Brief Japan: Descente’s Doleful Defense (Dicaeologia) and more

In this briefing:

1. Descente’s Doleful Defense (Dicaeologia)
2. Nissan Governance Outlook – Foggy Now, Sunny Later
3. CyberAgent: Tumbling Dice
4. Itochu and Descente: Gloves Off

1. Descente’s Doleful Defense (Dicaeologia)

The new Takeover Rules enacted in December 2006 (with one amendment to the SEL made in 2005 in direct reaction to the loophole used by Livedoor to acquire large stakes of Nippon Broadcasting System off-market to reach a level above one-third) are enshrined in the Financial Instruments and Exchange Act/Law (normally called “FIE”, “FIEA”, or “FIEL”), with the most relevant portions commencing with Article 27-2. These “TOB Rules” outlawed stealth acquisition off-market to “suddenly acquire” a large stake without passing through the market mechanism or conducting a Tender Offer. The principle of this was a sense of “fairness” such that minority investors had an equal opportunity to sell to someone who sought to have control or influence, and that it could not simply be arranged through collusive behavior. 

The first rule which mattered to Descente Ltd (8114 JP) was that the Board of the “Subject Company”, according to Article 27-10…

shall, pursuant to the provisions of a Cabinet Office Ordinance, submit a document which states its opinion on the Tender Offer and other matters specified by a Cabinet Office Ordinance (hereinafter referred to as the “Subject Company’s Position Statement”) to the Prime Minister within a period specified by a Cabinet Order from the date when the Public Notice for Commencing Tender Offer is made.

That period specified is 10 business days.

So by Thursday 14 February, Descente’s board was obliged to release a “Subject Company Position Statement” (意見表明報告書) saying whether it was for or against (or neutral or withholding an opinion about) the bid. It also had to state the reasons for its opinion, the process it took to come to those opinions, and whether it would take defensive measures against the bid (and other measures specified in the relevant Cabinet Order. This reporting obligation would allow Descente’s board to ask questions of the acquiror (to which the acquiror would be required to respond within five business days) and to ask for an extension of the Offer (which has a legal enforcement under certain conditions, which are not that difficult to meet).

Several days before that deadline, on Thursday 7 February, Descente Ltd (8114 JP announced its Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP)‘s Tender Offer with a 28-page supporting powerpoint deck (also in Japanese).

The shares were down Thursday and Friday for a reason. 

If Descente Management and the Board hope that nobody will tender, because Itochu’s presence will cause harm to the medium-long-term corporate value of the company, Management and the Board are putting investors on the spot.

Shares were trading in the ¥1870s and Itochu is offering 50% more than that. Descente saying that corporate value in the medium-long term will be damaged means that should show up in the share price, and investors at the close Friday – after a day to digest the Descente response – believed ¥2520 was the right price if one included the economic effects of the Itochu tender offer. Obviously, that means they think it was worth less if they were not going to tender. 

Investors who want to sell all of their shares now could possibly do so at a 33% premium to where their shares were trading. 

Management and the Board proposing investors not avail themselves of an opportunity to sell shares to someone willing to pay 50% more than pre-tender price for a portion of their shares (or perhaps 33% more than pre-tender as of Friday’s close for more or all of it) needed to explain their own value proposition. Descente had an opportunity to present a “fair value” number from a valuation expert and hints at why they think the shares are worth as much or more over the medium-long term, giving economically-minded investors a reason not to tender. 

The “Subject Company Position Statement” did not do that. 

2. Nissan Governance Outlook – Foggy Now, Sunny Later

This past week saw developments which put the Nissan Motor (7201 JP) – Renault SA (RNO FP) relationship on a better path.

There are interesting noises around the likely arrival of Jean-Dominique Senard on the board of Nissan which the French state won’t like (because they won’t be getting the pony they want) but which would ultimately serve Renault’s interests better. 

Renault and Nissan are conducting a joint investigation into the Renault-Nissan Alliance BV entity which Carlos Ghosn also chaired, and Renault has passed a dossier of Ghosn’s personal expenses borne by Renault and the Alliance to French investigators.

A trial balloon was floated in the Nikkei suggesting the French government had said to the Japanese government it was open to Renault selling some Nissan shares and perhaps the state could lower its stake in Renault. This was “categorically denied” by the French with some haste but the idea of forming a holding company was categorically denied as acceptable by the French just under a year ago. Things have changed.

Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.

Below, a discussion of what the board looks like, will look like, and could look like in/after June and a discussion of the structure of possible capital changes.

3. CyberAgent: Tumbling Dice

Source: Japan Analytics

TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.

PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly,  while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index. 

VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may. 

4. Itochu and Descente: Gloves Off

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.