Last year I wrote about the Japanese company Solcom (TYO:1987) after I posted about them on CoB&F. After their reverse split, I did end up buying some shares and the company was therefore part of my basket of Japanese stocks.
Today the company has announced that it will be acquired by Mirait Holdings (TYO:1417). Mirait has published an announcement in English (PDF) that has the details of the transaction. The acquisition will be done by a share exchange in which each share of Solcom will be exchanged for 2.05 shares of Mirait Holdings. At current share prices this would mean a consideration of ¥3563 for each Solcom share. With Solcom shares now trading at ¥3540 the discount doesn’t look interesting to me, so I’m probably going to sell my shares.
By the way, the name Mirait Holdings might sound familiar to readers of the blog. The company was also the acquirer of Singapore company LanTroVision in 2016. I was aware that Mirait Holdings was also a shareholder in Solcom (holding about 6% of its shares), but I didn’t expect a transaction to occur. Once again, Mirait is getting a good deal here.
Mirait is offering ¥3563 worth of stock to acquire Solcom, which values the company at around ¥18.3bn. Book value at March 31, 2018 was ¥27.2bn and around ¥12bn of the company’s assets were cash and securities. Solcom’s 2017 earings were ¥1.4bn, but guidance for 2018 was around ¥1.0bn. Mirait is only offering 0.67x book value. As so often in Japan, the acquirer does not take into account the excess cash that is on the target company’s balance sheet. Mirait Holdings itself seems to trade right around its book value and there doesn’t seem to be that much excess cash on their balance sheet.
You could say that Solcom shareholders should be feeling poorer after this transaction. I believe you shouldn’t really think like that when investing in Japan though. The concept of intrinsic value is great, but the Japanese refuse to pay it, so don’t expect to get it. This makes most investors avoid Japanese stocks like the plague, but I think there is a way to still do pretty well. You just buy when the stocks are stupid cheap (e.g. Graham net-nets) and wait for something to happen. That worked pretty well in the case of Solcom which was trading around ¥1600 at the time of my post. At that price the company was trading at 0.59x NCAV and 0.32x BV. Even though the ultimate price received might be inadequate, it’s still a gain of ~120%. It’s hard to lose when you buy profitable, cash rich companies at those types of multiples.
Update August 8: I’ve now sold my shares. This position has been replaced with another holding that is trading below 40% of book value.
Disclosure: no position anymore in Solcom (TYO:1987) or Mirait Holdings (TYO:1417)