Steel Partners & Sanko Sangyo
Steel Partners is back in the deals space after a long absence from Japan, with the announcement of an unsolicited offer to acquire the tiny (~US$45m market cap) printed-products player Sanko Sangyo, outbidding an agreed management buyout (MBO) led by its President.
Part of the wave of activism in the early 2000’s that led to the pre-GFC rise of the adoption of “poison pill” takeover defence measures amongst Japanese corporates, Steel Partners withdrew from the market over a decade ago. This announcement reflects the major changes in the Japanese market since that time, and also a change in Steel Partners’ approach from the pre-GFC period, in that this approach is with the aim of creating “long-term business synergies in Japan” per Steel founder Warren Lichtenstein, quoted in the Nikkei, rather than being an activist play.
Steel Partners is today a publicly listed financial & industrial conglomerate with capital to deploy, so these comments should not be unduly discounted.
The special committee of outside directors had originally recommended the MBO to shareholders, but has now withdrawn its recommendation in light of Steel’s approach. This is becoming a typical response where an overbidder emerges – the board still supports the original deal, but, puts the onus on shareholders to make their own decision. The original tender offer stays in place until it is clear – often after being extended – that it will not receive sufficient support to reach the 2/3 threshold necessary for share consolidation and delisting.
The MBO, despite offering a 63% premium, was priced at just 2/3 of the ¥8.7bn tangible book value, but the real value of the company’s net assets may be much higher. The company has operational real estate on the balance sheet carried at historic cost of ¥1.2bn. This includes a nice headquarters building in Shibuya, which alone could be worth multiples of the book value amount. Steel obviously saw a bargain, and perhaps a business with some improvement potential – the company has been operating at breakeven or thereabouts for the past five years. Sanko Sango could also serve as a bite-sized operating beachhead into the Japanese market for Steel, providing a platform for future acquisitions.
What makes the unsolicited offer particularly interesting, is that management appears to have the shareholder register sewn up, with around 51% (based on our analysis of Factset data) of the register comprised of holders who could usually be counted on to do whatever management asks. Steel was no doubt aware of this when making the friendly approach, but considered the 2/3 minimum acceptance condition in the MBO bid as a weak point, as around 30% of the shareholders not aligned with management will need to tender for the bid to succeed. Elliott faced a similar situation in the TICO deal, albeit with a somewhat less favourable shareholding structure for TICO management. Outside shareholders voted with their wallets in that case and may do so in this one too.
It is likely quite difficult for management to waive the 2/3 acceptance requirement, as bank financing is typically conditional on that level being achieved so the banks can gain direct security over the company’s assets within a short timeframe – around three months, which is the time taken to call and hold an extraordinary meeting of shareholders to vote on the share consolidation that squeezes out remaining shareholders. Without the squeeze out, there is no LBO loan, so equity financing is typically required.
Steel has not appeared on the shareholder register (yet), but more than half the company’s stock has turned over since the MBO was announced, so it is possible they hold a stake just under the disclosure threshold. Given the small size of the company relative to Steel, it seems unlikely that Steel is simply seeking to profit from building a stake and pushing management for a higher bid, which is the normal activist play. However, building a stake could give Steel greater control over the outcome, albeit while risking being left as a minority shareholder in an underperforming listed entity if the MBO is simply withdrawn and Steel’s offer rebuffed.
It seems like we are seeing new interesting test cases almost weekly in Japan, and this is yet another one!
Elliott Management & Toyota Industries
Speaking of Elliott & TICO, the battle for the ages finished with a whimper as Elliott agreed to tender its ~US$3bn stake into the take-private deal after the price was lifted a further 10%. This followed a previous 15% increase in the offer.
While the price still undervalues TICO, Elliott walks away with a solid uplift in a short timeframe, and Toyota gets to internalize and restructure its cross shareholdings, to the benefit of the Group – and perhaps the Toyoda family – if at the expense of outside shareholders in TICO.
Effissimo and Soft99
Moving to more (and uncharacteristically) aggressive activist intervention from the largest Japan-focused activist by AUM, Effissimo Capital Management’s second hostile tender offer for Soft99 resulted in it gaining 53% ownership of the car-care products maker.
It seems the founder and management-aligned shareholders did not tender into the deal, but with Effissimo now in control of the register, it seems likely the board will be replaced, at which time the management-alignment may switch to working in Effissimo’s favour.
It will be interesting to observe the path Effissimo pursues with Soft99. Will it remain listed and be used as an acquisition vehicle? Or will Effissimo pursue a sale of the company to private equity, perhaps after using the company’s cash reserves to buy out the cross-shareholders, thus increasing Effissimo’s shareholding, and thus upside, prior to the sale?
In any case, outside shareholders have enjoyed a far superior outcome to the one they would have experienced had the MBO succeeded:
