WHY Y1,200 IS NOT ENOUGH
Oasis has received an updated valuation from truly independent valuation experts, BVCJ Co. Ltd., which valued PanaHome at ¥2,061 per share based on a DCF analysis. This valuation represents a fair price that is a 72% premium to the current takeover price of ¥1,200 Yen. We had previously sent an independent fairness opinion from BVCJ to PanaHome but we received no comment. PanaHome has failed to disclose its own SMBC and Plutus valuation reports. These reports were purportedly produced for the protection of minority shareholders and, as such, should be publicly disclosed – that is, unless PanaHome has something to hide.
Based on the disclosure provided by PanaHome on February 28, 2017, PanaHome appointed Plutus Consulting to perform a “fairness opinion” purportedly in order to protect minority shareholders. Unsurprisingly for an after-the-fact fairness opinion, the Plutus valuation justifies the original SMBC valuation. PanaHome has provided very little information regarding the opinion; nevertheless, it is clear that the Plutus opinion was not designed to protect the minority shareholders because they accepted all the numbers provided by PanaHome without exception and did not carry out an independent verification -- note the following from the Plutus disclosure:
“Plutus has not guaranteed their feasibility, nor expressed any opinion on the analyses or forecasts subject to which they were prepared or the assumptions on which they were based.”
“… Plutus has used the materials and information as it was and has not independently verified the accuracy and completeness thereof, and is not obliged to verify them”
Additional disclosure and tender announcement show flaws in the fairness of the process
- We believe that the process undertaken was flawed and unfair to minority shareholders:
- Prevented Oasis from presenting an alternative bid to minority investors. Based on disclosures, even though Panasonic has a significant number of employees seconded to PanaHome it was still given two opportunities to conduct due diligence on PanaHome. PanaHome refused to allow us to perform any due diligence at all despite repeated requests from Oasis
- Failed to adequately consider the Oasis alternative offer. The independent committee claimed to have met a number of times to discuss the Panasonic offer and met with the advisors. Oasis was repeatedly refused access to the independent committee and when we were finally allowed to meet them, we were given just an hour and a half. It was clear from the meeting that lack of detailed questions from the independent committee that they were not considering our offer earnestly.
- No “Go Shop” process was undertaken. Ideally, the Special Committee, should “Go Shop” PanaHome to true independent third parties such as private equity funds and competitors to determine the true value of the business. PanaHome claims that there is no effective alternative to the privatization is apparent but this is obviously irrational and there was no attempt to look at alternatives. Failure to address this implies that the Special Committee were merely looking to rubber stamp Panasonic’s tender offer and, as a result, are in breach of their fiduciary duties to minority shareholders
- The tender received insufficient support from minority shareholders. Oasis tendered some shares so that those minority shareholders that wished to exit their positions after years of abuse could do so. Without Oasis tendering some of its shares, Panasonic would not have achieved a majority of the minorities. Even with Oasis tendering, only 57% of minority shareholders tendered their shares.
- PanaHome’s large cash balance was omitted from almost all the valuation metrics:
- The Discounted Cash Flow model employed by SMBC assumed several tens of billions of yen in cash was spent to for future growth but no growth or benefit of the assets from this expenditure were included in the calculation – therefore, only Panasonic benefits from the investment and minority shareholders lose the value of the cash. This is unfair
- PanaHome tries to claim that not all of the ¥97.5 billion in cash and deposits at end of Q3 are surplus and that ¥40 billion of working capital should be deducted from peak cash. This is obfuscates the truth because Q3 is the cash low point, and deducting the ¥40 billion from peak cash and securities amounts to ¥93 billion, so almost all of the Q3 cash is surplus:
“As the end of December 2016, PanaHome held 97.5 billion yen of cash and deposits…it should not be understood that all such cash and deposits are surplus funds. We need to set aside a significant part of this as working capital and for other purposes…” “As such, the balance of the cash and deposits described in PanaHome’s disclosure materials is at its peak at the end of March, and it can decrease by 40 billion yen due to the payment of said items.”
- Downward revision in forecasts and the impact on valuation:
- On October 14, 2016, PanaHome revised down their forecasts from the year ended March 2017. Buried in Panasonic’s tender offer announcement released on April 21, 2017, we learned that the downward revision of forecasts extends for the three year base period for the DCF analysis (March 2018 – 2020). This reduction was driven by delays in deliveries of multi-stories into the next year which is temporary, with no long term impact on the business. Profit was also negatively impacted by restructuring of the sales process which will improve profitability in the long term
- We note that prior to Panasonic’s takeover of two other listed subsidiaries, Sanyo Electric and Panasonic Electric Works, both companies revised down their forecasts
- Insufficient terminal growth:
- Management invests in land to make a significant positive return. As a result, any investment they do make should lead to profit growth in the future. If this is the case, then how could SMBC include large amounts of cash expenditure on investments with no impact on growth as they apply a 0% perpetual growth rate? We note again, this is after two years of investments that were planned to drive returns for the following years, well after the end of the short three year DCF calculation period. The condo building business takes 2.5 years to build and start realizing returns
- Additionally, a 0% growth rate is below Japan’s current inflation rate expectation which means that SMBC expects profits at PanaHome to decline in the future as the company does not even grow in line with inflation. This is very hard to believe considering the dramatic growth expected from March 2017 to March 2020, with Operating Profit expected to be the highest since 1997. For a calculation to not give any benefit for the investment assumes that PanaHome are investing for failure and expect to lose all the money they invested, this is preposterous. In SMBC’s EBITDA exit multiple methods it again adopts the lowest possible multiples based on the weak comparables it selected
- The most sensitive single variable in the DCF is the discount rate, with which small changes create massive differences in value. Since the original tender offer, interest rates and volatility in the Japanese market has decreased and as such one would expect the discount rates to have decreased, however, SMBC have managed to increase both the low and high range of their discount rate by over 8%, which has a substantially negative impact on the valuation
Highly questionable comparable companies analysis
- To gain further insight into the correct comparable companies we approached a large number of salespeople working for various homebuilders including, PanaHome, Seikisui House and Daiwa House to as who their competitors are. The PanaHome salesman emphasized that their main competition are homebuilders that use steel in their construction and include Sekisui House, Daiwa House and Asahi Kasei. Salespeople from Daiwa House and Sekisui House all commented that their direct competitors were also those homebuilders that use steel including most prominently PanaHome. None of the sales people identified Mitsui Home, Open House, Sumitomo Forestry, Tama Home or Misawa Home as competitors, yet SMBC and Plutus use them exclusively. Additionally, the Shikiho adopts Seikisui House and Daiwa House as comparators but none of those used by SMBC and Plutus. It is evident, that the comparators chosen were not on merit but on which would determine the lowest valuation possible for PanaHome
- SMBC and Plutus have simply and intentionally avoided using direct competitors such as Daiwa House and Sekisui House in their comparable company analysis as using these would calculate a significantly higher valuation. The criteria for comparable companies adopted by the SMBC valuation were a) similarity, b) revenue size, and c) stock price information including float turnover not being unnaturally low. However, the comparable companies selected included loss making companies such as Tama Home and a stock with unnaturally low turnover, Mitsui Home.
- PanaHome claims that the privatization is a necessity because “it has been difficult for them to take bold or quick measures” which they will be able to as part of Panasonic – except that PanaHome’s CEO and three other senior executives are former Panasonic employees and they have failed to invest for the future because they deposited their at Panasonic, so why should it be better there?
- We believe that the Special Committee was misled, unqualified, or not independent, and that this resulted in an unfair process and a transaction price well below fair value.
How did this happen? All of the parties involved including the “independent” bank, the “independent” law firm and the special committee did not do their job to protect minority shareholders.