January 28, 2013

Hostile Bid May Be a First for Japan

Here’s news from Taketoshi Yoshikawa and John Taylor of ISS’ Japan Proxy Research:

An unsolicited bid by Japan’s second largest golf course operator, PGM, to acquire a majority stake in rival Accordia will, if successful, mark the country’s first successful hostile takeover. In a country that many argue has long lacked a functioning market for corporate control, PGM’s proposal is being watched closely. The bid follows a trend, dating back to the early 2000s, that has seen a number of increasingly credible hostile takeover bids for Japanese companies by hedge funds as well as strategic buyers, though none has been successful.

Acrimony Between the Firms
PGM’s November bid represents the second attempt by Heiwa, PGM’s parent company, to take over Accordia in less than a year. In the first attempt, which failed at Accordia’s annual meeting in June, Heiwa itself launched a proxy contest for control of Accordia’s board after accusing Accordia President Michihiro Chikubu of misappropriating funds.

Heiwa, a pachinko and pachislot (hybrid pinball and slot machine) manufacturer, acquired PGM from Lone Star Funds in October 2011. Accordia’s name as potential acquisition target came to the fore after Heiwa appointed former Accordia executive Arihiro Kanda as PGM President in January 2012. At the time of the acquisition, Heiwa’s move surprised analysts, as its pachinko and pachislot manufacturing business has little apparent overlap with golf course operations. Immediately after Kanda was officially appointed PGM President, Kanda and Heiwa President Yasuhiko Ishibashi, approached Accordia with a plan to integrate PGM and Accordia. Accordia management was not open to Kanda’s proposal from the start. Heiwa proceeded to impugn Accordia’s top management, raising accusations that led to Accordia President Michihiro Chikubu’s resignation amid allegations of fund misappropriation.

At Accordia’s June annual meeting, Heiwa argued for board changes to address what it characterized as “compliance issues.” While Accordia management proposed nine nominees, including five independent outsiders, Heiwa proposed an alternate slate of eight dissident nominees with four outsiders. Heiwa’s four executive director candidates eventually withdrew and none of its eight nominees received majority support. (Masaharu Hino, a former prosecutor and one of the Heiwa-nominated dissidents, received 48.9 percent.)

Both PGM and Accordia originated as vehicles for investment banks to acquire bankrupt golf courses after the collapse of Japan’s massive asset bubble around 1990. PGM was launched by Lone Star in 2004, and Goldman Sachs, where Kanda was an executive, launched Accordia in 2002. Both operators subsequently grew, with PGM now operating 150 golf courses, and Accordia operating 154. Goldman Sachs exited in 2011, selling its stake on the open market, and Lone Star sold PGM to Heiwa the same year.

Tender Offer and Accordia Response
The Heiwa/PGM tender offer to acquire 20 percent to 50.1 percent of Accordia is set at JPY 81,000, a premium of 52 percent based on market prices the day before the announcement. According to PGM, current Accordia shareholders could choose to tender their shares either for cash or for shares in the merged entity.

Although the Heiwa/PGM side has announced its intention to merge the two golf operators, it has not yet announced details. PGM claims that a detailed plan can’t be crafted until after discussions with Accordia management, completion of due diligence, and consideration of legal, accounting and taxation considerations. PGM expects three kinds of integration synergy: (1) increased sales through targeted marketing based on analysis of PGM and Accordia’s combined 2 million client base, (2) capital and other cost synergies and (3) opportunity to acquire additional high profit golf courses by leveraging lower capital cost.

Accordia countered that its financial performance is superior to PGM’s and that the bidder’s offer price of JPY 81,000 per share is insufficient, based on evaluations by its advisers Daiwa Securities and PricewaterhouseCoopers. Both advisers used a discounted cashflow analysis based on the company’s newly announced medium-term management results. Daiwa Securities argued valuation lies between JPY 124,632 to 163,916 and PricewaterhouseCoopers found a valuation of JPY 105,492 to 134,944 per share. Accordia also argued that PGM’s tender offer scheme is a two-tier, coercive takeover plan that does not target all Accordia’s outstanding shares, and seeks integration at a later stage without disclosing plan details or even the share exchange ratio. From Nov. 19, the business day after the PGM tender offer announcement, until Jan. 16, the day before the tender offer closing date, Accordia’s share price ranged from JPY 72,000 to JPY 80,800.

An Unusual Defense
In an unorthodox defensive move, Accordia announced Jan. 4 plans to seek an increased supermajority requirement. It will schedule a special meeting of shareholders in March to amend its articles of incorporation to increase the threshold required for passage of merger or acquisition related proposals from the current two-thirds to three-quarters of votes cast. Accordia claims the amendment is needed in order to protect the interests of minority shareholders in the event PGM acquires majority stake, and to address the “coercive nature” of the tender offer. If the proposal passes, a majority of the minority shareholders (i.e., investors other than PGM) will have to vote in favor of merger or acquisition, in order for the proposal to pass. Accordia did not increase the threshold for appointment or removal of directors, retaining a simple majority standard. Therefore, if PGM succeeds in acquiring a majority stake, it will have the power to propose and pass shareholder proposals to remove or appoint directors of its choice, calling into question the effectiveness of Accordia’s defense strategy.

Third Player Emerges
To complicate the issue further, on Jan. 7, Reno, a hedge fund founded by former associates of the former Murakami Fund, whose aggressive hostile bids stirred considerable controversy in the last decade, disclosed it holds 13.8 percent of Accordia, acquired at an average purchase price of just under JPY 78,000.

Until the Murakami Fund was brought down by insider trading charges in 2006, the activist fund was involved in numerous high-profile Japanese takeover battles, either as a hostile bidder or as a third-party player. On Jan. 15, Reno announced that it further increased its stake to 18.1 percent at an average purchase price of JPY 78,460, and urged Accordia management to accept PGM’s due diligence and to start negotiating with PGM on terms and conditions of an integration. Reno also is urging Accordia to execute share buybacks until the share price recovers to a level where it exceeds book value (JPY 88,443 as of September 2012). On Jan. 16, Accordia responded to Reno, saying it will not rule out negotiation with PGM after the end of the tender offer, and agreeing that share buybacks are on the table as one of the options management is considering, financed potentially through the sale of some of its golf courses.

Initial Tender Offer Fails
On the Jan. 17 tender offer closing date, Bloomberg cited an unconfirmed report that Accordia planned to sell 10 golf courses and raise JPY 15 billion for share buybacks. The market surged on the news to a peak of JPY 83,800 and closed at JPY 81,100, still above the PGM offer of JPY 81,000 a share. The next day, PGM announced the failure of its bid to reach the 20 percent minimum shares tendered. PGM President Kanda cited the Bloomberg report as the main reason for the failure. PGM remains committed to seek integration with Accordia, he said, but it will have to “assess the situation” before deciding the next step.

Potential to Make History
Hostile takeover bids remain far rarer in Japan than in the U.S. and some European capital markets, and, due to cross shareholdings, management-friendly investor blocs, and a variety of other defense mechanisms, no hostile bidder has yet succeeded in securing more than a majority stake in a Japanese target. But PGM and its parent Heiwa may ultimately still be first. Accordia is unusually vulnerable, as almost all its equity is held either by arms-length institutional or individual investors and it has no major management friendly shareholders. And unlike many Japanese firms, it lacks major cross shareholding relationships with other companies.

Moreover, unlike most past Japanese hostile takeover targets, Accordia is not a cash-rich company with a market valuation well below its net asset value. While a relatively strong valuation makes it less attractive or obvious as a target, it complicates any Accordia strategy to find a non-strategic potential buyer, such as a white knight, that has in the past rescued other targets in Japan. Finally, while PGM is backed by Heiwa’s strong balance sheet, any potential white knights for Accordia are other large golf operators, none of whom are more than one-third the size of either PGM or Accordia as golf operators.