The famous “Bulldog” brand of Japanese
Tonkatsu Sauce
Facing a potential takeover by the foreign investment firm Steel Partners, Japanese tonkatsu sauce maker Bull-Dog was saved last week in a disturbing effort by the Japanese courts to prevent foreign money and ownership permeating into an important aspect of the Japanese cultural dinner table.
Steel Partners has made investments in over 30 companies in Japan over the past couple of years, with a number in the “washoku” industry, including the holy grail of the Japanese sauce portfolio, Kikkoman soy sauce. Since Steel Partners announced they owned over 5% back in 2005, the stock price has increased over 50%. But enough is enough, apparently.
The number of M&A and takeovers in Japan, both domestic and from abroad has grown drastically in recent years on the back of a reviving Japanese economy. And a hot topic of deliberation in financial circles has been the introduction of so-called “poison pills” to prevent takeover by undesirable suitors. A culture of arranged marriage is much more appropriate than a shotgun approach it would seem. 
Activating a poison pill assures that a target company can be protected against the unwanted advances of a hostile investor to take control of the company. When a company begins buying up shares and launches a takeover bid, the target company activates the poison pill, which in effect stops the takeover company in their tracks.
Casting my mind back to ECON101, although it was a while ago, wasn’t the idea of a free market just that, it was free, and equal rules and fair competition by all ultimately drives up the value of the economy and the companies which are a part of it? The legality of this method has been hotly debated, but the courts have now quashed this debate, allowing the use of poison pills in Japan. Depending on the suitor. Maybe.
The process went as such; Steel Partners offered a premium on the current share price in an open takeover bid. They were told this was not welcomed by the tough characters at Bull-Dog, but proceeded anyway with a hostile bid. Garnishing 80% of votes at the Shareholder’s Meeting, the pill was activated, and Bull-Dog diluted the value of shares held by Steel Partners, from just over 10% to 2.5%. They did this by issuing free equity warrants to all shareholders, including Steel Partners. 3 new shares for each 1 held. However when it came to exchanging these warrants for newly issued shares, Steel Partners only was excluded. 
This increased the number of shares four-fold, but Steel Partner’s share numbers didn’t increase, dropping their percentage to a quarter of what they had, and dropping them out of the take-over bid.
Bull-Dog was also required to buy back the useless warrants off Steel Partners, at a cost of approx. 2.3 billion yen. Add to this the approx. 700 million yen in legal and advisory fees, and that is a loss of 3 billion yen, or almost 15% of the companies total assets of 18 billion yen. Theoretically this actually decreased the value of the investments of those 80% shareholders who voted for it.
This is not only a travesty of value-destruction for and by the shareholders of Bull-Dog, but it has also signaled to foreign investors that Japan is still not a fair and transparent market to invest in, that the establishment is still more than happy to jump in to block actions from foreigners which they don’t like, and it also shows that Japanese investors are still more happy to receive their box of tonkatsu sauce during dividend season than support that company to make higher profits and increase the value of their investments. 
This is a strong blow for those who hoped the recovery in the Japanese economy would be accompanied by a new level of sophistication of the public after experiencing the crash of the bubble.
Poison pills are illegal in the UK, and rare on continental Europe. They are allowed in the US, but their legality was debated for over 5 years in the early 80’s. The first pill was approved at Board level in Japan only 2 years ago, and the high court has now set a disturbing semi-precedent by allowing their use. Their reasoning? Steel Partners is an “abusive investor”, an unsettlingly subjective judgment.
In other words, the magistrate has decreed that the Gaijin kid is not suitable for his daughter, and will heed her cries of help. However another young local kid from down the road were to ask for his daughters hand, maybe he would agree. That is his role as a paternal figure, to protect his daughters and do what is in there interest. Not to uphold a rule of law or free market economics. Another bleak sign on the already stunted path of globalization for Japan.
Love the picture of Keanu!
Bone, have you seen what is happening to the stock price post this debacle?
Yahoo Finance Chart
If what you said is true about the company destroying shareholder value is true then it’s pretty wierd, eh. To be clear, Yahoo has kindly adjusted their chart so when the stock was actually trading at 1600 yen a few days ago this is written as 400 yen on the new chart (to adjust for the fact that everyone (except Steel) got an extra three shares and so the value of one share should theoretically be 1/4 of what it was before.
In other words, Friday’s closing price of 750 yen is actually the equivalent of 3000 yen in the old price! Yes, the stock is up over 50% from the Steel TOB price (which was thought by many to be more than generous)!
The best theory I’ve heard so far is this:
Steel is still challenging the warrants in the Supreme Court. If they should win by some slim chance then people will not get their three extra shares and the stock price will go back to representing a similar % of the company as it did before. So if you thought that there was a significant chance of that happening then you can effectively buy a stock worth about 1600 yen for only 750 yen. Better yet, if Steel does go and win at the Supreme Court then their TOB will still be in effect and you can sell to them at 1584 yen or whatever they had offered then – ie no risk of finding someone to sell to! That said, if ofcourse Steel loses the appeal then there is a pretty good argument that the stock should fall to at least 400 yen. With the stock trading approximately 1/3 way between 400 and 1600 yen I guess it means that 1 in 3 people out there think there is a decent chance of Steel winning the appeal. Do they know something we don’t?
I don’t know and I’m not sure if I’d make the bet by buying shares today but it is certainly an interesting situation.
What do you think of the Shacho and her response to Steel. If what she is saying is true then maybe there was good reason for 80% of the shareholders to vote with her and not Steel.
Bulldog’s medium term plan
Look at the numbers on page 28. I have no idea of how realistic the target is but I would buy shares in them if they can really increase profits three fold by 2012.
Oh, if you don’t read Japanese then don’t both clicking on the link. As one would expect there is no English on their site at all.
You’ve gotta love the name of section IV: “企業価値を守るための方策” – yup, I’m sure that’s how Steel would describe it, too.
Sotei-guy,
I think you’re missing the point. Pull up the chart that I was talking about on Yahoo! Finance. Actually, I’ll make it easy for you and give you the link:
5 year log chart of Bulldog Sauce
Steel announced that they held over 5% of the company some time in 2003/2004. I’m not sure exactly when but let’s assume that the announcement was the reason that the stock jumped from 200 yen to 300 yen. ie “Pre-Steel Bulldog Sauce” was worth 200 yen a share. Today’s closing price was 850 yen per share.
Why are you getting so excited about management increasing profits by 3x? The share price has already gone up four times. For management to explain the current share price then they have to increase profit even more than they are promising in that project you sent us the link to. It sounds like there are some hefty expectations being hung on management. I’ll bet you a tonkatsu with sesame that if they can’t meet those numbers the stock will perform like the bitch it’s namesake suggests.
Sotei Guy, thanks for the link.
It seems that the real question here is whether Steel Partners is being abusive or not. It seems that SH has done some predatory takeovers in the past, so this issue is not such a clear-cut “anti-gaijin” case as some make it out to be.
There’s an interesting article about this in Japan Times
http://search.japantimes.co.jp/rss/nb20070712a2.html
I disagree with you Ao-san.
Steel Partners has no experience in managing companies. They don’t understand the true spirit of the Tonkatsu Sauce. It’s no mystery that 80% of true Japanese shareholders voted against them. Can you show me an example of where they have added sustained value to a corporation before?
I also disagree with you Bone-san.
The court is not ruling against Steel because they are Gaijin. Look at the battle that Mikitani is having with TBS. You lose a battle in our country if you are a nail that sticks out. Actually, Gaijin nails are more likely to get a better option because we’re keen to get rid of them. This is a perfect example. According to Hillsozku-san, Steel paid less than 200 yen a share yet the Tokyo Chisai ruled in favor of paying them 396 yen per share in cash. That is sweeter than a bottle of amakuchi sauce for the gaijin predators.
Hillszoku,
I can only agree with you that with the stock trading approximately 1/3 way between 400 and 1600 yen, that 1 in 3 people out there think there is a decent chance of Steel winning the appeal. I cant see any way to justify the increase otherwise. I guess we have to remember that there are huge numbers of day traders in Japan these days, and what people forget is that these people are usually not smart and professional traders. A lot of it is gamble money. And this one certainly seems like a gamble!
In the article, I didnt want to angle to make it an article about Japan vs the rest of the world, as I dont think that is totally the case. If an aggressive and abusive Japanese fund did the same thing, I suspect the courts would say the same thing. What concerned me was that the court verdict was extremely subjective, and as the fund happened to be a Gaijin fund, which does add a cultural aspect as they certainly went about this like we would expect of a Gaijin fund, and based on that, the omiai analogy seemed to make sense.
It was a screw up all round. SP shouldnt have attacked the way they did, they should have been more “Japanese” about their approach. (This is Japan afterall). The courts upheld a poison pill which is dodgy at best, with a lack of substantial basis for doing so. The company used up a portion of its assets to buy back the stock, lessening its asset base (small win for SP). And now a bunch of day traders may well get hurt if the Supreme Court upholds the High Court ruling. What is the old saying- noone wins in battle?
Interesting thread you guys have going here. I have been following this closely.
I took some Japanese classes back in the States, and remember studying about 株主平等の原則, which states you cant give some shareholders different treatment to others? How did Bulldog get around that?
Isnt this what happened with Livedoor and TBS? Wasnt that a poison pill situation, but they got shut down? Does anyone remember this?
I find this issue very interesting too, though I don’t know too much about business, especially investment. Here are some more articles of interest
http://www.japaninc.com/tt430 (Actually quotes this stippy article; opinion here summed up is that shareholders voted for the poison pill so they deserve it)
http://www.spjsf.jp/pdf/070601-bulldog2_e.pdf (PDF, 100K)
This second link is Steel Partners’ answers to Bulldog’s questions. Basically Bulldog wanted to know what S.P. was going to bring to the table, what their plans were for running the company, etc. and S.P. said they do not plan to run the company and take part in day-to-day operations. Although it’s all translated into English, you can clearly see the cultural clashes.
Looks like those gambling day traders are getting chicken- Bulldog down 12% already this morning. When is the Supreme Court verdict due?
Thanks for the link Ao, although a little confusing as it is for Tenryu Saw and not the Saucy Bulldog. All the same I laughed outloud (a little too loud as I was at work) when I read this question from the company to Steel:
“please indicate… personal history of, experience in manufacture and sale of saws, knives and similar products”
Does that include being stabbed in the back by the Japanese press?
It looks like Steel has started up a second appeal (in addition to the 株主平等の原則) – they must be pretty serious:
TOKYO (Nikkei)–The Tokyo High Court ruling upholding Bull-Dog Sauce Co.’s (2804) takeover defense violates the precepts of equality and the protection of property rights under the Constitution, according to an appeals filing by U.S. hedge fund Steel Partners.
Well it looks like Steel’s appeal was turned over by the high court. I guess it is back to happy days for the management of the sauce.
Update on Japan Supreme Court Ruling Against Steel Partners
The Supreme court ruled yesterday to uphold the pleas for help of Bulldog Sauce, and threw out the appeal by Steel Partners, confirming again the legality of the poison pill in Japan. The ruling this time from the judge was more logical, stating that if thats what 80% of the shareholders of the company voted for, then it should be in the interest of the company.
In a surprise announcement however, Steel Partners has decided to continue with their TOB. This is despite the fact that their shareholding has been diluted to 1/4 of what it was before the poison pill. They have also dropped their TOB price to 1/4 of the original price accordingly.
Two questions remain:
1. If 80% of shareholders have already voted for the poison pill, ie against SP, what makes them think it will go any better this time?
2. What was so attractive about Bulldog sauce to begin with?
So the poison pill basically didn’t work at all then?
It’s pretty clever by SP because when you think of it, all they ever owned anyway
was 10% of the company. The price that they would have paid for the remaining 90% is the same as what they will pay going forward (they buy 4x more shares but they cut the price by 1/4), the only “increased” payment they have to deal with is for the 10% that they didn’t own (which they end up paying 4 times the original price for).
Works out not very much different from where they started. Although one significant difference is that Bulldog has announce that they are to lose over $10mil this year, which is massively down from $5mil profit last year.
SPs original stake of 9.3% has fallen to 2.3%.
That means that instead of buying 90.7% of the company they are now trying to buy 97.7% of the company. Because they have reduced the TOB price by a factor of four to make up for the extra shares outstanding, it really means that their cash-out is only 7.7% higher than they had expected. I’m sure Steel doesn’t give a shit if they have to pay 7.7% more in the whole scheme of things.
Given that they’ve used their takeover defense once, it is unlikely that they can do it again so Steel should be successful this time. That said, 90% of shareholders did tell Steel to f&ck off so they probably won’t tender which means Steel are wasting their time but who cares – it’s all good press.
I was watching the commentary here with a bit of skepticism here because the stock was trading so much higher than Steel’s bid. I thought it was just for the publicity. But it is amazing how efficient markets are. Look at the stock today, it’s trading down to 460 yen. Wouldn’t it be funny if it continued to fall and Steel “got lucky” and bought the whole company.
The Steel Partners TOB of Bulldog Sauce finished today, with them not getting enough support. Fizzle fizzle fizzle.
SP ended up with acceptance of the TOB by 1.89% of Bulldog shareholders. Shocker.
All one needs to do is look at Steal (it’s how it should be spelled) Partners history. This person started in the US, he would take over a company bleed it of all it’s assets then dump it. Other stock holders were hurt, employees were hurt. This guy made money. it’s all he cares about. someone said that he didn’t have experience managing a company, that’s very true. I think the Japanese courts defined steel partners correctly.