Daily Japan: Japanese Savings Rates Soar in 2018: A Blow to Abe’s Plans but a Boon for Discount Retailing and more

In this briefing:

1. Japanese Savings Rates Soar in 2018: A Blow to Abe’s Plans but a Boon for Discount Retailing
2. BDMN/BBNP Merger Leads to BDMN Buyout Arb
3. Smartkarma’s Week That Was in JP/​​​​​​KR:  Amorepacific, Hitachi, and Trump’s 2nd Meeting With KJU
4. Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
5. Itochu Confirms Intent to Deepen Hold over Descente

1. Japanese Savings Rates Soar in 2018: A Blow to Abe’s Plans but a Boon for Discount Retailing

Average monthly savings rates and total savings stocks have long been high in Japan, but savings rates broke all records in June 2018.

In one sense, this was a sign that the government’s six-year effort to increase wages – and thus consumption and inflation – was finally bearing fruit, albeit small not very sweet fruit.

However, anxiety about the future, coupled with a lack of incentive to spend, meant that most of the increases in wages and bonuses stayed in the bank.

At the same time, while the majority hoarded, brands and retailers at both the luxury and discount ends of the market are reporting a record year, and discount retailers, in particular, are worthy long-term investments.

This demonstrates the further polarisation of the retail market but inventive marketing and solid cost performance will still unlock those wallets in premium mass markets too.

2. BDMN/BBNP Merger Leads to BDMN Buyout Arb

In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in Bank Danamon Indonesia Tbk (BDMN IJ), five years after DBS’ aborted attempt to obtain a majority in the same bank. 

This was discussed originally in Pranav Rao’s Bank Danamon: Takeover Redux. 

MUFG initially bought 19.9 percent of Bank Danamon from Singapore state investor Temasek Holdings 15.875 trillion rupiah ($1.17 billion), then valuing the Indonesian lender at around $6 billion.

Step 2 saw the OJK give the OK (BDMN announcement in English) for MUFG to up its holding to 40% – the statutory maximum under the prevailing OJK regulation No.56/POJK 03/2016 – and the Indonesian Financial Services Authority (OJK), seemingly granted permission for MUFG to go above 40% in Bank Danamon when OJK deputy commissioner for banking, Heru Kristyana, wrote in a message to a Reuters journalist (article here) on August 3rd last year “They (MUFG) can have a larger stake than 40 percent once the merger (with Bank Nusantara) has gone through and as long as they meet provisions and requirements.”

As Johannes Salim, CFA pointed out in his interesting insight Bank Danamon: Fundamentals Revisited Plus Thoughts on M&A in March last year, the revised OJK regulation No.56/POJK 03/2016 placed the authority for determining whether or not a foreign acquiror could go above 40% squarely on the OJK – no BI approval would be necessary. 

Indonesia has a “Single Presence Policy” (OJK Regulation No. 39/2017) which requires that a foreign owner may not hold more than one control stake in a bank. In order to get to Step 3 which would be to acquire the remaining 33.8% of Danamon from Temasek affiliates (Asia Financial Indonesia and its affiliates), MUFG would need to merge its presence in Bank Nusantara Parahyangan (BBNP IJ) (also known as “BNP”) where it holds more than three-quarters of the shares (and has controlled since 2007) with Danamon. 

The New News

This morning’s paper carried a giant notice in bahasa announcing the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019. The Boards of Directors and Boards of Commissioners of each bank

• “view that this Merger will increase the value of the company because it is a positive move for stakeholders, including the shareholders of Bank Danamon,” and
• “have proposed to their shareholders to agree with the resolution on the proposed Merger in each of their respective GMS.”

Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. In addition, the structure of such takeovers creates short-term options (for holders) and possibly longer-term obligations for the acquiror which are a little unusual, but provide for a very interesting opportunity in this case.

There is a trade here.

3. Smartkarma’s Week That Was in JP/​​​​​​KR:  Amorepacific, Hitachi, and Trump’s 2nd Meeting With KJU

The start of the year has been bullish on the Korean and Japanese stock markets. KOSPI is up 4% and Nikkei is up 3% YTD. Some of the most beaten down stocks in the last 3 months of 2018 in Korea and Japan have been rebounding nicely YTD. In the past week, the following reports that are relevant for Japan and Korea have received a lot of interest:

• Yaskawa Electric: We Are Probably Now Close to the Bottom for This LT Structural Growth Story
• Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market
• Softbank – A Sizeable and Tactical Tender? 
• Hitachi Tender for Yungtay Engineering Launches
• TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity
• Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific

Finally, it was announced that Trump plans to meet North Korea’s Kim Jong-Un in late February in Vietnam. It has been nearly seven months since their last meeting in Singapore and there has been no progress in terms of nuclear weapons inspection or dismantling of its nuclear weapons and ICBM missiles. In April 2009, North Korea reactivated its nuclear facilities, after more than two years of North Korea promising to not to restart its nuclear programs. They lied and got away with it. And it seems like they are replaying this story-line once again.

4. Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?

Last week on 17 January, printing and HR services company and funeral parlor operator Kosaido Co Ltd (7868 JP) announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement. 

The company’s board of directors announced it supported the deal. 

Terms & Schedule

5. Itochu Confirms Intent to Deepen Hold over Descente

Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).

Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.

Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.