Triangle Love Drama: Who Will Keisei Choose?
Triangle Love Drama: Who Will Keisei Choose?
As we all know, and have been constantly reminded of these first few weeks of the course, creating shareholder value is one of the fundamentals in the corporate finance world. And upon scouring the Financial Times for some daily news intake, I stumbled across an article that I believe perfectly highlights the exact opposite of what a company should do if they want to maintain or attract any new investors.
The article in question revolves around a Japanese railway company with a significantly large stake in the owner of Tokyo Disneyland, and the valiant efforts of a UK based fund to unlock the trapped shareholder value within the railway company. Additionally, the article discusses the concerns of modern corporate Japan's overall quest for better corporate governance.
Our story begins with Keisei Electric Railway, a company most notable for its operation of trains around Tokyo, including the vital line from Narita airport into the city center. However, this is where the story takes a turn; Keisei Electric Railway holds a 22% stake in Oriental Land, the property group which owns Tokyo Disneyland.
Now you might ask, what is the problem with this investment? I thought investing was one of the key ways for companies to create shareholder value? Well let me tell you why.
The problem stems from the blatant inconsistency in the valuation of Keisei’s share in Oriental Land. Looking at the balance sheet of Keisei for the fiscal year ending in April (due to accounting standards in Japan), its stake in Oriental Land was noted to be worth approximately $1.3 billion. Digging a little deeper, this is a stark contrast to the actual current market value of the shares which are roughly worth $12 billion, nearly ten times the accounting valuation published by Keisei!
The glaring undervaluation not only underlines the transparency issue of various accounting procedures that can conceal the true value of companies, but also the massive potential value for shareholders that remains untapped.
This is where the UK based fund Palliser Capital enters the stage. Led by former employees of the activist fund Elliott Management, Palliser has undertaken the mission to try to unlock the hidden value within Keisei.
Being the 8th largest shareholder with a 1.6% stake in Keisei Electric Railway, Palliser is putting constant pressure on Keisei to re-evaluate its stake in Oriental Land. The goal of Palliser’s campaign is simple;
decrease Keisei’s stake in Oriental Land and redistribute the capital towards the core of the business, which involves modernizing and operating the railway in order to enhance efficiency and profitability.
Personally, I agree with Palliser’s strategic proposition and I believe that its campaign goes beyond the immediate financial gain from selling the stake. By reallocating the capital, Keisei can align itself with both the demands from the shareholders and also the demands of the modern market. It’s about focusing on the businesses core aspect and ensuring the company’s long-term growth, which in its turn, creates value for shareholders.
As if enough pressure hasn’t already been put on Keisei Electric Railway, Palliser is planning on attending and presenting its case at the 13D Monitor Active-Passive Investor Summit, a hedge fund activism conference in New York. This further outlines the growing global interest in corporate governance and the value creation for shareholders.
Furthermore, This story also outlines the concern of broader regulatory efforts in Japan to enhance governance standards and boost corporate values. Japanese authorities are even setting up a “name and shame” regime in order to encourage capital efficiency within companies.
I would like to conclude this week’s blog by stating that the ongoing story between Keisei and Palliser represents the ongoing quest for creating shareholder value. It outlines the current world of finance where investors are pushing for transparency, value realization, and improved corporate governance. The Keisei situation emphasizes the increasing need for companies to adapt and meet these expectations in order to ensure the creation of shareholder value, further contributing to the future success of companies in the modern business world.
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