Founded in 2005, RMB Capital is an independent, Chicago-based investment
management firm. We manage more than $6 billion of assets in global
equities, fixed income, and other asset classes and strategies, guided
by our long-term investment philosophy. We serve a diverse client base
of high-net-worth individuals and families, as well as institutional
investors such as endowments and foundations. RMB Capital owns more than
5% of Faith (4295 JP) and Nippon Columbia (6791 JP) as filed in October
2015 and in June 2016, respectively.
We support Faith’s plan to fully consolidate Nippon Columbia
Faith is an innovating information technology company that has provided
many services including the global standard of mobile phone ring tone
coding. Founded in 1910, Nippon Columbia launched Japan’s first
phonographs, first long-playing records, and the world’s first compact
discs. As the oldest record label in Japan, the firm owns several
historic music properties created by Shirley Yamaguchi and Hibari
Misora, and is an influential entertainment business in Japan with its
strength in rock music and animation songs.
We started investing in Faith and Nippon Columbia in 2010 and 2014,
respectively, and have been engaging with the management as a friendly
shareholder. We support Faith’s plan to fully consolidate Nippon
Columbia, believing both firms will generate further synergies going
However, we oppose the stock swap acquisition
As a shareholder of both Faith and Nippon Columbia, however, we oppose the stock swap consolidation plan for the following reasons:
1. For the Faith shareholders, issuing new stocks at the price below the book value, despite a large amount of cash on book, is not the best option. The price-to-book ratio of the shares of Faith is about 0.8 times, as of March 28th, 2017. On the other hand, Faith has about 6 billion yen of cash at the parent firm and about 14 billion yen of cash at the consolidated level.
2. For Nippon Columbia shareholders, the Faith stocks are very illiquid in the market and are not an ideal payment. In addition, we believe the stock swap ratio is flawed as explained below.
We believe the stock swap ratio is flawed
We believe the swap ratio was unfairly depressed by unreasonable use of DCF valuation of Faith stocks, which was much higher than the market price.
1. Based on the disclosed information, we estimate the DCF valuation of Faith stocks from 2,000 yen per share to 2,440 yen per share (average 2,220 yen per share), which is much higher than the market price of 1,300 yen per share on the stock swap announcement date. If the management used such a non-existent price, the resulting swap ratio is unfairly low for Nippon Columbia shareholders.
2. We believe DCF valuation should be used only to factor synergy values and expectation for future price appreciation associated with the stocks that will be delisted. In this deal, DCF should be used only for the valuation of Nippon Columbia, not Faith.
3. Based on the disclosed information, we estimate the DCF valuation of Nippon Columbia stocks from 770 yen per share to 1,080 yen per share (average 925 yen per share). The price range indicates a premium from 14.8% to 61.0% (average 37.9%), which is comparable to recent acquisition deals in Japan.
4. If we use the market price of 1,300 yen per share for Faith stocks and above DCF valuation 925 yen per share for Nippon Columbia, a new stock swap ratio will be 0.71, which is 20.3% higher than the proposed 0.59.
Further, we believe the valuation of Nippon Columbia is unfairly low due to the excessively pessimistic earnings forecasts, which is explained in the disclosure: “(management) expects operating profit will decline
by 60.5% year over year in fiscal year ending March 2018 at Nippon Columbia.”
Our proposal: A cash tender by Faith to acquire Nippon Columbia shares
As an alternative, we propose that Faith initiate a cash tender offer to acquire Nippon Columbia shares for the following reasons:
1. The acquisition process will be more transparent through a tender
offer with better disclosure.
2. The shareholders’ value of Faith will not be impaired without a stock
issuance of as much as 40% of the outstanding shares at the price
below the book value.
3. By using the excess cash, the shareholders of Faith can expect an
appreciation of the stock price with the reduced asset size and better
4. The shareholders of Nippon Columbia will be rewarded with a fairer
valuation under a transparent tender offer process and can receive
cash instead of illiquid stocks of Faith.
We believe corporate governance did not work properly at both companies
We believe corporate governance did not work properly at the boards of
both companies during their decision-making process. More specifically,
we believe the independent board members, who are supposed to represent
minority shareholders, did not properly check the conflict of interest.
As the Corporate Governance Code clearly requires, independent directors
have a duty to monitor potential conflict of interests by executives.
Such monitoring function is strongly expected when a controlling company
consolidates its publicly listed subsidiary, a situation where interests
of minority shareholders are at risk.
Mr. Yasuyuki Higuchi (CEO of Microsoft Japan, representative director at
Panasonic from April 1st) is an independent director at Faith
and Mr. Yasuyuki Nanbu (founder of Pasona Group) is an independent
director at Nippon Columbia. We believe they are responsible to explain
their view on the stock swap transaction and how they fulfilled their
monitoring duties to protect interests of minority shareholders.
(An excerpt from the Corporate Governance Code issued by the Tokyo Stock
Principle 4.7 Roles and Responsibilities of Independent Directors
Companies should make effective use of independent directors, taking
into consideration the expectations listed below with respect to their
roles and responsibilities:
iii) Monitoring of conflicts of interest between the company and the management or controlling shareholders; and
iv) Appropriately representing the views of minority shareholders and other stakeholders in the boardroom from a standpoint independent of the management and controlling shareholders.
We demand boards of both companies reconsider the plan
Upon the delisting of Nippon Columbia, which we believe is a historic
event in Japan’s entertainment industry, we demand boards of both
companies reconsider the plan in order to implement the full
consolidation through a fairer and more appropriate way. We plan to make
related shareholder proposals upon the annual general shareholders’
meetings at both companies in June.
Portfolio Manager, Japan investment team