Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Today after the close, <a href="https://www.smartkarma.com/entities/brother-industries-ltd" target="_blank" data-smartkarma-citation="entities:6114:1" rel="noopener">Brother Industries (6448 JP)</a> announced a takeover of its TSE2 and Nagoya2-listed subsidiary <a href="https://www.smartkarma.com/entities/nissei-corp" target="_blank" data-smartkarma-citation="entities:10064:1" rel="noopener">Nissei Corp (6271 JP)</a>.This is not entirely unexpected. The TSE has been pressuring companies to reduce parent/subsidiary "dual listings" because of the inherent conflicts of interest posed by a parent company which wants to benefit from its subsidiary, perhaps at the expense of minority shareholders in the subsidiary. METI, in summer of 2019, released the <a href="https://www.meti.go.jp/policy/economy/keiei_innovation/keizaihousei/pdf/fairmaguidelines_english.pdf" target="_blank" rel="noopener">METI Fair M&amp;A Guidelines</a> to attempt to reduce the inequity often seen in the process, where asymmetric information, incumbency, and existing control of a board (and thereby management) could lead to sub-optimal outcome for minority shareholders. Despite the fanfare, and some initial adherence to the guidelines by good corporate citizens, there has been a run of takeovers since then whereby Boards of Target Companies have not seen fit to abide by the Fair M&amp;A Guidelines and takeovers have been proposed (and effected) at prices which would not otherwise be possible in a fair process for control and delisting. This is yet another example of a too-low price. To be sure, it is a decent premium to the last-traded price - about 37.6%. And it is a not quite 4-year high price. But...<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/240/309/original/Screenshot+2021-11-08+at+3.09.18+PM.png?1636355720" class="editor-image img-responsive" data-smartkarma-image-id="240309"></figure></section>...while the Takeover Price at ¥1,500/share yields a Tender Offer Market Cap of ¥41.55bn, which seems relatively high for a company whose highest net income in 5yrs is ¥1.211bn, looking a little closer changes things.When one realises the company has ¥11.4bn of cash, another ¥10.1bn of securities holdings, and other current assets (mostly receivables) less ALL other liabilities at the company would be another ¥6.3bn, that means Brother is buying out the company at a 'valuation' of ¥13.7bn, which is the cumulative EBITDA forecast by management from now until about August 2025. Management forecasts used by the DCF valuation agent suggest EBITDA should double in the five years from March 2023 to March 2028, and Operating Profit should triple. And for this, a takeover at just under 1.0x book value. Given the real estate could be sold and leased back, or there could be synergies by adding Nissei Corp back into Brother to share facilities, that effectively means the takeover is basically free. I may sound like a scratched record, but this seems.... too low?

Today after the close, Brother Industries (6448 JP) announced a takeover of its TSE2 and Nagoya2-listed subsidiary Nissei Corp (6271 JP).This is not entirely unexpected. The TSE has been pressuring companies to reduce parent/subsidiary "dual listings" because of the inherent conflicts of interest posed by a parent company which wants to benefit from its subsidiary, perhaps at the expense of minority shareholders in the subsidiary. METI, in summer of 2019, released the METI Fair M&amp;A Guidelines to attempt to reduce the inequity often seen in the process, where asymmetric information, incumbency, and existing control of a board (and thereby management) could lead to sub-optimal outcome for minority shareholders. Despite the fanfare, and some initial adherence to the guidelines by good corporate citizens, there has been a run of takeovers since then whereby Boards of Target Companies have not seen fit to abide by the Fair M&amp;A Guidelines and takeovers have been proposed (and effected) at prices which would not otherwise be possible in a fair process for control and delisting. This is yet another example of a too-low price. To be sure, it is a decent premium to the last-traded price - about 37.6%. And it is a not quite 4-year high price. But......while the Takeover Price at ¥1,500/share yields a Tender Offer Market Cap of ¥41.55bn, which seems relatively high for a company whose highest net income in 5yrs is ¥1.211bn, looking a little closer changes things.When one realises the company has ¥11.4bn of cash, another ¥10.1bn of securities holdings, and other current assets (mostly receivables) less ALL other liabilities at the company would be another ¥6.3bn, that means Brother is buying out the company at a 'valuation' of ¥13.7bn, which is the cumulative EBITDA forecast by management from now until about August 2025. Management forecasts used by the DCF valuation agent suggest EBITDA should double in the five years from March 2023 to March 2028, and Operating Profit should triple. And for this, a takeover at just under 1.0x book value. Given the real estate could be sold and leased back, or there could be synergies by adding Nissei Corp back into Brother to share facilities, that effectively means the takeover is basically free. I may sound like a scratched record, but this seems.... too low?

Brother MBO/LBO of Nissei Corp (6271) - Another Too-Low Price Parent/Sub Takeout