Itoen Pref (25935 JP) - Bigger Discount, Ongoing Governance Disappointment
This is always a hard thing to write about. But every now and then I throw myself on the mercy of the ho-humming crowd and write about the Ito En Ltd Preferred Shares (25935 JP).
Why now?
There is no catalyst. There is no expectation terms will improve. I have no expectation that the company will buy back the Pref Shares in inordinate quantities because it is trading very cheap to the common shares. I do not expect Itoen to merge the commons with the prefs.
But if you think that it is possible that the Itoen Prefs might get to a 50% discount to the common shares sometime in the next five years, this is probably a good replacement trade, albeit very illiquid.
The issuance of these prefs was a disaster of governance. The fact they exist 13 years later is a disaster of governance. Seasoned Japan capital structure and relative value investors will look at the headline and ticker and might dismiss this insight out of hand.
After all, the discount always widens.
I will agree this has been an unfortunate outcome for shareholders of the common who received the prefs and did not bail immediately. And I am always reluctant to say "this time it is different."
Some will say "But why would I buy this at a 67% discount when I could have bought Softbank at a 60% discount to its parts?"
My first answer will be, "I'm glad you made money following our recommendation in Softbank Starts on Its ¥4.5trln Capital Plan - A Model for Bullishness.
My second will be, "It's not at a 60+ discount any more, is it?"
Over the medium-long-term, it is strange that the company has not allocated its excess capital to buying back the prefs. It is accretive to everyone.
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