Large discount to NAV
This idea was recently covered in this Value Investors Club pitch. Sun Corporation is trading at a very wide c. 60% discount to its NAV. While the “discount to SOTP value” stories are not uncommon in Japan, this situation stands out due to the presence of prominent activists, including Oasis Management (which owns 16%) and Leopard Activist Management.
Sun’s NAV is comprised of:
- 47% stake in Cellebrite, a US-listed SaaS company specializing in digital forensics. The stake is worth JPY 7140/share vs Sun’s share price now at JPY 3400/share;
- net cash – JPY 662/share;
- a small operating business that operates at breakeven levels and is largely irrelevant to the valuation.
Leopard Activist Management began urging Sun’s management to narrow the discount in late 2023. You can find the website dedicated to the campaign here. The activist proposed that distributing CLBT shares to Sun’s equity holders would be the most effective strategy. However, in February, Sun’s management explained that this approach would not be feasible, mainly due to Sun’s significant base of Japanese individual investors, who typically cannot hold US-listed securities. Nonetheless, management expressed willingness to discuss other options to enhance shareholder value. Given the involvement of Oasis Management, which is one of Asia’s leading activist hedge funds with a solid track record (e.g. Nintendo campaign to focus on mobile games, RENN litigation settlement, etc.), there is optimism for a favorable resolution for Sun’s shareholders. An outright sale of CLBT to a PE firm seems like a viable option, especially given that Thoma Bravo has recently acquired two of CLBT’s largest competitors. Assuming that the CLBT stake gets sold at the current share price levels and the proceeds are taxed at 30%, the potential upside to NAV would still stand at 65%.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring the attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.
True Wind Capital – Tender offer of 4400/yen/share
https://www.tradingview.com/news/reuters.com,2024:newsml_FWN3I702Z:0-true-wind-capital-launched-tender-offer-for-japan-s-sun-corp-at-4-400-yen-a-share/
Interestingly, CLBT also shot up 10% today. Is the market pricing in greater probability of CLBT being taken over by PE firms (including True Wind)?
A report from Nikkei:
“True Wind said the purpose of the purchase is to help boost Sun Corp.’s corporate value over the long term.
True Wind manages private equity funds, and is a sponsor of an Israeli company dealing in digital forensics for mobile devices that is an equity method affiliate of Sun Corp.
Regarding the tender offer, Sun Corp. stated that True Wind did not make any prior contact and gave no conditions or requests. It will announce its opinion on the offer at a later date.
Hong Kong fund Oasis Management owns a total of 19% of Sun Corp.’s outstanding shares. True Wind commented that the tender offer is being made independently of Oasis.”
The tender offer expires next Monday (07/22) and Sun Corp’s price has gradually traded down, now at 4490 yen, only 2% above the offer price of 4400 yen/share.
For those that don’t subscribe to Tradingviews, here is an article, translated to English, regarding the terms of the tender:
Hebara Holdco II, LP (True Wind Capital Management) launched a tender offer (TOB) for Sun Electronics Co., Ltd. (6736), listed on the Tokyo Stock Exchange Standard Market, on the 10th. The purpose of the purchase is to obtain capital gains and dividends from the stock.
The purchase period is from June 10 to July 22, 2024.
The purchase price is 4,400 yen per share, and the total purchase amount is 18.653 billion yen.
The maximum number of shares to be purchased is 4,239,500 shares, which corresponds to a 19.00% ownership ratio, and the minimum is 3,793,400 shares, which corresponds to a 17.00% ownership ratio.
The three-month average premium is 27.80%. The tender offer agent is Mita Securities.
Given that True Wind is acquiring at least 17% of outstanding shares, it’s very likely that they have not exhausted the quota before the July 22 deadline, and stock price will be well supported during the next one month.
Can we play this as a one-month free option?
4400 Yen/share is still far below NAV and now we have a new player (True Wind) in town.
I didn’t act on my own idea of “free option” yesterday, and the stock price went up further today.
Previously there were not many Japanese ideas posted on SSI, and even fewer comments from members;
so I felt hesitant and deterred because there might not be a critical mass here to crowd-source and cross-check each other’s thoughts in relation to Asian companies.
However, activism is on the rise in Japan and Hong Kong these days. It seems like a good idea to step up research into these two markets.
For example, in Hong Kong market, there is a very interesting closed-end fund activism case going on, with Argyle Street Management fighting a very public campaign to close the NAV discount . Interested members can check out China Merchants China Direct Investment Ltd(0133:HKG).
If it’s true that True Wind had not contact with Sun prior to announcing the tender offer, it seems like an unusual approach for a PE firm to take.
In any case, with one investor holding a 19% position, an activist fund making noises, and another firm trying to acquire a 19% position, it’s hard to imagine the stock not rising. The only way the tender will not succeed is if the price rallies and exceeds the tender price (which means shares will be moving to holders with a higher price expectation and holders that will be supportive of action). If the tender succeeds, it’s hard to imagine 2 large holders and an activist firm agreeing with management without implementing actions that raise the stock price.
How much does Leopard own?
And it’s interesting that True Wind explicitly refrains from exceeding Oasis’s 19% stake by setting a max 19% limit in its own tender.
Is there any legal implication in Japan for overtaking the largest shareholder or exceeding 20% ownership?
Or it may suggest that True Wind is sending a friendly signal to Oasis.
– Leopard has not disclosed its stake on the campaign website. The activist has also not filed an ownership disclosure on Japan FSA’s website (see the link below), suggesting that the firm’s stake in Sun Corporation is below 5%.
– I have not come across any legal implications of overtaking the largest equity holder or exceeding 20% ownership in Japan. For reference, the threshold for a requirement to launch a mandatory tender for all outstanding shares is 33% (currently in the process of getting lowered to 30%).
https://disclosure2.edinet-fsa.go.jp/WEEE0030.aspx
True Wind has raised the tender price to JPY 4,750 and extended the tender deadline to August 5.
True Wind has raised the tender price further to JPY 5500 (“best and final”), nearly 16% above the previous offer of JPY 4750, and 25% above the original offer of 4400.
The deadline has been extended to Aug 15.
Minimum participation threshold was also cut from 15% to 5%. I guess the offer will complete now. The question is, what’s next? The performance of this idea has been pretty nice so far, but a lot of the gains is due to positive movement in CLBT (up 20%+) since early May. The discount to NAV is still pretty wide (somewhere around 40%).
After the tender, True Wind and Oasis combined will own enough shares to block any major corporate actions (such as asset sales, privatization).
I guess they will push management to evaluate strategic alternatives and seek for the highest bidder, and block any sales that undervalue the company/asset.
It seems to me a good idea for minority shareholders to tag along for the ride.
I’ve exited my position. I expect the tender offer to go through at Y5,500 and I think there is a decent chance that it is oversubscribed and the price falls after the tender (although it would certainly still seem very cheap).
Why would True Wind lower the minimum participation threshold drastically from 15% to 5% unless they are seeing very lukewarm participation in the tender so far?
I agree that the risk of the tender getting oversubscribed is low, considering the tender’s large size (19% of outstanding shares) and likely minimal or no stockholder participation so far. As already noted, the offer still values Sun Corp at a wide discount to NAV—36% at current prices—as the latest bid’s premium over the initial offer is roughly in line with the jump in CLBT stock price since early June. So, I think the tender is worth participating in for those wishing to exit their positions. However, I believe there is significant upside left here, and given the recent developments/multiple activist involvement, I have maintained a hedged position.
With Sun Corp now at 4,890. What’s the risk buying & tendering for 5,500 ? Am I missing something very obvious here? Is the tender likely to get pulled ?
I think the decline in Sun Corp’s share price can be at least partially explained by the recent broader Japanese stock sell-off. This might increase the risk of the tender getting oversubscribed. Another reason for the wide existing spread might be the market’s fears that the tender might be pulled due to a significant decline in CLBT’s share price, with the stock already down over 10% since the latest tender amendment (based on pre-market trading). Note that CLBT is an Israeli-based company, so the sell-off might have been driven by the ongoing geopolitical turmoil in the Middle East.
I have not been able to confirm if the tender is conditioned on ‘market move’ and/or ‘MAE’ conditions. The initial tender offer registration document (see the link below, p. 32) states that the tender might be withdrawn if “any case where any of the events listed in items (iii)(a) through (iii)(g)” of article 14 occurs. However, I have not been able to find article 14 in the same document nor in other filings available on the EDINET platform (see another link below).
So, while True Wind Capital is a reputable investment firm, there might be a risk of the tender being pulled.
https://assets.website-files.com/664f2898c7baf13357375be8/6663e6a603e576ef333a6c4f_TW_TORS(eng)%20(final)%20clean%20v2.pdf
https://disclosure2.edinet-fsa.go.jp/WZEK0040.aspx?S100U4ZU
Following the unprecedented single-day collapse in Nikkei index, I guess the likelihood of the tender getting oversubscribed has become much higher.
Sun Corp trading at 5970 yen/share, 8% above the tender price of 5500.