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

Hokuetsu – Uninspiring but There Is Some Value Here

Quiddity Advisors

Event-Driven

<p><em>If you want to skip the background and go straight to the nitty gritty, scroll down to the thin red line.</em></p><h2>The Background</h2><p>In the early to mid Noughties, the Japanese paper industry was in virtual turmoil, with a few large entities having merged to create champions, but many smaller companies remaining at the margins, running overcapacity in the industry. There was a limited amount of guidance from Bureaucratic Japan, which could hint at desired outcomes, but not force companies to collude to reduce capacity together so that pricing would stabilise. And of course, the companies could not collude on their own as the JFTC was feeling its recently gained strength. </p><p>From mid-Q1 to summer in 2006, the Number One paper company in Japan, Oji Paper, negotiated  #6 Hokuetsu Paper, with Oji wanting to merge with Hokuetsu and Hokuetsu wanting to stay independent. This was done CEO to CEO, with letters and occasional meetings. This was triggered because in the depths of the doldrums for an industry rife with overcapacity, Hokuetsu was rumored to be trying to increase capacity again. Oji wanted better industry self-control over industry prospects. Hokuetsu wanted to stay independent. Concurrent with these talks, as later became apparent, Hokuetsu was negotiating for a capital injection by Mitsubishi Corp on behalf of Mitsubishi Paper, with which Hokuetsu had once had an alliance, and might again, after Mitsubishi's failed attempt at an alliance the year before with another paper maker.</p><p>In summer 2006. things started getting hotter and heavier. In early July Oji Paper Chairman Suzuki visited Hokuetsu to propose a merger again, and Hokuetsu president Miwa "instantly refused" according to media coverage which came out later. Two weeks later, Hokuetsu proposed a poison pill, and two days after the poison pill proposal, announced a third party allotment of 50,000,000 shares to Mitsubishi Corp which, if paid within two weeks, would result in Mitsubishi Corp owning 24.44% of Hokuetsu.</p><div>
<p>The same day Oji announced that it intended to launch a tender offer for Hokuetsu if Hokuetsu withdrew the share issuance plan. This was brand new. And exciting. A corporate-on-corporate hostile tender offer was quite rare, and because Oji Paper's banker was Nomura Securities, this made it all the more surprising. Bankers just didn't support hostile action. </p>
<p>The next day Hokuetsu said Oji's proposal in early July was just an "informal inquiry" and they had no intention of stopping the share issuance.</p>
<p>A few days later Oji officially launched its Tender Offer for 50.1% of Hokuetsu Paper, saying it would pay ¥800/share, or ¥860/share if Hokuetsu cancelled the share issuance to Mitsubishi Paper (which was done at ¥607/share).</p>
<p>Two days later, #2 paper company in Japan Nippon Paper said Oji's move "disturbed the industry" and announced plans to buy up to 10% of Hokuetsu (which combined with Mitsubishi's 24.4% would create a negative control position of more than 33.4%). </p>
<p>Mitsubishi Corp made payment on the 7th of August. Nippon Paper announced the next day they owned 8.85%, and on the same day, Hokuetsu's independent committee recommended taking anti-takeover measures against Oji. </p>
<p>Oji's tender offer failed.</p>
<p>There were small buybacks in 2010-2015 to offset some of that dilution. Annual revenues at Hokuetsu are up 80% and OP is up 49% in the 13 years since March 2006. Annual Net Income is up 180+%. But it took 9 years, until 2015, for Hokuetsu Paper shares to get back to the ¥800/share level and the shares have spent a sum total of 12 weeks above that level since. I note that Mitsubishi Corp sold 15.1mm shares of its position in Hokuetsu to lower it to 36.6mm shares in December 2013. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/524/original/Screenshot%202020-02-24%20at%2011.35.45%20PM.png?1582558566" class="editor-image img-responsive" data-smartkarma-image-id="119524"></figure><div style="text-align: left;" class="content-caption">source: tradingview.com, Quiddity</div>
<hr>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/525/original/ThinRedLine%20v4.png?1582558999" class="editor-image img-responsive" data-smartkarma-image-id="119525"></figure><h2>The New News</h2>
</div><p>On Friday 21 February, <a href="https://www.smartkarma.com/entities/hokuetsu-kishu-paper-co-ltd" target="_blank" data-smartkarma-citation="entities:7802:1" rel="noopener">Hokuetsu Corporation (3865 JP)</a> announced a <a href="http://www.hokuetsucorp.com/pdf/OSIRASE/20200221_release02.pdf" target="_blank" rel="noopener">Secondary Share Sale</a> by Mitsubishi Corp for up to 26.5mm shares, and a <a href="http://www.hokuetsucorp.com/pdf/OSIRASE/20200221_release01.pdf" target="_blank" rel="noopener">ToSTNeT-3 Buyback</a> of up to 23 million shares (12.13%) for up to JPY 14 billion on either the 26th or 27th of February. </p><p>That is the end of the 13.5 year period where Mitsubishi Corp acted as defensive white knight against a potential raid by Oji Paper. It was dodgy governance at best back then. It is a bit shameful it took Hokuetsu 13.5 years to unwind it.</p><p>The dynamics here are slightly complicated, and the timing suggests there could be some fun in the next few days. It is strongly reminiscent of the flow dynamics around the <a href="https://www.smartkarma.com/entities/japan-post-insurance-co-ltd" target="_blank" data-smartkarma-citation="entities:840:1" rel="noopener">Japan Post Insurance (7181 JP)</a> Secondary Offering of April 2019. </p>

If you want to skip the background and go straight to the nitty gritty, scroll down to the thin red line.The BackgroundIn the early to mid Noughties, the Japanese paper industry was in virtual turmoil, with a few large entities having merged to create champions, but many smaller companies remaining at the margins, running overcapacity in the industry. There was a limited amount of guidance from Bureaucratic Japan, which could hint at desired outcomes, but not force companies to collude to reduce capacity together so that pricing would stabilise. And of course, the companies could not collude on their own as the JFTC was feeling its recently gained strength. From mid-Q1 to summer in 2006, the Number One paper company in Japan, Oji Paper, negotiated  #6 Hokuetsu Paper, with Oji wanting to merge with Hokuetsu and Hokuetsu wanting to stay independent. This was done CEO to CEO, with letters and occasional meetings. This was triggered because in the depths of the doldrums for an industry rife with overcapacity, Hokuetsu was rumored to be trying to increase capacity again. Oji wanted better industry self-control over industry prospects. Hokuetsu wanted to stay independent. Concurrent with these talks, as later became apparent, Hokuetsu was negotiating for a capital injection by Mitsubishi Corp on behalf of Mitsubishi Paper, with which Hokuetsu had once had an alliance, and might again, after Mitsubishi's failed attempt at an alliance the year before with another paper maker.In summer 2006. things started getting hotter and heavier. In early July Oji Paper Chairman Suzuki visited Hokuetsu to propose a merger again, and Hokuetsu president Miwa "instantly refused" according to media coverage which came out later. Two weeks later, Hokuetsu proposed a poison pill, and two days after the poison pill proposal, announced a third party allotment of 50,000,000 shares to Mitsubishi Corp which, if paid within two weeks, would result in Mitsubishi Corp owning 24.44% of Hokuetsu.
The same day Oji announced that it intended to launch a tender offer for Hokuetsu if Hokuetsu withdrew the share issuance plan. This was brand new. And exciting. A corporate-on-corporate hostile tender offer was quite rare, and because Oji Paper's banker was Nomura Securities, this made it all the more surprising. Bankers just didn't support hostile action. 
The next day Hokuetsu said Oji's proposal in early July was just an "informal inquiry" and they had no intention of stopping the share issuance.
A few days later Oji officially launched its Tender Offer for 50.1% of Hokuetsu Paper, saying it would pay ¥800/share, or ¥860/share if Hokuetsu cancelled the share issuance to Mitsubishi Paper (which was done at ¥607/share).
Two days later, #2 paper company in Japan Nippon Paper said Oji's move "disturbed the industry" and announced plans to buy up to 10% of Hokuetsu (which combined with Mitsubishi's 24.4% would create a negative control position of more than 33.4%). 
Mitsubishi Corp made payment on the 7th of August. Nippon Paper announced the next day they owned 8.85%, and on the same day, Hokuetsu's independent committee recommended taking anti-takeover measures against Oji. 
Oji's tender offer failed.
There were small buybacks in 2010-2015 to offset some of that dilution. Annual revenues at Hokuetsu are up 80% and OP is up 49% in the 13 years since March 2006. Annual Net Income is up 180+%. But it took 9 years, until 2015, for Hokuetsu Paper shares to get back to the ¥800/share level and the shares have spent a sum total of 12 weeks above that level since. I note that Mitsubishi Corp sold 15.1mm shares of its position in Hokuetsu to lower it to 36.6mm shares in December 2013. 
source: tradingview.com, Quiddity

The New News
On Friday 21 February, Hokuetsu Corporation (3865 JP) announced a Secondary Share Sale by Mitsubishi Corp for up to 26.5mm shares, and a ToSTNeT-3 Buyback of up to 23 million shares (12.13%) for up to JPY 14 billion on either the 26th or 27th of February. That is the end of the 13.5 year period where Mitsubishi Corp acted as defensive white knight against a potential raid by Oji Paper. It was dodgy governance at best back then. It is a bit shameful it took Hokuetsu 13.5 years to unwind it.The dynamics here are slightly complicated, and the timing suggests there could be some fun in the next few days. It is strongly reminiscent of the flow dynamics around the Japan Post Insurance (7181 JP) Secondary Offering of April 2019. 

End of an Era Marked by Hokuetsu Paper Buyback And Offering