´´ Foul Play - Co- Cos Nobouka (JP:3599)

Saturday, November 22, 2014

Foul Play - Co- Cos Nobouka (JP:3599)

With disgust I came to realize that another MBO foul play is in the making in Japan. On November 5th Co- Cos Nobouka, a stock mentioned on this blog, announced a MBO that is seriously ripping- off its minority shareholders.

Unfortunately this is the second time I have to witness atrocities in the J-net sphere to minority shareholders. The first I came across and spelled out was Sonton Food. It was bought out by its management at the end of 2012 at inadequate terms. As far as I can remember Sonton paid their minority shareholders only a slight premium over liquidation value and a significant discount to NCAV, not to mention book value.

Not only were I appalled how blatantly the management took advantage of their minority shareholders, but also by comments of a so called institutional value investor being oblivious of getting screwed on that deal.

" (...) Sonton Food (...) im Dezember 2006 (haben wir) in diese Aktie investiert (...) (sie hat)  zu einem Kurs gehandelt, der im Vergleich zu dem von uns ermittelten Wert ihrer Vermögenswerte niedrig war. Gleichzeitig hielt Sonton Food eine hohe Netto-Liquiditätsreserve (...)  Kurz nach unserer ersten Investition gerieten die Gewinne des Unternehmens jedoch unter Druck, weil die Rohstoffpreise anstiegen. Daraufhin sank der Kurs dieser Aktie um 45%. Im Jahr 2010 erholten sich die Gewinne dann aber wieder und kletterten um 150% auf ein 5-Jahreshoch nach oben. Das Unternehmen hatte zuvor seine Kosten gesenkt und seine Energieeffizienz verbessert. Außerdem waren auch die Rohstoffkosten wieder zurückgegangen. Die darauf folgenden Jahre ähnelten einer Achterbahnfahrt. Uns war jedoch klar, dass das Management dieses Unternehmens sehr effizient auf Veränderungen reagiert. Deshalb waren wir auch zuversichtlich, dass dieser Titel langfristig gute Erträge abwerfen würde. Im August 2012 wurden wir dann aber positiv überrascht, als Sonton Food die Übernahme durch sein eigenes Management (einen so genannten MBO) bekannt gab. Daraufhin stieg der Aktienkurs um 46% an. Insgesamt haben wir mit diesem Investment (einschließlich Dividenden) einen Ertrag von 52% erzielt (was einer Rendite von 7,7% p.a. entspricht. (...)"

Source: Sparinvest

(Transl.) "In August 2012 we were positively surprised when the management announced a MBO. The stock price increased by 46%, giving us a gain on this investment of roughly 52% (incl. Dividends), which represents a return of 7,7% p.a. on this investment."

They should not have been positively surprised but rather been disgusted. This fund manager does not take its fiduciary responsibility towards its investors seriously and should be tarred and feathered for such ignorance and naivety.

Be it as it may. Let us turn our attention to the pirates at Co- Cos Nobouka.

Who are they?

Well its leader is Masao Nobouka the founder of the company. With a holding of 23% of Co-Cos Nobouka's outstanding shares he is the one most to gain by fleecing the minority shareholders. But also the rest of the Nobouka clan will profit handsomely. Mitsuo Nobouka, another clan member, is holding 5,4%. Eiko Nobouka, which conveniently is also an auditor of the company, is holding 4%.

Kenji Aokage, with 11% second largest shareholder and managing director of the company, will very likely be also on deck of the Nobouka pirate ship.


What are they offering? Unfortunately not a lot!

The offering price for the remaining shares out is 785 Yen per share. If one only is concerned about the operational price metrics, offering 15 times average earnings and 10 times average operational cash- flow could be regarded as not great but decent. Especially when keeping in mind that Co- Cos is opertionally not a great business (low profitability over an extended period of time).

Having said that the wary investor should take note that Co- Cos has a lot of highly liquid assets on its balance sheet. When adjusting for those the rip- off becomes patently obvious.

The management is only offering their minority shareholders a 4 time EV/ Ebit multiple and a 3,5 EV/ Ebitda multiple. That is a joke! The offered multiples become even worse when long- term investment holdings are taken into account. Co- Cos holding in Itochu alone is apparently worth roughly 300 Mios. of Yen.

It gets even worse for the minority shareholders. Co- Cos is offering a discount of 50% over stated book value and a premium of only 11% over liquidation value. The Nobouka clan is not even willing to pay the 990 Yen NCAV per share. The offer implies a discount of rougly 20% to NCAV. If one includes the long-term investment holdings into NCAV the discount widens to rougly 35%.


Basically Co- Cos is only willing to offer the discounted dividend value of the company. They are giving no value to their assets and the fact that the company is a viable business, albeit with low profitability.

 The offer price is a shocking 50% below the intrinsic value (conservatively calculated!) of the company.  What a scam!

What can a minority investor do?

Unfortunately not much given that almost 50% of the stocks are already held by the Nobouka clan and its lackey. Even if one had the financial means of taking management to court, he will very likely be disappointed by the ruling. For no apparent reason courts in Japan deem a tender offer as reasonable should it entail a certain premium over the last few weeks market price of the stock. Although Japanese courts do take more sophisticated valuation models as a basis for evaluating the appropriateness of such transactions in the private market, it does not if publicly traded stocks are involved. Thus, there is not only nothing illegal, albeit highly immoral, about the MBO pushed through by the Nobouka clan, but also their offer would very likely be nodded through by the judge.

If I was a holder of Co- Cos Nobouka I might contact Catam Asset Management trying to point him to the fact that Co- Cos Nobouka's offer is inadequate and unacceptable. Catam Asset Management appears to have a significant interest in the overall Japanese market and holds over 1% of Nobouka's shares outstanding


This episodes of minority shareholders being fleeced by the management should come as a warning shot to any J-net investor in Japan. It should be plain clear to them that they have to discriminate when selecting net-net stocks. In Nobouka's case shareholder composition could have been a warning sign. An insider ownership of up to 20% is a plus. One close to 50% is not! The same is true for subsidiary companies that were spun- off by its mother company at a certain point in time. They often have mouthwatering quantitative readings, but the mother still holds a stake in it that is often around 50%. I would not touch those issues with a barge-pole regardless of any favorable valuation metrics.

Also the fact that the management did not take any action in order to remedy the prolonged undervaluation of the stock, i.e. share buybacks and/ or dividend increases, could have served as a warning sign. I am convinced that especially share repurchases in undervalued stocks allow conclusion to be drawn about the integrity of the management of a company.

Masao Nobouka, Mitsuo Nobouka, Eiko Nobouka and Kenji Aokage should be ashamed by fleecing the minority shareholders in such a blatant manner. Hostile activist funds are often labeled locust investors or vultures by the Japanese establishment. What a hypocrisy. The real vultures on the Japanese stock market appear to be majority shareholders like the Nobouka family eating the rest of the shareholders alive. Shame on you!

 Disclosure: No position in Co- Cos Nobouka


  1. Good post. I agree we are getting screwed, but on the other hand I think I made about 55% on this one plus dividends and didn't hold it very long. So I'll sell out and put the money to work in something else. If anyone knows where I can get screwed like that again let me know :)

    By the way, is there any way for someone who does not know japanese to see the insider holdings of these companies?

  2. Lucky you!

    But luck doesn't appear to me as a viable long-term investment strategy.

    Having in mind your investment process and attitude; I only can wish you luck!

  3. Indeed, was very unhappy with this MBO as well. However, my friend helped me translate a report by Nomura and he said that as minority shareholders we have no choice but to just accept it, otherwise we would be just holding shares of a non-tradable company. That said, I accepted the offer.

  4. Fair enough. But write about it on your blog. Get active!

    1. Thanks for reading my blog! Will dedicate a post on it and activist investing. Too bad activism is quite hard in Japan. Are you based in Japan?

    2. You are welcome.

      No I am not based in Japan.

      Not sure if activism in general is so hard in Japan. Hostile approaches are for sure! But there are activists out in Japan. But rather cooperative ones.

      I see writing about atrocities like at Nobouka as a form of activism. There is nothing worse in Japan than losing face. So write about it and/ or get this post viral on the net in order to get the highwaymans spelled out.

    3. Hi O-tone,

      Wrote the article regarding activist investing. Hope we can see more of this in future. Would really be a good vision to work towards imo.



    4. This is it? A rather uninformative post I have to say.

      By the way. If you take information from my blog you could at least state the source!

  5. Are you from Germany/Austria? On your pictures are some german words, which got me interested :)

    By the way, I totally agree with you about the mbo. Very nice writeup!

    1. Yes. I am based in Berlin, Germany.

      The MBO is an atrocity to the minority shareholders. But they do not seem to care really.