Event-Driven

Brief Event-Driven: Itochu and Descente: Gloves Off and more

In this briefing:

  1. Itochu and Descente: Gloves Off
  2. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility
  3. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

1. Itochu and Descente: Gloves Off

Itochu org.numbers

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

2. ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility

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Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.

The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.

J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.

data source: capitalIQ

Terms & Schedule

Terms & Schedule of J-Will Partners MBO on ND Software

Tender Offer PriceJPY 1,700
Tender Offer Start Date8 February 2019
Tender Offer Close Date25 March 2019
Tender Offer Settlement Date29 March 2019
Tender AgentSMBC Securities
Maximum Shares To Buy17,632,501 shares (100%)
MINIMUM Shares To Buy11,755,000 shares  (66.67%)
Irrevocable Undertakings5,512,800 shares (31.26%)

With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…

BUT…

3. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

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  • It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
  • SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
  • With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

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