FamilyMart Co., Ltd. (8028 JT Equity) (“FamilyMart” or the “Company”) is a major convenience store franchise in Japan and the listed subsidiary of Itochu Corporation (8001 JT Equity) (“Itochu”). Itochu, one of the largest trading companies in Japan, has held a 50.1% stake in FamilyMart since 2018.
On July 8, 2020, Retail Investment Company, LLC (“Tender Offeror“), a subsidiary of Itochu, initiated a tender offer for FamilyMart, in a transaction which would ultimately result in a minority shareholder squeeze-out, the privatization of FamilyMart, and FamilyMart becoming a wholly owned subsidiary of Itochu.
Oasis believes that the TOB process has been highly flawed to benefit Itochu above all other shareholders. Itochu is privatizing the Company at a price that FamilyMart’s board and the Special Committee could not call fair. The price is at a significant discount to a fair price.
FamilyMart Special Committee’s own statements in the Tender Offer Document attest to the undervaluation:
“The Tender Offer is not at a level where the Company can actively recommend that its general shareholders should tender their shares in the Tender Offer because, for example, the Company does not believe that a sufficient premium has been added compared to the levels of premiums in other tender offers of a purchase size of at least JPY 50 billion conducted for the purpose of making a company private that have been announced since 2010.”
Japan’s policy makers have been focused in recent years on improving fairness and governance in acquisitions of companies by controlling shareholders, where structural conflicts of interests and information asymmetries may exist. On June 28, 2019, Japan’s Ministry of Economy, Trade and Industry (“METI”) published its “Fair M&A Guidelines,” which sets out the principles that should be achieved in such transactions. The FamilyMart transaction falls short of the Guidelines’ explicit principles, on many accounts.
While we believe the Tender Offeror is not offering a fair price, Itochu has repeatedly said that it will not raise the price of the Tender Offer. However, FamilyMart is currently in a unique situation where FamilyMart itself can improve the overall economic consideration of the deal for its shareholders by declaring a special dividend. This is the only way to achieve fair value for minority shareholders during the Tender Offer Period. Paying a special dividend does not require an approval at the shareholder meeting, and the FamilyMart Board of Directors can make a decision at their sole discretion. The Tender Offeror cannot withdraw the tender offer, nor make the Tender Offer price lower, because of the special dividend, as it is not specified in their Tender Offer document. In addition, as the Tender Offeror did not specify in its tender offer document, FamilyMart has no restriction in the amount to be paid for the special dividend. This means FamilyMart could pay in full the distributable amount it owns, which is worth 1,062¥ per share, if the Board decides to do so. After the minority shareholder squeezeout, FamilyMart will be a wholly owned subsidiary of Itochu, so the proceeds used for the special dividend will effectively be paid by the Tender Offeror.
Should FamilyMart declare a special dividend, Itochu would be forced to amend the Tender Offer Document, due to the clause below:
“11．Others
The Company passed a resolution at its board of directors meeting held today to revise its dividend forecast for the fiscal year ending February 2021 announced on April 13, 2020 and to not pay dividends of surplus for the fiscal year ending February 2021 on the assumption that the Tender offer is successfully completed. Further, if the Tender Offer is not successfully completed, the Company will reconsider the dividends for the current fiscal year from the perspective of shareholder returns as a listed company. For details, see the Notice Regarding Recording of Other Income and Other Expenses (IFRS) and Revisions to Business Forecast and Dividend Forecast announced by the Company today.”
Should FamilyMart declare a special dividend, a revision to this paragraph would be legally required. As such, the Tender Offeror would need to extend the Tender Offer for 10 business days. Considering the time required for the settlement, FamilyMart could declare the special dividend anytime during the Tender Offer Period.
Although FamilyMart should take advantage of this unique position to protect minority shareholders, on August 14, 2020, FamilyMart announced they would not announce a special dividend. As such, Oasis sent questions to FamilyMart on August 17, 2020 and has requested that FamilyMart respond to those questions. In order to improve understanding for all of FamilyMart’s general shareholder, Oasis has decided to make these questions, along with our correspondence with FamilyMart, public.
FamilyMart’s Board of Directors should reconsider paying the special dividend so the total economic consideration of the deal will be fair for all shareholders, or formally withdraw their support for the Tender Offer.
Oasis encourages all shareholders to engage with, or continue engaging with, the Company, in line with Japan’s Stewardship Code .