AJOT
Daibiru • Q1 2022
Trading activity was elevated over the quarter as we sold our stake in Daibiru following the 50% premium tender off from its parent company.
Trading activity was elevated over the quarter as we sold our stake in Daibiru following the 50% premium tender off from its parent company.
The tender offer for Daibiru at a 50% premium, added 174bps to returns making it the largest contributor over the quarter. Daibiru was a relatively new position for AJOT, entering the portfolio at the end of 2020 following a COVID-induced sell-off. It owns a collection of well-located office buildings in Tokyo and Osaka, and while masquerading as a property developer, its lack of sales activity made the Company more akin to a REIT (without the tax benefits). Poor corporate governance, an inefficient holding structure and the listed subsidiary relationship with Mitsui O.S.K. Line (MOL) meant Daibiru traded on a phenomenally wide (after-capital gains tax) discount of 50%. This was far wider than the single digit discounts of listed office REITs with similar portfolios.
Changing TSE listing rules, new leadership at both Daibiru & MOL and mention in MOL’s rolling management plan that it will dispose of non-core business assets such as real estate, led us to believe that a privatisation event was a higher likelihood than assumed by the Market. Confident in Daibiru’s undervaluation, quality and potential event, we built a near 1% stake in the Company and embarked on a private engagement campaign putting forward suggestions on how to address various issues, including corporate governance and the subsidiary listing structure.
While the quality of Daibiru’s portfolio allowed us to be patient, it was pleasing that in just over a year of ownership MOL and Daibiru took the decision to collapse the subsidiary structure, with MOL offering a 50% premium to buy the 48% of the Company it didn’t already own. The Y2,200 offer price, however, came at a 30% discount to Daibiru’s published real estate value and followed a flawed negotiation process by Daibiru’s board of directors. We launched a public campaign to raise awareness of how MOL was exploiting Daibiru, publishing our arguments on a dedicated website “www.assetvalueinvestors.com/stopexploitingdaibiru/”.
With MOL owning 52% of Daibiru, and only needing 14% more shares to force a squeeze out, the prospects for successfully pressuring MOL to raise the price were slim. However, we felt a responsibility to challenge such an obviously flawed process and defend the rights of all minority shareholders. Our campaign gathered considerable attention, with several other shareholders voicing protest, both publicly and privately, and numerous articles published by the Japanese media sympathetic to our arguments.
Even in the absence of a higher offer price, we hope the publicity can be helpful for our engagement at other portfolio companies. Daibiru has been an excellent investment for AJOT, generating a total return of +74%, and an IRR of +84%.
On the last day of the month, our 5.3% position in Daibiru was subject to a tender offer from its parent company, Mitsui O.S.K. Lines (MOL), at a 50% premium to the prevailing share price – AJOT’s fifth investment to be taken private since launch. That another investment has been taken private is clearly a positive. However, we are disappointed with both the price, coming at a 30% discount to Daibiru’s real estate value, and the negotiation process with Daibiru’s board of directors failing to act in the best interests of minority shareholders. We have been extensively engaging with Daibiru and MOL for the past year, and will defend our minority shareholder rights, hoping to raise awareness of MOL’s exploitation through a public campaign which can be found at www.assetvalueinvestors.com/stopexploitingdaibiru Still, even in the absence of a higher price, Daibiru has been a good investment for AJOT, generating a total return of +74%, and an IRR of +84%. The uplift from the 50% premium tender offer will add roughly +2.7% to NAV.
It is hard to pin Daibiru’s -2.0% share price weakness on anything fundamental. Rather, it is probably more a consequence of profit taking following its strong share price performance earlier in the year. Daibiru owns a portfolio of high-quality commercial real estate in Tokyo and Osaka and is a listed subsidiary of Mitsui O.S.K. Lines (MOL). We don’t think the subsidiary relationship is tenable, and although the timing is uncertain, we expect MOL to buy-in Daibiru. With Daibiru trading on a 50% discount to our estimated NAV, we expect a tender price to come at a substantial premium.
Daibiru’s +18% share price gain bucked what was a generally weak quarter for real estate stocks, with Daibiru’s peers seeing their share price decline by an average -4%. It was, therefore, a narrowing of Daibiru’s discount from 55% to 47% that drove the strong performance. This still implies +89% upside to the after-tax fair value of Daibiru’s real estate, a value which we think will be mostly realised either by a sale of Daibiru or a buy-in from its parent company Mitsui O.S.K. Lines.
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