Higher Offer / Bidding War – Upside TBD
A potentially interesting situation is unfolding at Tokyo-listed UV ink and resin manufacturer/seller T&K Toka. Bain Capital wants to acquire the company and intends to launch tender offer at ¥1400/share. However, another party, hedge fund Dalton Investments, holds a large blocking stake and will likely oppose the transaction. This should force Bain Capital to raise its bid. There is also a chance of a competing offer from Dalton, given its multiple previous attempts to partially/fully acquire T&K Toka as well as the recently increased stake in the company. T&K Toka currently trades at a 3% premium to Bain’s offer, reflecting market’s expectations of a price bump. With Bain’s tender set to commence shortly, the setup should play out in the coming weeks/months. Even if there is no higher bid, the downside is well protected as Bain is unlikely to simply walk away from the transaction.
Here’s a timeline of the relevant developments over the last year:
- Sep’22 – Dalton Investments proposed to privatize T&K Toka at undisclosed terms (see here, p. 13). Both sides engaged in discussions but the offer was eventually withdrawn “before the company (T&K Toka) could receive sufficient answers” to its questions.
- Jan’23 – Dalton Investments, along with its affiliates, launched a partial tender offer for up to 44% of T&K Toka’s shares (including Dalton’s 22% stake at the time). The tender was not approved by T&K Toka’s board and failed to meet the minimum acceptance condition of 42%.
- Aug’23 – Bain Capital announced its intention to launch a tender offer at ¥1400/share. The tender was/is supported by Toka’s management and other shareholders, for a total of 27.4% outstanding shares vs the minimum acceptance condition of 66.6%. Bain Capital expected the tender to commence in Jan’24, subject to several pre-conditions, including the requirement of partial disposal by T&K Toka of its stake in its Chinese subsidiary, Hangzhou Toka Ink (ticker: 688571.SS) from 33.5% to below 30% as well as regulatory approvals in Serbia and Japan.
- Sep’23 – Dalton increased its ownership in T&K from 22% to 24%.
- Nov’23 – T&K Toka announced that it had reduced its stake in the Chinese subsidiary to below 30%. It is not clear if all the other pre-conditions, including regulatory approvals, have already been met. However, reducing the stake in the Chinese subsidiary was likely the key hurdle. This potentially paves the way for the commencement of the tender offer.
It’s not the first time Bain Capital has been compelled to increase its offer after encountering rival bids or opposition from sizable shareholders. Several precedents are listed below. While these instances do not necessarily guarantee a similar outcome in this specific situation, they showcase that Bain isn’t prone to abandoning deals without a fight.
- This year, Bain agreed to acquire Estia Health at A$3/share. The transaction met resistance from Estia’s largest equity holder, Wilson Asset Management (owned 10%), asserting that the bid undervalued the company. Bain eventually increased its offer to A$3.2/share, leading to Wilson’s support. This situation was covered on SSI.
- In 2017, Bain made an offer to acquire the generic drug maker Stada at €58/share. Following a competing bid from Permira and Advent International at the same terms, Bain teamed up with Cinven to raise the offer to €66/share. However, the consortium’s bid fell short of the minimum acceptance threshold, facing opposition from activist investor Elliott, which held a blocking stake. Subsequently, Bain and Cinven again increased their bid to €74.40/share, meeting Elliott’s demands.
- In late 2022, Bain proposed to acquire Caverion at €7/share. After a competing bid from the Swedish venture capital firm Triton at €8/share, Bain made a new offer with two alternatives: 1) €8/share in cash or 2) a debt instrument entitling holders to a fixed cash payment of €8.5/share nine months post-offer completion. However, Bain’s tender offer eventually failed to meet the minimum acceptance condition.
- In 2019, Bain sought to acquire the Japanese printing services provider Kosaido at ¥610/share. After failing to secure the necessary support from target’s equity holders, Bain bumped the bid to ¥700/share. However, Bain subsequently failed to acquire the company after encountering resistance from activist investor Yoshiaki Murakami, who argued that the offer still undervalued the company.
Whereas Bain is unlikely to walk away easily, Dalton is quite likely to push for a higher price or make its own offer. Dalton Investments is an investment management firm ($3.6bn in AUM) with a focus on value opportunities in Asia and emerging markets. In 2019, Dalton launched a Japan-focused activist investment trust, Nippon Active Value Fund (NAVF). Dalton/NVAF has successfully pursued several activist campaigns in Japan so far:
- In early 2021, NAVF accumulated a 6% stake in Sakai Ovex before before launching a campaign to encourage the company’s management to pursue a privatization. The activist fund proposed a buyout at ¥2350/share which sparked a higher bid from the management at ¥3810/share. The fund reportedly marked a 103% gain on the position.
- In 2019, Dalton submitted a proposal to Shinsei Bank pushing for share buybacks and the appointment of an independent director. Shortly after the activist’s proposal, the company announced a 10% share buyback. Shinsei Bank later followed up with another share buyback.
- In 2022, Dalton submitted similar proposals to a number of Japanese companies, several of which, including Mitsuboshi Belting and Teikoku Electric, subsequently raised their dividend payout ratios.
The weak part of this setup is the lack of obvious valuation support for a higher offer, at least from the quick look at operating performance. Bain wants to acquire T&K Toka at 14.4x TTM PE multiple, after adjusting for the market value of its stake in the listed Chinese subsidiary. Over the recent years, the company has displayed flat/declining topline and sub 1% operating margins. For reference, another Tokyo-listed printing ink manufacturer, Sakata Inx, currently trades at 8.4x TTM PE. Sakata Inx is a larger industry player and has displayed growing sales and higher operating margins (exceeding 3% in recent years). So I find it hard to argue for a substantial price bump from an earnings perspective.
However, T&K Toka appears cheap from the book value perspective, trading at 0.64x P/NAV compared to Sakata Inx’s 0.73x. On top of that, T&K Toka’s book value is likely understated: the investment securities, including the publicly-listed Chinese subsidiary + others, sit on the balance sheets at only ¥13.5bn whereas the market value of the stake in the Chinese subsidiary alone stands at ¥21bn (Sep’23 financials include 33.5% stake). Assuming Bain could dispose of this subsidiary at market prices, it would end up paying only ¥11bn (¥32bn market cap less ¥21bn in proceeds for the subsidiary) for T&K Toka’s other assets that currently have a net book value of ¥37bn and are mainly comprised of buildings/factories and offices located in Japan as well as machinery and equipment. That’s a multiple of only 0.3xBV. So it might be that Bain is after the hard assets rather than the struggling and barely profitable operating business.