">Pan Pacific International Holdings (7532 JP)</a> last year, but the country’s largest discounter still managed an improved performance thanks to ongoing turnaround of stores acquired from Uny and expansion overseas.</p>

The pandemic led to slower growth at Pan Pacific International Holdings (7532 JP) last year, but the country’s largest discounter still managed an improved performance thanks to ongoing turnaround of stores acquired from Uny and expansion overseas.

Don Quijote: Slower Growth, Better Stores

<p>Japan’s  largest retail conglomerate is just emerging from years of group restructuring and, despite perennial complaints from investors that it should make more money, achieved record operating profits in FY2019 before the pandemic. Now, the group is looking at technology to create a whole new future to ensure leadership ahead of <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a> for the long-term.</p>

Japan’s  largest retail conglomerate is just emerging from years of group restructuring and, despite perennial complaints from investors that it should make more money, achieved record operating profits in FY2019 before the pandemic. Now, the group is looking at technology to create a whole new future to ensure leadership ahead of Seven &amp; I Holdings (3382 JP) for the long-term.

Aeon Vs Seven & I: New Ideas to Stay Ahead

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

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.

<ul>
<li>Our 2021 High Conviction call, <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a> delivered 2QFY22 results yesterday with revenue surpassing consensus estimate by around 9.7%. The company’s 2QFY22 operating income was 8% below consensus.</li>
<li>Although Q2 results seemed a bit weak on profitability with 0.3% YoY growth, we think it was driven mainly by a temporary rise in SG&amp;A costs in the overseas convenience stores business due to the completion of the Speedway acquisition.</li>
<li>The initial price reaction to results was negative. Yet we think it's mostly down to the overall weaknesses in the Japanese market.</li>
<li>Nevertheless, there are many positives to look forward to in the near term as the increase in the Speedway synergies, strong growth in America and the expansion into India could provide an impetus for Seven &amp; I to break the resistance, which is currently at around the ¥5,400 level.</li>
</ul>


Our 2021 High Conviction call, Seven &amp; I Holdings (3382 JP) delivered 2QFY22 results yesterday with revenue surpassing consensus estimate by around 9.7%. The company’s 2QFY22 operating income was 8% below consensus.
Although Q2 results seemed a bit weak on profitability with 0.3% YoY growth, we think it was driven mainly by a temporary rise in SG&amp;A costs in the overseas convenience stores business due to the completion of the Speedway acquisition.
The initial price reaction to results was negative. Yet we think it's mostly down to the overall weaknesses in the Japanese market.
Nevertheless, there are many positives to look forward to in the near term as the increase in the Speedway synergies, strong growth in America and the expansion into India could provide an impetus for Seven &amp; I to break the resistance, which is currently at around the ¥5,400 level.


2021 High Conviction: Seven & I Raises Speedway Synergies & India Expansion Could Break The Deadlock

Japan

Seven & i Holdings Co., Ltd. is a holding company which was established through the merger of Ito-Yokado Co., Seven Eleven Japan Co., and Denny's Japan. The Company plans, manages, and operates mainly convenience stores, supermarkets, and department stores.

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Seven & I Holdings (3382 JP)

Shinsei Objects to SBI Tender - Offers "Requirements" To Approve

Shinsei comes out "AGAINST" the SBI tender, as was expected. But it offered SBI a way out. SBI lambasted the proposals and said it had no intention...

Travis Lundy

Japan's Department Stores: Radical Contraction Still to Come if Sector Is to Survive

Japan's department stores are in trouble and were well before the pandemic but their outlook is much worse now. Major changes are required, not...

Michael Causton

Don Quijote: Slower Growth, Better Stores

Don Quijote remains a solid bet. At home, its staples discounting offers guaranteed growth given the buoyancy of discount demand and overseas,...

Michael Causton

Aeon Vs Seven & I: New Ideas to Stay Ahead

After Seven & I's purchase in the US, Aeon is no longer far ahead of its rival by sales volume but now expects to grow ¥3 trillion in the next 5...

Michael Causton

2021 High Conviction: Seven & I Raises Speedway Synergies & India Expansion Could Break The Deadlock

There are many positives to look forward to in the near term as the increase in the Speedway synergies, strong growth in America and the expansion...

Oshadhi Kumarasiri

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