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Rising Sun calls for leveraged MBO at Fuji Media Holdings

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Hedge fund Rising Sun Management is pushing for a friendly leveraged MBO (management buy out) at Fuji Media Holdings [TYO:4676]. This would be for all the outstanding shares of FMH.

Rising Sun said in a letter it sent to management at Fuji Media and also to media outlets that it was representing the interests of a ‘concert party’ that includes investment trust Nippon Active Value [LON:NAVF], US open-ended fund NAVF Select LLC, and other managed accounts advised by Dalton Investments. Together this comprises around 6.55% of the free float of Fuji Media Holdings.

“Our goal as an investor is unwavering: to enhance value and shareholder returns for all parties,” said Paul ffolkes Davis, who is the chairman of Rising Sun Management. “Fuji Media is demonstrably the cheapest company in Japanese broadcasting, but it is not just a broadcaster, it is a conglomerate. It trades at a big discount to the sum of its parts. It needs to be broken up, and this is becoming urgent.”

Is Fuji Media Holdings an underperformer?

Fuji Media Holdings is rated an underperformer by stock market data analytics specialist Bridgewise. While shares are currently trading up 20.9% over the 12 month picture, they have come off since the middle of April. Shares remain up +49% on the two year picture, but there is a case to make here that the company has benefited from a weak yen during that time period.

Bridgewise said that Fuji does not appear to be a “very appealing investment” within the media sector at the moment.

Japan plays home to a number of conglomerates across several sectors which  have accumulated diverse underlying holdings, sometimes outside their core business areas. These are considered to be inefficient in their use of capital by foreign investors, but at the same time rely on the passive cooperation of large scale local investors.

The practise is not confined to larger Japanese stocks either: our own analysis has discovered a tendency by smaller and younger Japanese companies to acquire businesses well outside their core area of focus, with little demonstrable benefit to the main business line. Such holdings can stick around as part of the group for years, often contributing little to the main profit line.

A case in point, Fuji Media, while considered a broadcasting company, including both satellite and terrestrial broadcasting subsidiaries in its empire, is also active in the hotels and resorts sector and has an urban development arm.

Fuji Media: “disappointing and lacklustre”

Rising Sun has said that Fuji Media is seeing “disappointing and lacklustre” share price performance. Return on equity has declined to 4.4% which is far below the Tokyo Stock Exchange target of 8%. It is also below the 5% hurdle Institutional Shareholder Services requires as their minimum to support the re-election of a listed company’s CEO.

Fuji Media has issued a mid-term guidance which included a dividend increase, share buyback and a restricted stock program for the management team. Rising Sun is arguing that these gestures have not been sufficient to sustain the share price.

The average age of the members of the Fuji board is also a topic of criticism for the hedge fund. It says this is one of the oldest boards in Japan which “can hardly provide the open-mindedness, energy and dynamism your businesses need.”

Rising Sun says its alliance of funds is keen to participate in the proposed MBO, up the the permitted volume for foreign investors of 20% of the new private entity. The fund also said it believes private equity funds are following Fuji closely.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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