Why did Alpine accept such a low offer? (Updated)
We believe Alpine accepted such a low offer due to significant flaws and manipulation of the process. The valuation flaws include an extraordinarily long lead time, loss making comparable companies and cash and securities not being included in the Discounted Cash Flow (“DCF”) model. All of these issues culminated in the failure to protect minority shareholder rights.
Below we set out a summary of just a few of the flaws in the process and valuation - for a more detailed analysis please download our presentation here
Serious Flaws in the Fairness of the Process
1. Lack of independence of the Third-party Committee. Hideo Kojima is a member of Alpine’s Audit and Supervisory Committee, an outside director of Alpine and a member of the Third-party Committee entrusted with ensuring that minority shareholders are protected in the proposed merger with Alps. Minority shareholders are heavily reliant on Kojima-san, however, we have found that Kojima-san has strong historical ties to Alps which suggest he is far more interested in helping Alps get the best deal possible, and not minority shareholders. Kojima-san was one of the Ernst & Young auditors that were mentioned in the Alps Japanese annual reports in fiscal years 2005 and 2006. He was also the auditor of Alps Logistics, a 46.6% subsidiary of Alps, in the same years, and became the auditor at Alpine in 2011 and a board member in 2016. It is abundantly clear that Kojima-san has had an intimate relationship with Alps and its subsidiaries for many years, and is likely far more concerned with Alps’ wishes than he is with Alpine’s minority shareholders’ rights.
2. Alpine has dramatically outperformed. Alpine revised up its forecasts twice since the announcement, increasing operating profit from JPY6.5 billion to JPY11 billion. In its full-year results announcements, Alpine even beat those forecasts and posted an operating margin of JPY13.7 billion, 111% higher than the original forecast. Alps on the other hand is guiding a 17% drop in operating profit for FY19. Alpine is clearly outperforming Alps.
Alps is acquiring Alpine cheaply before its stock price goes up. The acquisition will only be completed in 2019 making this the longest lead time of any merger in Japan in the past 30 years. We believe Alps is doing this in order to secure Alpine at a cheap price, well before the stock re-rates due to expected record operating profit in 2019 and 2020, detailed in the tender document and potential further growth. Alps knows Alpine’s operating business and future opportunities better than anyone else and we strongly suspect that they are using this distinct advantage to buy Alpine at the lowest price and well below the fair value.
No Control Premium. Alps owns less than 50% of Alpine, and although it consolidates Alpine, we believe Alps should ensure Alpine minorities receive a fair price, and pay a control premium over a comparative-company neutral valuation of Alpine.
No “Go Shop”. To protect minority shareholder interests, and conduct real price inquiry as to what the market would pay for the shares of Alpine and the control of the company, the board of directors should have approached other investors to determine what they would have paid for Alpine. This would be the true fair value. Shopping the deal is the only true test of fair value and the best deal for minority shareholders.
The acquisition was a foregone conclusion. Even prior to the conclusion of the negotiations, Alpine had announced, on May 23, 2017, its intention to move the remainder of its headquarters staff to Alp’s headquarters. With most of its staff already located at Alps, we believe that Alps had increased its control over Alpine even further and as such there was no opportunity for Alpine to try and achieve the best price possible for its minority shareholders.
Serious Flaws in the Valuation Methodology Used by Alpine
Alpine relied on a valuation provided by Japanese investment bank SMBC and was based on the ranges of values determined by the market share price analysis, comparable company analysis, and DCF analysis.
1. Average Market Price used is flawed
The chart below clearly demonstrates the flaw of using the average market price. In the months following the announcement of the share exchange, Alpine has had an incredibly strong performance and its stock price would have risen dramatically were it not capped by Alps which has performed poorly and is expected to continue. Alpine’s share price before the announcement is not an indication of its true value, Alps simply wanted to acquire the Company before its stock price increased.
2. Comparable companies analysis is flawed
SMBC used three comparable companies - Pioneer, JVC Kenwood, and Clarion but two of these have fundamental issues such as continued losses unlike Alpine and thus undervalue Alpine
Pioneer Corporation has been loss-making in two of the last three years. It also has high exposure to the unpredictable after-market segment in volatile locations such as Russia and Brazil. This is a far cry to the stable businesses of the large European automakers to which Alpine is exposed. In its most recent results Pioneer has revised down its operating profit forecast this year by 76%
JVC Kenwood, as well as being loss-making at the time of the announcement, it has significantly different business compared to Alpine with less than 38% of its operating income coming from the automotive segment and an even smaller proportion coming from the OEM business. On other hand, Alpine has strong relationships with the top European automakers such as BMW and Audi.
Clarion has been restructuring and in its most recent results it has revised down next year’s operating profit forecast by 59%. This demonstrates that it was likely trading at a low valuation due to low investor expectations of Clarion.
3. Discount Cash Flow Analysis is flawed
Alps is getting the cash, securities and investments for free. We have attempted to replicate the DCF based on the limited disclosure in the tender document but are unable to attain such a low share exchange ratio as exhibited by SMBC’s valuation. We conclude that it is likely that SMBC did not include the cash, securities portfolio, or the various Neusoft investments in their calculation. This is highly unfair to the minority shareholders as they are not being given the full value of their shareholding and the benefits of the cash and securities are being handed to Alps for free. This further demonstrates the lack of impartiality of SMBC, or the lack of seriousness of their process, and highlights the unfairness of the process.
The DCF employed does not use updated forecasts. As discussed above, Alpine’s business is performing far better than it was at the time of the announcement and all the forecasts would have to be revisited and increased. This will substantially increase the value of Alpine.
The missing JPY30 billion. We note from Alpine’s statement on December 4, 2017, that approximately ¥30 billion of cash has been arbitrarily allocated as operating cash for working capital, which reduced the valuation by almost JPY400 per share. The allocation of such a large amount of cash as operating cash is unacceptable and is against the accepted industry standard of allocating approximately 2% of revenue as operating cash.
Perpetual growth rate of 0% is inappropriate. SMBC’s use of a 0% perpetual growth rate is also peculiar and inappropriate considering the huge operating profit growth that was achieved in FY18 and forecast for FY19 and FY20.
EBITDA exit multiples are nonsensical. SMBC has chosen a very narrow EBITDA exit multiple range based on the poor comparator companies as described above. This methodology is merely used to lower the valuation of Alpine.