TASAKI MBO - MBK Goes Diving for Pearls Again

Part way through the middle of the afternoon session Friday, the Nikkei helpfully carried a headline saying that Tasaki & Co Ltd (7968 JP) would see management conduct a Management Buyout (MBO) at a premium of "about 30%", and the deal would be announced as early as that evening.

TASAKI shares, as might be expected, popped, as did volume. Then trading was suspended. Apart from any commentary about the ongoing inappropriateness of such Nikkei "leaks" during trading hours, there will be a lot of questions about whether the deal itself is appropriate.

This one could become something of a fight.

THE BACKGROUND - As their website says, TASAKI is Japan's only 'Maison' which has its own pearl farm. TASAKI has been in business for ~70 years, was listed in 1985, and is one of Japan's eminently well-known jewelry store brands. The company has been selling pearls and diamonds in Ginza since forever, with English-speaking staff at its flagship store helping foreigners and wealthy jewelry buyers to buy its pricey pearls, and is one of two ubiquitous pearl maisons in Japan. But among market players the company has not been well-known.

What had been a pretty sad story of net profits for many years turned into a really bad story in 2008 on the operating side. After writedowns in mid-2008 the Tasaki family looked for help, and in late 2008, relinquished control to MBK Partners, a private equity firm concentrated in Korea, Japan, and now China, injected capital and new management. The company took huge write-downs and restructured very heavily for four years and by mid-2015 started seeing those efforts pay off. Net profits in H1 2015 were double what the company had earned in any full year in the previous 20 years. There was a turnaround and the shares were up.

In spring of 2015 MBK commenced a sale process for its stake and the shares rose further. In June 2015 after the sale process appeared to stall, MBK turned its prefs into common shares to own nearly 80% of the shares outstanding in what appeared to be a surprise to the rest of management but should not have been. In July it sold a bit more than 30% of its stake back to the company, which went into debt to buy the shares back, and then sold the rest of the shares in an offering announced in mid-July 2015 and placed in early August 2015.

THE DEAL - The company's management has decided that Japan is not growing and therefore the only hope for the company to grow is to open more stores abroad, and that will cost money and hurt earnings. Because the company knows MBK and has used its expertise before, the company asked MBK to help it again. MBK has agreed to support the Management Buyout (by buying all the company's shares).

MBK will pay JPY 2,205 yen per share for TASAKI shares. That sounds like a nice premium - indeed it is a 42.2% premium to the share price of the day before the news broke.

It is, however, a 1 yen premium to the Offering price of mid-summer 2015 when MBK foisted its shares onto the investing public at JPY 2,204 per share and hapless investors who bought into the bookbuilding when the share price was slightly higher than that (bookbuilding closed at 2,224 yen) have never seen a day with the share price higher. The day after bookbuilding was -5%. The day after that shares fell 6%. 6 weeks later after global market gyrations struck in late August and early September the shares were down 35+% from the offering price.

In November that year the price rebounded to within 5% of the offering price but then tailed off again.

The price of this deal is designed to get those retail investors out with a 1 yen profit. Since that time, some of those investors have sold and new shareholders appear on the register.

Those new shareholders may make this deal situation interesting.

More history and deal analysis below the fold for subscribers.