CHICAGO--(BUSINESS WIRE)--RMB Capital (“RMB”), an independent investment advisory firm, opposes the tender offer by Bandai Namco Holdings Inc. (7832 JP) to acquire a controlling stake in Sotsu Co., Ltd. (3711 JP).
RMB’s opposition to this tender offer is due to the following reasons:
- The planned post-tender offer transactions between the founding family of Sotsu and Bandai Namco may violate the tender offer rule that prohibits discriminatory tender offer conditions among shareholders as specified by the Financial Instruments and Exchange Act in Japan.
- The tender offer process does not comply with the Management-buyout (MBO) Guidelines that were revised in June of this year, and RMB believes it fails to protect the interest of the minority shareholders of Sotsu.
- Independence of the legal advisor has been compromised by appointing a legal firm that has a strong tie with the founding family.
- Valuation assumptions of the tender offer price are not disclosed at all.
- The tender offer price is unfairly low for minority shareholders.
RMB demands the board of directors and the special committee at Sotsu comply with the revised MBO Guidelines and proactively protect the interest of minority shareholders. RMB also demands Bandai Namco explain how the transactions with the founding family of Sotsu are compliant with regulatory guidelines in Japan.
Details to each of RMB’s objections to the tender offer are as follows:
Issue #1: The interest-conflicted transactions by the founding family of Sotsu may violate the tender offer rule in Japan
According to the press release, the founding family is in a negotiation with Bandai Namco to acquire J-Broad Co, which is an 87% subsidiary of Sotsu. At the same time, the family is negotiating to sell its stake in Sotsu Entertainment, Inc., which is also a subsidiary of Sotsu, to Sotsu after the tender offer. RMB believes these transactions conflict with the minority shareholders’ interest and even violate the Financial Instruments and Exchange Act in Japan that prohibits discriminatory tender offer conditions among shareholders.
J-Broad is a non-public company that mainly operates job-search websites and is one of the top players to support the job search by medical students in Japan. The firm generated net income of 384 million yen and had the shareholders’ equity of 2.551 billion yen, according to public disclosures of the firm. These figures represent approximately 20% of the consolidated net income and approximately 10% of the consolidated shareholders’ equity at Sotsu, respectively, clearly making the firm an important subsidiary of Sotsu.
RMB believes selling such an important subsidiary only to the founding family, after the tender offer transaction, without disclosing the key conditions (including the price) is unfair and significantly conflicts with the minority shareholders’ interest. More specifically, RMB suspects the founding family may have accepted a low tender offer price of Sotsu shares while expecting favorable transactions for J-Broad and Sotsu Entertainment shares. RMB believes such a situation would undermine the purpose of the Section 27-2, Item 3 of the Financial Instruments and Exchange Act that requires an equal treatment of shareholders and prohibits discriminatory tender offer conditions among shareholders.
Issue #2: The tender offer process does not follow the revised MBO Guidelines and is unfair to minority shareholders
In the past years, “Guidelines for Management Buyouts (MBO) to Enhance Corporate Value and Ensure Fair Procedures” (the “MBO Guidelines”) governed the tender offer practices in Japan. In June this year, the Ministry of Economy, Trade, and Industry released “Fair M&A Guidelines" (the “revised MBO Guidelines”) to further enhance the protection of the minority shareholders’ interests. RMB believes that the tender offer process of this transaction consistently ignores the key measures specified in the revised MBO Guidelines and fails to protect minority shareholders’ interest, which is the goal of the guidelines. More specifically, the revised MBO Guidelines require that a special committee hire its own legal and financial advisors and obtain its own valuation, then must examine the fairness of the tender offer price from the viewpoint of the minority shareholders. However, the special committee of this transaction did not appoint its own advisors; it received key advice from an interest-conflicted legal advisor and accepted a financial valuation prepared by the board.
RMB thus believes the tender offer process does not comply with the revised MBO Guidelines and is unfair for minority shareholders.
Issue #3: Independence of the legal advisor that has a strong tie with the founding family
RMB doubts the independence of TMI Associates, a legal advisor that was appointed by the board and the special committee of the transaction. Needless to say, a legal advisor should be independent of the founding family due to the potential conflict of interest with the minority shareholders. However, TMI Associates is a legal firm where Mr. Yuta Nasu, the eldest son of the founder of Sotsu, has been working for eight years and nine months since January 2011. RMB believes appointing a legal firm that has a strong tie with the founding family is a serious problem from the viewpoint of protecting the minority shareholders’ interest, especially when the family is engaged in the interest-conflicted transactions mentioned above. Further, RMB is seriously concerned the fairness of the entire tender offer transaction was seriously compromised, given the important role of TMI Associates to influence the tender offer scheme and the decision making processes at the board and the special committee of Sotsu. RMB notes the board of Sotsu recognized the existence of the conflict of interest around Mr. Yuta Nasu because it stated in its press release that “Mr. Yuta Nasu did not participate in the deliberations and resolutions in order to avoid the suspicion of conflicts of interest and to ensure the fairness of the Transactions since he is the eldest son of the Founder Shareholder.” RMB believes it is a serious breach of the fiduciary duty by the board and the special committee to appoint TMI Associates as a legal advisor.
Issue #4: Valuation assumptions of the tender offer price are not disclosed at all
RMB believes the disclosure around this tender offer, especially that of the valuation assumptions of the tender offer price, is very limited compared with the normal tender offer practices in Japan. It is unfair from the perspective of the protection of the minority shareholders. Key information missing in the disclosure includes (a) the names of the peer companies that are used in the peer company comparison method, and (b) the financial projection, discount rate, perpetual growth rate and other assumptions behind the DCF method. Several media sources report that Sotsu’s business is expected to grow along with the expansion of Gundam business as Bandai Namco expands the production capacity of Gundam figure toys by 40% with the new factory in 2020, while global expansion of Gundam IP is planned with its live action movie created by a Hollywood studio. RMB believes it is a serious issue for minority shareholders if the tender offer price is unfairly discounted based on unfair or undisclosed assumptions.
Issue #5: The tender offer price may be unfairly low
RMB believes the tender offer price of 3100 yen per share, which is offered by Bandai Namco, is unfairly low in light of the intrinsic value of Sotsu. The tender offer price indicates Sotsu, or its core IP Gundam, which is one of the most valuable entertainment IPs in Japan, is worth a mere 40bn yen. The value can be recouped by the free cash flow at Sotsu in only 10 years – a significantly low valuation for the IP that celebrated its 40th anniversary this year and is expected to expand globally going forward. The valuation appears to be unfairly low compared to other global entertainment IPs in Japan such as Hello Kitty (approximately 170bn yen), and Dragonball & One Piece (approximately 190bn yen).
RMB believes the fair value of Sotsu’s share should be at least approximately 4600 yen per share based on a reasonable financial projection and fair DCF assumptions.
RMB demands the board of directors and its special committee at Sotsu take the following actions to protect the minority shareholders’ interest:
1: RMB demands full disclosure of the interest-conflicted transactions
RMB demands the board and the special committee of Sotsu make a full disclosure of the above mentioned interest-conflicted post-tender offer transactions by the founding family. They should explain why they reached a conclusion that these post-tender offer transactions, exclusive to the founding family, would not harm the minority shareholders’ interest. RMB also demands Bandai Namco explain how the transaction complies with the regulation that requires a uniform tender offer condition.
2: RMB demands implementation of a fair tender offer process compliant with the revised MBO Guidelines
As RMB claims, and as the board of directors at Sotsu admits, there is a potential conflict of interest between the founding family and minority shareholders. RMB demands the board and special committee at Sotsu follow the revised MBO Guidelines and implement a fair tender offer process to avoid the conflict of interest and protect the minority shareholders’ interest. RMB strongly believes that the special committee should appoint its own legal and financial advisors, then obtain and disclose the valuation.
3: RMB demands full disclosure of the foundation of the tender offer valuation
RMB demands the board and the special committee of Sotsu fully disclose the assumptions of the tender offer valuation including peer companies, financial projection, discount rate and perpetual growth rate.
The revised MBO Guidelines that were released in June this year require the board and its special committee take necessary actions to protect the minority shareholders’ interest. RMB hopes Sotsu’s board of directors and its special committee proactively take actions to protect the minority shareholders. RMB also expects Bandai Namco to implement a tender offer process that complies with the tender offer rule in Japan.
About RMB Capital
Headquartered in Chicago, RMB Capital is an independent investment and advisory firm that serves high-net-worth individuals and families as well as institutional investors. Its businesses include wealth management, family office services, asset management, and retirement plan consulting. Its asset management business specializes in long-term, concentrated, active investing strategies with coverage that spans the market-cap spectrum and the globe. To learn more about RMB, visit www.rmbcap.com.