Hong Kong fund’s Fancl stake portends challenge to Kirin bid

INVESTORS are betting that Kirin Holdings will need to raise its offer price for Fancl to complete a proposed takeover, as concerns among shareholders that it’s undervaluing the Japanese skincare brand spill into the open.

MY.Alpha Management HK Advisors disclosed a surprise 5.1 per cent stake in Fancl this week, a move seen as being a rallying cry for investors to band together to pressure Kirin into raising its offer price, people familiar with the matter said.

The Japanese brewer is seeking to buy two thirds of Fancl it does not already own for 220 billion yen (S$1.9 billion) via a tender offer announced last month. While the offer was at a 40 per cent premium to the 1,916.5 yen share price at the time, stocks were trading at a six-year low. The offer was also 18 per cent lower than what Kirin paid to Fancl’s founder five years ago for its initial stake.

Since Kirin’s latest offer, one-third of Fancl’s outstanding shares have changed hands above the offer price, suggesting anticipation of a higher bid. The stock was trading at 2,727 yen in Tokyo on Thursday (Jul 18).

In order for Kirin’s bid to succeed, the brewer needs at least 41.1 million shares, or roughly another third of Fancl, to be tendered by a Jul 29 deadline.

Takeovers of Japanese companies by shareholders who already hold a significant stake have come under scrutiny, because of the influence they have over management in pushing for lower valuations and shortchanging other shareholders.

The country’s initiatives to improve corporate governance have increasingly emboldened stakeholders to demand better returns, and activist investors like ValueAct Capital Management have notched up recent wins against big businesses like Seven & i Holdings and Recruit Holdings.

While MY.Alpha is unlikely to lead the charge for a higher price, its disclosure of a significant position may encourage other investors to step forward with their intentions to block the bid at the current price, said the people, asking not to be identified because the discussions are not public.

MY.Alpha’s investment mandate does not currently allow it to engage in public activism. The firm may “provide advice and make important suggestions to management,” it said in a filing.

Representatives of the Hong Kong hedge fund firm, a spinoff of York Capital Management, declined to comment. Kirin did not immediately respond to a request for comment.

So far, hedge funds with a history of high-profile engagement in Japan – such as Oasis Management and Elliott Investment Management – appear to be standing on the sidelines. But investors who think Kirin’s offer is too low may be holding significant positions in part or in full through swap arrangements with brokers, which do not require stock exchange disclosure, said one of the people.

Those holdings can easily be converted into cash equity ownership, allowing them to block the deal.

For the brewer, Fancl represents an opportunity to diversify revenue beyond beer, beverages and alcohol, sales of which have been declining in a country with an aging population.

Fancl would also help Kirin improve synergies with Australian vitamins maker Blackmores, which it bought last year.

Kirin’s offer undervalues Fancl, which has a subscription model that provides more stability than peers have seen, said the people. The firm could benefit from the introduction of new supplements in Japan and the recovery of sales to a growing number of foreign visitors.

There may be additional upside from the approval of supplement sales in China and the upcoming expiration of sole distributor rights in Greater China for its cosmetic products, one person said. BLOOMBERG