Showa Aircraft TOB by Bain - 1.35mm Square Meters of Land At Stake

If you want to skip past the history, jump to The New News...

Just over 80 years ago in 1937, a gentleman named MAKITA Tamaki, who was married to the daughter of the effective founder of Mitsui Mining DAN Takuma (which back at the turn of the century was a seriously big business), decided to get a license to build non-military planes (as everyone else in the business in Japan was building military planes in the mid-late 1930s). He got the license to produce the DC-3. Building airplanes requires a lot of ground space, and an airfield. He arranged to buy at low a couple of huge swaths of land out in western Tokyo, including big swaths in what is now Akishima Town, a couple of kilometers west of Tachikawa Station as the crow flies. It was farming land (a lot of sericulture (silkworm raising/production) and mulberry orchard (silkworms eat mulberry leaves to digest and produce silk). He also got a huge swath of land near what is now Haijima which is one station further along the Ome Line. Those stations still exist. In the Haijima Area they got 550,000 tsubo (about 1.8mm square meters, ~180 hectares, ~450 acres). In a year they had built a huge spread.

The company arranged to get employees out into dormitories on the land, and also built houses around the outskirts. They built stations and offered land to the railway company to get the train lines extended. They built schools for employees and locals who moved out there to commute into Tokyo. They ended up decades later with about 400,000 tsubo. And a huge factory which produced 400+ DC-3s and a couple hundred other military planes as the war effort continued into the 1940s. At the end of WWII, the Occupation led by MacArthur's GHQ decided that Japanese companies should not be in the business of building airplanes. So Showa Aircraft branched out into other businesses - real estate, various industrial fabrication, etc, and in the 1950s eventually building a business in specialty vehicles, such as fuel trucks, airplane re-fueling trucks, and long tanker trailers for both petrochemicals and eventually milk. They also built modules for the Self-Defense Force which could be trucked on flatbeds - communications modules, living modules, etc and they make the aluminum structures we see in airplane galleys and some of the containers which go underneath.

In 1960 they got honeycomb license technology from a company called Hexcel Corp (HXL US) which was started just after WWII in California to work with the aerospace industry. 60 years later, honeycomb products in aluminum, fiber, and special materials is still part of their business. They use it to make lots of things stronger and lighter. They make satellite parts, and tankers, airplane parts (including the and numerous other somewhat high tech parts for airplanes), and satellite parts/bodies. Nota bene: colleague Janaghan Jeyakumar, CFA just wrote a pair of pieces on the merger announced between Hexcel and Woodward Inc (WWD US), including one yesterday where he says Hexcel shareholders deserve a bump. Read Hexcel-Woodward: Is the Offer Fair? for more (Janaghan says not really).

But through all this, Showa Aircraft Industry still had the land - over 1,000,000 square meters of it in western Tokyo. So they did some trading and cleaning up and turned what was an aircraft factory with a runway (here before it was actually built...

.... into an industrial complex with a golf course...

...into a leisure resort starting in the 1980s, with substantial effort in the 2000s to completely transform it into a family-oriented full-day leisure/sports/park area called Showa no Mori (Showa Forest). It has a golf course, driving range, onsen, tennis courts, water features with kayaking lessons, an indoor climbing facility, etc. It has a half dozen restaurants, and shopping, and a variety of features designed to waste a day. It is also right next to Showa Memorial Park, which any Tokyoite with young children will know as a great day out.

As might be surmised from the origin, the Mitsui Group has long had an interest in the company (the founder was also, at one point, chairman of Mitsui Mining), and in several other related businesses in the area (one can see it in the history of MBOs for Tachihi Enterprise and Tachikawa Aircraft many years ago). At one point, Mitsui E&S Holdings (7003 JP) which was looking to branch out from shipbuilding bought a stake, and then bought treasury shares from the company.

In early 2014, MES launched a Tender Offer to raise its stake to close to 60%. That Tender Offer was at ¥1650/share based on a DCF cashflow range of ¥1445-1937/share. At the time, Aberdeen Asset Management, which held a stake got unhappy, saying the company was worth more like ¥4000/share because of the vast potential unrealized gains on the huge land holdings in western Tokyo which were under-earning and therefore under-valued in a DCF. Mitsui E&S told them to get stuffed. The result got them 62.1%. With some buybacks and Treasury shares, MES now owns 65.53% of the voting rights.

In May of last year, Mitsui Engineering & Shipbuilding announced a Mitsui E&S Group Business Revival Plan (presentation) after years of losses in EP&C projects, targeting the sale/exit of loss-making businesses and reduction in interest-bearing debt/EBITDA to below 5x by 2022. Then the murders began (it's a twitter thing). They outlined their three core domains and it did not appear Showa Aircraft was in that grouping. Six months passed before anything happened to Showa Aircraft's stock price.

The NEW News

After trading in an extraordinarily tight range for the most of the five years subsequent to that Tender Offer (the little blip on the far left of the chart above), at the end of October the company announced an upward revision in profit forecast for H1 (revenues up 7%, OP +47%, NP+57%) but reduced implied gains in H2 erasing ~70% of that uplift. In the middle of November 2019 with H1 results, the shares started flying. They appeared to move after a MES update on its Business Revival Plan. Nothing appears to mention Showa specifically, but the attitude was one of picking the pace of selling assets. Since the end of October, the shares have nearly doubled, and much of it in higher-than-normal volume.

It turns out MES had been working to sell it since last June and it is pretty clear that others knew about it coming (not me - I missed it). Today, after the close, an entity sponsored by Bain Capital Japan announced a Tender Offer for Showa Aircraft Industry (7404 JP) in a structure much like the ones used for Calsonic Kansei and Hitachi Koki a few years back

The total payout of the Tender Offer plus Special Dividend is ¥2760 with a Special Dividend of ¥631/share and a Tender Offer Price of ¥2129/share. ¥2760 is an 8.8% premium to last, but it's complicated.

Showa Aircraft will conduct a capital reduction, then pay a special dividend of ¥631, with an ex-date prior to the Tender Offer, but a pay date after the Tender Offer, contingent on the Tender Offer's success. The Tender Offer will take place. It will end, and be successful or not. If successful, it will lead to squeezeout and delisting. Like the two similar situations three years ago, this creates weird technical problems, but it is likely to go through.

More below.