3D encourages shareholders to support the strengthening of the oversight function of FUJISOFT’s Board of Directors and the conditional share repurchase to maximize FUJISOFT corporate value
TOKYO–(BUSINESS WIRE)–3D Investment Partners Pte. Ltd., as investment manager of 3D OPPORTUNITY MASTER FUNDER (together, “3D”) today published a presentation regarding its shareholder proposals to enhance Board oversight and accountability and maximize corporate value at Fuji Soft Incorporated («FUJISOFT» or the “Company”) (9749.T), which will be presented at the Company’s 54th annual general meeting of shareholders scheduled to be held on March 15, 2024 (the «Annual General Meeting»). 3D has proposed the appointment of one external corporate auditor and the implementation of a share repurchase of FUJISOFT’s common stock, which would become effective should the Board of Directors reject the take-private proposal.
The presentation details can be found at the following website:
https://www.3dipartners.com/engagement/fujisoft-presentation-on-shareholderproposal-en-202402.pdf
As the largest shareholder of FUJISOFT with over 21% of outstanding shares, 3D has been engaged in constructive dialogue with FUJISOFT over the past four years. In September 2023, 3D approached potential acquirers in Japan and overseas, and received take-private proposals for FUJISOFT from several prominent private equity funds (“Proposers”) at prices significantly higher than the share price at the time and submitted them to FUJISOFT’s Board of Directors. These proposals, as FUJISOFT itself admits,1 were » bona fide offers » under the «Guidelines for Corporate Takeovers» published by the Ministry of Economy, Trade, and Industry on August 31, 2023.
Upon receipt of any “bona fide offers”, FUJISOFT is required to give “sincere consideration” to them. In other words, proposals should be submitted to the Board of Directors, the Board of Directors should obtain additional information from the acquirers about their take-private proposals, and then the Board of Directors should consider the appropriateness of taking FUJISOFT private from the perspective of whether the acquisition would contribute to enhancing corporate value2.
FUJISOFT has now established a special committee consisting solely of outside directors to «consider all management options that could maximize corporate value» as well as «enhance the collaborative interests of shareholders»1 and is proceeding with its evaluation of the take-private proposals.
However, 3D is concerned that the review process that FUJISOFT is pursuing will not maximize FUJISOFT’s corporate value. FUJISOFT is currently attempting to consider the appropriateness of each take-private proposal by comparing the proposals received from Proposers with the «intrinsic value» based on the new medium-term management plan announced in February 2023. In our view, this review process is flawed, incomplete, and based on incorrect assumptions. First, to our knowledge, the special committee has not solicited take-private proposals on its own. In addition, the special committee has not engaged at a level sufficient to refine these proposals and increase prices with interested parties by providing customary due diligence materials.
Additionally, FUJISOFT has not requested each Proposers to submit updated proposals reflecting the significant changes to the Company’s business and opportunities since the proposals were delivered in September 2023, including the announcement of the extremely ambitious new medium-term management plan.3
Furthermore, this ambitious new medium-term management plan announced in February 2023 was formulated with the Proposer’s take-private price in mind. 3D is concerned that the special committee may derive an overly optimistic “intrinsic value” by overestimating the feasibility of the new plan and underestimating FUJISOFT’s cost of capital.
3D expects that FUJISOFT’s directors will embrace their responsibility to maximize corporate value and protect the interest of shareholders, through conducting a thorough, comprehensive strategic review process. Specifically, 3D is asking FUJISOFT to (1) maximize the value of the take-private proposal by soliciting take-private proposals that take into account the major changes to FUJISOFT’s circumstances4 and engaging constructively with interested parties, and (2) apply an appropriate comparative method (rather than a comparison to an «intrinsic value») that examines the value of the proposals from the perspective of whether the proposed acquisition price is at an appropriate premium to the share price after the announcement of the new medium-term management plan. 3D believes that, if this methodology is not used, FUJISOFT is unlikely to maximize corporate value and protect the interest of shareholders.
Proposed Appointment of Stephen Givens as the Corporate Auditor
3D believes that the appointment of one additional external corporate auditor will enhance the effectiveness of the above review process. A corporate auditor is required to play a role5 in monitoring whether the supervisory function of the board of directors is being properly exercised to enhance corporate value, which in turn contributes to the prevention of inappropriate management decisions by the board of directors in the review process on the take-private proposals. In this instance, as the decision the Board faces is the consideration of a take-private proposal, it is essential that the auditor have knowledge of M&A and corporate governance. Accordingly, 3D proposed the appointment of Mr. Stephen Givens, a U.S. corporate lawyer based in Tokyo for over thirty years with deep experience in the aforementioned areas, as an outside corporate auditor of FUJISOFT.
Share Repurchase Proposal to be Effective if the Board of Directors Does Not Accept the Take-private Proposal
If the Board of Directors determines not to accept the take-private proposal, the share price at that point would be significantly lower than the «intrinsic value» based on the New Medium-Term Management Plan. In our view, FUJISOFT should then aim to close the gap between its market share price and its “intrinsic value” (as determined by the Board of Directors) through a meaningful share repurchase. 3D believes that share repurchases are the most straightforward and direct way to close such a gap. 3D is proposing that, if the Board rejects the takeover proposal, FUJISOFT should conduct a share buyback of 75 billion yen within one year after the close of the Annual General Meeting.
3D believes that 75 billion yen is a reasonable amount for a share repurchase for the following reasons:
- The amount of excess capital elimination required for FUJISOFT to achieve a return on equity that is competitive with the Company’s peers is approximately 135 billion yen.6
- The total amount of share buyback committed by the company in the new medium-term management plan is 100 billion yen.7
- The distributable amount of FUJISOFT8 and net cash on a consolidated basis9 after real estate sales are 155 billion yen each.
- The latest distributable amount on a stand-alone basis is 77 billion yen.10
In addition, since FUJISOFT has a large-scale real estate liquidation plan for FY2024, it is reasonable to delimit the shareholder return policy to a period of one year, and 3D believes that the combination of the purchase size of 75 billion yen and the one-year period is reasonable11 in terms of market liquidity.
As described above, 3D believes our respective proposals will help maximize FUJISOFT’s corporate value by enhancing the effectiveness of the strategic review process and closing the large gap between FUJISOFT’s market price and its intrinsic value if the Board determines not to accept the take-private proposals.
About 3D Investment Partners Pte.
3D Investment Partners Pte. Ltd. is an independent Singapore-based, Japan focused value investing fund manager founded in 2015. 3D Investment Partners Pte. Ltd. focuses on partnering with management who share its investment philosophy of medium to long-term value creation through compound capital growth and a common objective of achieving long-term returns.
Disclaimer
This press release is provided for informational purposes only and does not constitute an offer to purchase or sell any security or investment product, nor does it constitute professional or investment advice. This press release should not be relied on by any person for any purpose and is not, and should not be construed as, investment, financial, legal, tax, or other advice.
3D Investment Partners Pte. Ltd., and its affiliates, and their related persons («3DIP») believe that the current market price of FUJISOFT does not reflect its intrinsic value. 3DIP acquired beneficial and/or economic interest based on its own idea that FUJISOFT securities have been undervalued, provides attractive investment opportunities, and may in the future beneficially own and/or have an economic interest in FUJISOFT securities. 3DIP intends to review its investments in FUJISOFT on a continuing basis and, depending upon various factors including, without limitation, FUJISOFT’s financial position, and strategic direction, the outcome of any discussions with FUJISOFT, overall market conditions, other investment opportunities available to 3DIP, and the availability of FUJISOFT securities at prices that would make the purchase or sale of FUJISOFT securities desirable,. 3DIP may, from time to time (in the open market or in private transactions), buy, sell, cover, hedge, or otherwise change the form or substance of any of its investments (including the investment in FUJISOFT securities)to any degree, in any manner permitted by any applicable law, and expressly disclaims any obligation to notify others of any such changes.
No representation or warranty, either expressed or implied, in relation to the accuracy, completeness, or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets, or developments referred to herein. 3DIP expressly disclaims any responsibility or liability for any loss whatsoever arising from any use of, or reliance on, this press release or its contents as a whole or in part by any person, or otherwise arising in connection with the press release. 3DIP hereby expressly disclaims any obligation to update or provide additional information regarding the contents of this press release or to correct any inaccuracies in the information contained in this press release. 3DIP disclaims any intention or agreement to be treated as a joint holder (kyodo hoyu sha) under the Financial Instruments and Exchange Act of Japan, a closely related party (missetsu kankei sha) under the Foreign Exchange and Foreign Trade Act with other shareholders, or receiving any power or permission to represent other shareholders in relation to the exercise of their voting rights, and has no intention to solicit, encourage, induce, or require any person to cause other shareholders to represent such voting rights.
3DIP has no intention of making a proposal, directly or through other shareholders of FUJISOFT, to transfer or abolish the business or asset of FUJISOFT and/or FUJISOFT group companies at the general shareholders meeting of FUJISOFT. 3DIP does not have the intention and purpose to engage in any conduct which constricts the continuing and stable implementation of business of FUJISOFT and/or FUJISOFT group companies.
This press release may include content or quotes from news coverage or other third-party public sources («Third-Party Materials”). Permission to quote from Third-Party Materials in this press release may not have been sought nor obtained. The content of the Third-Party Materials has not been independently verified by 3DIP and does not necessarily represent the views of 3DIP. The authors and/or publishers of Third-Party Materials are independent of, and may have different views than 3DIP. The quoted Third-Party Materials on this press release do not imply that 3DIP endorses or concurs with any part of the content of the Third-Party Materials, or that any of the authors or publishers of the Third-Party Materials endorses or concurs with any views which have been expressed by 3DIP in the relevant subject matter. The Third-Party Materials may not be representative of all relevant news coverage or views expressed by other third parties on the stated issues.
In respect to information that has been prepared by 3DIP (and not otherwise attributed to any other party) and which appear in the English language version, the meaning of the Japanese language version shall prevail unless otherwise expressly indicated in case of any contradictions between the Japanese version and the English version.
1 Notice Concerning Progress of Corporate Value Enhancement Measures» FUJISOFT January 12, 2024
2 “Guidelines for Corporate Takeovers» Ministry of Economy, Trade and Industry published on August 31,2023
3 “Medium-Term Management Plan 2028″ FUJISOFT February 14, 2024
4 The take-private proposal submitted by 3D is as of the end of July 2023, but the share price has since risen 31%. FUJISOFT announced a real estate liquidation plan in August 2023, acquisition of a listed subsidiary in November 2023, and an ambitious new medium-term management plan in February 2024 that aims for an operating income CAGR of 16.8% over the next five years.
5 Standards on Auditing by Corporate Auditors» Japan Corporate Auditors Association, July 23, 2015
6 Net assets after taking into account unrealized gains on real estate before share buybacks as of December 2026 are calculated to derive the amount of excess capital required to achieve a competitive ROE of 16.5%. Based on the December 2023 financial results, updated from the figures as of the time of the shareholder proposal, with an assumed net income (the Bloomberg Consensus Operating Income multiplied by 70%) for the period from December 2024 to December 2026 and an assumed dividend payout ratio of 35%, 3D calculated the net assets after considering unrealized gains on real estate before share repurchases as of December 2026.
7 Medium-Term Management Plan 2028″ FUJISOFT February 14, 2024
8 “The distributable amount before the sale of real estate was calculated using the book value of retained earnings, legal reserve, other capital surplus, and treasury stock for the year ending December 31, 2022, and non-consolidated net income and dividends for the year ending December 31, 2023. Then, calculated by adding unrealized gains on real estate assuming real estate market value of 195,429 million yen (based on third-party calculations), book value of 84,536 million yen, and a tax rate of 30%.
9 Net Cash for FY12/2023 is calculated as Cash and Deposits + Marketable Securities + Investment Securities – Short-term Debt-Long-term Debt – Commercial Paper. Real estate market value of 195,429 million yen (based on third-party calculations), book value of 84,536 million yen, and a tax rate of 30% are assumed for calculating generated cash from the sale of the real estate.
10 Calculated using non-consolidated other capital surplus as of FY12/2022 (0.5 billion yen) + other retained earnings (75.0 billion yen) – treasury stock (4.6 billion yen) + non-consolidated net income as of FY12/2023 (10.8 billion yen) – total dividends for FY12/2023 (4.4 billion yen: from CF statement)
11 Based on the average daily trading volume (126,600 shares) over the past six months at the time of the shareholder proposal and market participation rate of 35%, share repurchasing within 1 year is feasible. Based on examples of share buybacks at Citizen Watch and Toshiba, 3D assumes that a 35% market participation rate is feasible. Citizen Watch acquired approximately 17% of its outstanding shares (excluding treasury stock) between February 2023 and June 2023, with the average number of shares acquired per day being about 36% of the average daily volume for the six months prior to the announcement of the share buyback. Toshiba acquired approximately 30% of its total outstanding shares (excluding treasury stock) between November 2018 and November 2019, with the average number of shares acquired per day at that time being approximately 35% of the average daily volume for the six months prior to the day before the share repurchase was announced (Toshiba uses ToSTNET).
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