Hibiki Path Advisors Opposes to the Share Exchange Ratio in the Merger of Matsumotokiyoshi Holdings Co. Ltd., and cocokara fine Inc.

March 10, 2021 1:00 AM EST

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TOKYO--(BUSINESS WIRE)-- Hibiki Path Advisors, hereafter Hibiki, is an asset management company based in Singapore. Its business has focused on long-term asset management both within Japan and overseas. Through the management of customer assets, and as of the end of February 2021, Hibiki has voting rights for around one percent of the shares issued by cocokara fine Inc., hereafter cocokara fine.

A press release entitled Matsumotokiyoshi Holdings Co. Ltd. and cocokara fine Inc. Announce a Merger Agreement, hereafter, the press release in question, was issued on February 26, 2021, signed jointly by both cocokara fine and by Matsumotokiyoshi Holdings Co. Ltd., hereafter Matsumotokiyoshi. In advance of the merger to be in effect on October 1, 2021, the companies announced that they had entered into a merger agreement. The two companies plan to join hands to dominate the market share in both health and beauty industry which they are currently in. As competition within the drugstore industry in Japan intensifies in ways that blurs existing industry boundaries, it is without a doubt that the importance of the drugstore industry act as a social interface for the health and wellness of Japanese citizens across a broad range of areas beyond any single point of customer contact. This was further intensified in light of the unprecedented spread of COVID-19 and megatrends that include the difficulties we see in the health insurance system, the exhaustion of hospital capacities, the declining birthrate with aging of Japanese citizens, and the growing needs related to regional medical care. Given the current environment, we heartily agree with the fundamental vision of the merger in question, to provide an even higher standard of value-added services to the Japanese people via this industry reorganization in the hopes of it becoming a touchstone for even more benefits.

However, we believe that the merger in question drifts away from the spirit of equality that both companies initially announced on August 16, 2019 considering the capital relationships between the two companies and the status of the design of the corporate governance for the post-merger corporate entity. Based on the announced terms, it is our view that the merger in question appears to be the acquisition of cocokara fine by Matsumotokiyoshi instead and below are the rationale for our view.

  1. When both entered business capital alliance in March of 2020, Matsumotokiyoshi became the largest shareholder of cocokara fine, owning 20.02 percent of its voting rights. As a result, cocokara fine was therefore considered an equity method affiliate to Matsumotokiyoshi. We believe that cocokara fine would not have been positioned to negotiate with Matsumotokiyoshi on an equal footing.
  2. The original merger structure of establishing holding company through joint share transfers from both was changed to share swap making Matsumotokiyoshi a full parent company and cocokara fine a full child company respectively. Under such this scheme, cocokara fine would therefore become a subsidiary of Matsumotokiyoshi.
  3. Under the terms of the management structure for the post-merger holding company, Matsukiyo cocokara & Company, the president and chief executive officers, of three executive positions for that new holding company, would both be the existing chairman and the existing chief executive officer for Matsumotokiyoshi. The chief executive officer of cocokara fine would become the executive vice president for that new holding company.
  4. Of the planned fifteen people for the new holding company’s board of directors, current decisions call for ten of them to be current directors from Matsumotokiyoshi and five to be current directors from cocokara fine. Two-thirds of the new board of directors would therefore be held by Matsumotokiyoshi.
  5. The location of the post-merger entity would be located at the very building, where Matsumotokiyoshi currently is occupying.

Given the above, from the perspective of the capital relationship between the two companies and the proposed corporate governance of the post-merger entity, this business integration can easily be represented as the acquisition of cocokara fine by Matsumotokiyoshi. On the other hand, according to the press release in question, every single common of cocokara fine share will be exchange for 1.70 common shares of Matsumotokiyoshi. According to the Press Release, the share exchange ratio is based on the results of due diligence conducted by both companies on the other party, with reference to the results of calculation and analysis by a third-party accounting institution and the advice of legal advisors. Based on this, the results of careful negotiations and discussions between the two companies over multiple times, taking into consideration factors such as the financial situation, future outlook, and stock price trends of both companies, are judged to be appropriate. However, there has in fact been no disclosure of the concrete reasons as to why that agreement was reached, what kind of negotiations were carried out and why it was justified to be appropriate. In addition to the lack of transparency, given the capital relationship between cocokara fine and Matsumotokiyoshi, it is difficult to guarantee that a fair negotiations on equal footing were established.

As such, we cannot exclude the possibility that there were significant issues in the decision process for the relevant share exchange ratio. Furthermore, the lack of a premium over the market share price of cocokara fine shares within the relevant share exchange ratio is indicative of plans to acquire cocokara fine at market share price. As minority shareholders in cocokara fine, we believe that Matsumotokiyoshi must apply a management control premium appropriate to both the market share price of cocokara fine and their intent to make cocokara fine a wholly owned subsidiary. Therefore, we oppose to the current share exchange ratio and request the boards of directors for both companies to seriously reconsider the share exchange ratio.

The merger in question, as a re-organization, shall require a super majority of “For” vote of shareholders, wherein two-thirds must agree, during the regular General Meeting of Shareholders scheduled for June 29 of this year. We honor the fiduciary duty entrusted to us by the asset owners, and, failing any substantive changes to the share exchange ratio for the merger in question which currently has inappropriately undervalued prices for cocokara fine shares, we will oppose the merger in question.

The original source-language text of this announcement is the official, authoritative version. Translations are provided as an accommodation only, and should be cross-referenced with the source-language text, which is the only version of the text intended to have legal effect.

Yuya Shimizu
Representative Director and Chief Investment Officer
Hibiki Path Advisors

Source: Hibiki Path Advisors Pte. Ltd.

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