HONG KONG--(BUSINESS WIRE)--Oasis Management Company Ltd. (“Oasis”) is the manager to funds that beneficially own approximately 15.1% of pharmacy franchise Ain Holdings Inc. (9627 JT) (“Ain” or the “Company”). Oasis has adopted the Japan FSA’s “Principles for Responsible Institutional Investors” (a/k/a the Japan Stewardship Code) and, in line with those principles, Oasis monitors and engages with its investee companies.
As a major shareholder of Ain, Oasis is concerned about the Company’s abysmal corporate governance practices, and we have been engaging with the Company in the interest of enhancing Ain’s corporate value and improving its corporate governance for the benefit of all shareholders and stakeholders. Oasis believes that the most recent scandal at KKR Sapporo Medical Center, where two directors from Ain and one of its subsidiaries were arrested and found guilty by a court of first instance, is yet another example of the poor corporate governance at Ain. This scandal also exposed a toxic corporate culture at Ain, characterized by the repeated replacement of public solicitation proposal documents after proposal deadlines had passed. For far too long, the Company’s TSR has underperformed its peers and its ROE has declined, yet President Kiichi Otani has continued his reign by appointing friendly “independent outside” directors who all have prior ties to the Company or to Mr. Otani personally. Many of these so-called “independent outside” directors come from companies with which Ain has a business relationship, including a business and capital alliance, or who are Ain’s shareholders introduced through third party allotments solely to increase shareholders friendly to management for the benefit of Mr. Otani.
Oasis Open Letter and Questionnaire to Ain’s “Investigation Team”, Management, and Board of Corporate Auditors
Following the most recent scandal at KKR Sapporo Medical Center, where multiple Ain senior management were arrested and found guilty by a trial court, Ain’s response has lacked transparency. They have continued to make illogical and misleading statements in their responses opposing Oasis’s shareholder proposals. Following such responses, Oasis has sent an open letter questionnaire, a copy of which is attached here, to Ain’s “investigation team”, management, and board of corporate auditors. Oasis has requested Ain to provide their formal answers publicly via their website by July 16, 2024 for the benefit of all shareholders exercising their shareholder votes. We also request that the responses from the Company’s “Investigation Team” and corporate auditors not be reviewed by the Company’s management, employees or their advisors prior to releasing such responses, and that they be made public without any intervention, in order to seek to ensure the integrity and independence of the Investigation Team and the board of corporate auditors’ responses.
Ain’s relationship with 7 & i and its recent acquisition of Francfranc
Considering this long history of poor corporate governance practices, Oasis has sent multiple shareholder proposals aiming to improve the Company’s corporate governance. Our proposals included the dismissal of Mr. Junro Ito from 7 & i Holdings (“7 & i”), who sits on the Company’s board as an “independent outside” director, despite Ain and 7 & i having a long and deep relationship, including close to 15 years of “cross boarding” with four directors serving on the other company’s board. Facing our constructive proposal to dismiss Mr. Ito due to a conflict of interests and potential damages to Mr. Ito’s personal reputation from the poor corporate governance at Ain, Mr. Ito retired from Ain’s board. However, instead of following the spirit of our proposal (i.e., the Company should not elect a director whose interest is not consistent with other minority shareholders as its independent outside director), Ain and 7 & i decided to nominate Mr. Shigeki Kimura, a 7 & i employee, as a new “independent outside” director of Ain.
Ain has now further proceeded to make the shocking decision to disclose its plan of acquiring Francfranc Corporation (“Francfranc”), a furniture and home décor company, from 7 & i at an extremely high valuation (the “Acquisition”). The basic facts surrounding Francfranc and the Acquisition are as follows:
- Francfranc is a furniture and home décor company, with over 150 stores in Japan.
- Francfranc was listed until 2011, when it was delisted through an MBO valuing Francfranc at approximately 16 Bn JPY, and at a 17.4x P/E valuation based on the full year financials at the time, after awarding a 47.5% premium to the market price.
- Francfranc has a deep relationship with 7 & i, which became a 49% owner of Francfranc in 2013, and still owns 15% of the Company as of this date.
- Francfranc has seen virtually no long-term growth – comparing Francfranc’s last full financial year before delisting and the latest financial year: revenue has only grown at a CAGR of 1.4% from 33.3 Bn JPY at FY2011/1 to 39.5 Bn JPY at FY 2023/8; net income has only grown at a CAGR of 1.9% from 940 Mn JPY at FY2011/1 to 1,194 Mn JPY at FY 2023/8.
- Further, Francfranc’s net income margin has decreased from 3.0% in FY2011/1 to 2.8% in FY 2023/8, and its current income margin has decreased from 6.1% to 5.7% in the same period.
- The Acquisition is priced at 50.0 Bn JPY, at a 41.9x P/E valuation, based on the latest full-year financials.
We view this transaction as problematic, and suspicious. We consider that this acquisition of Francfranc by Ain – especially at such an unreasonable high price – could possibly appear to be an attempt to overcompensate 7 & i in an effort to gain their support for the continued reign of Mr. Otani. After all, Ain is acquiring a company that has no relevance to their core dispensing pharmacy business with virtually no growth over the years, but at a twice the MBO P/E multiple and three times in equity value. We should also emphasize that the MBO price was already at a 50% premium to the market price then. Ain has prided itself on the cheap acquisitions it has made in the past, disclosing in their IR materials the EV/EBITDA multiple of the acquisitions they have conducted, so this transaction appears even more odd as it is wholly inconsistent. Although the EV/EBITDA multiple of the Acquisition is not disclosed by Ain, it is estimated to be at around 10x, which is much higher than their historical acquisitions of approximately 5x EV/EBITDA, and much higher than their own valuation, which is also at around 5x. Further, it is important to note that the Ain Board has approved this value-destructive transaction, their largest acquisition ever, right before the July 30 AGM at which they are proposing a new director candidate, Mr. Hattori, an M&A expert, as a board member. In the two days following the announcement of this deal, the Company’s share price fell sharply by more than -12%, which is good evidence showing that this Acquisition is unreasonable and the market does not appreciate it at all. Therefore, we believe that this Acquisition may not have been executed in the best interests of enhancing the Company’s corporate value, but rather, possibly as a preferential deal with a specific major shareholder, 7 & i, with the possible intention of deepening their relationship in order to secure a vote and support in favor of the current management of Ain for Mr. Otani’s continued reign.
We have also learned that, at least on 7 & i’s side, Mr. Junro Ito was not excluded from the decision-making process for the divesture of Francfranc. This indicates 7 & i’s lack of sensitivity to the conflicts of interest around this transaction, and raises questions as to whether appropriate measures were taken at Ain to mitigate the conflicts of interest.
Oasis also cautions Ain against using equity financing to dilute shareholders
Oasis also cautions Ain against using equity financing, such as third-party allotments or other means, to finance this Acquisition. Oasis fears that such equity financing could be used as an excuse to dilute the shareholdings of Oasis and other shareholders while increasing the Company’s ownership by “friendly” shareholders. Shareholders should not be diluted in order to facilitate such an ill-advised acquisition, and Ain should seek to finance the Acquisition through loans. Although Oasis would not believe such claims were true, if Ain insists that it cannot meet its funding needs by way of senior loans, Oasis is willing to support Ain through the provision of mezzanine loans.
Shareholder proposals
For the upcoming AGM on July 30, Oasis would like to reiterate its recommendation to its fellow shareholders to vote AGAINST the Company’s proposed “outside” director candidate, Mr. Shigeki Kimura, and to vote FOR the Oasis shareholder proposals in the interest of enhancing Ain’s corporate value. Oasis strongly urges shareholders at the Company’s upcoming AGM to:
- Vote AGAINST: Appointment of Mr. Shigeki Kimura as new director.
- Vote FOR: Dismissal of incumbent board directors Mr. Shigeru Yamazoe and Mr. Junro Ito.
- Vote FOR: Election of four new outside board director candidates: Mr. Yoshitake, Mr. Maeda, Mr. Dmitrenko, and Mr. Shinmori.
- Vote FOR: Introduction of a new compensation plan for outside directors.
To learn more about Oasis’s proposals, please visit www.AinCorpGov.com. We welcome all stakeholders to contact Oasis at AinCorpGov@oasiscm.com to help improve Ain’s Corporate Governance.
***
Oasis Management Company Ltd. manages private investment funds focused on opportunities in a wide array of asset classes across countries and sectors. Oasis was founded in 2002 by Seth H. Fischer, who leads the firm as its Chief Investment Officer. More information about Oasis is available at https://oasiscm.com. Oasis has adopted the Japanese FSA’s “Principles for Responsible Institutional Investors” (a/k/a Japan Stewardship Code) and, in line with those principles, Oasis monitors and engages with our investee companies.
The information and opinion contained in this press release (referred to as the "Document") is provided by Oasis Management Company (“Oasis”) for informational or reference purposes only. The Document is not intended to solicit or seek shareholders to, jointly with Oasis, acquire, transfer, or exercise any voting rights or other shareholder’s rights with respect to any shares or other securities of a specific company which are subject to the disclosure requirements under the large shareholding disclosure rules under the Financial Instrument and Exchange Act. Shareholders that have an agreement to jointly exercise their voting rights are regarded as Joint Holders under the Japanese large shareholding disclosure rules and they must file notification of their aggregate shareholding with the relevant Japanese authority for public disclosure under the Financial Instruments and Exchange Act. Except for the case where Oasis expressly enters into the agreement as a joint holder requiring such disclosure, Oasis does not intend to take any action triggering reporting obligations as a Joint Holder. The Document exclusively represents the opinions, interpretations, and estimates of Oasis.