January 20, 2022

RMB Calls for Shareholders’ Support for a Spin-off IPO of Nippon Columbia at the Faith EGM

CHICAGO - RMB Capital (“RMB”), a Chicago-based independent investment advisory firm and a long-term shareholder of Faith Ltd. (4295 JP, “Faith”) that owns approximately 10% of the firm’s total outstanding shares, calls for shareholders’ support for a spin-off IPO of Nippon Columbia at Faith’s emergency general shareholders’ meeting (EGM) scheduled on February 18, 2022.

Corporate value of Faith has been cut in half due to management's inaction

Faith made Nippon Columbia a wholly owned subsidiary through a stock swap deal in August 2017. At that time, management of Faith promised to the shareholders they would improve the corporate value of Faith and justified the deal as “the best way for shareholders to share the benefit”. However, the corporate value of Faith has nearly been cut in half due to management's inaction, even though shareholders patiently waited for more than four years.

As a large shareholder, RMB has proposed several plans to improve the corporate value of Faith; (a) cut non-performing new ventures, (b) focus on the music label business including Nippon Columbia, and (c) enhance shareholder returns, through actions such as a share buyback. However, the management has ignored all proposals and in fact, did the exactly the opposite: management kept spending money on loss-making venture businesses at the cost of Nippon Columbia’s cash flow, and did not implement any programs to reward shareholders after share buybacks in 2018 and 2019 that were forced by RMB’s activism engagement.

Spin-off IPO is the best way to realize the value of Nippon Columbia

Due to the mismanagement of Faith, Nippon Columbia, which has a history of more than 100 years and is a very important company not only for shareholders but also the general public of Japan, lost growth opportunities for years. Overseas, music label businesses with growth are valued at much higher multiples. For example, Warner Music, one of the three biggest major labels in the world, is valued at 20 times in EV/EBITDA multiples after being listed in 2020. Universal Music, another global major label, receives 24 times multiples after being spun-off from Vivendi in France in 2021. We estimate Nippon Columbia would be worth at least 2,200 yen per share of Faith stock as stand-alone company. RMB believes Nippon Columbia’s spin-off IPO is necessary so that Nippon Columbia will receive fair valuation, while avoiding further destruction by Faith’s management.

RMB suggests two options for Faith’s management: Improve corporate value or go private via MBO

(1) RMB proposes to Faith’s management the following actions to improve the corporate value:

• Spin-off IPO of Nippon Columbia
• Terminate unprofitable venture businesses
• Enhance shareholder returns through share buybacks

(2) If management wants to keep its venture business attempts at the expense of Nippon Columbia, RMB believes management should take Faith private via MBO (management buyout) by paying fair value to general shareholders, so that the management assumes 100% of this risk. We cannot accept management’s actions to put the capital of shareholders at risk and destroy corporate value.

Say no to management by supporting RMB’s proposal

Upon choosing TSE Prime Market for its new exchange, management of Faith filed an improvement plan to clear the market capitalization standard. However, the plan is just reiterating baseless ideas management has repeatedly attempted and failed in the past. Further, management expects the timing to clear the standard to be 2026. After failing to deliver a return promised in 2017, RMB wonders how many more years should management be given to continue with this plan. RMB believes the answer should be “no more,” and calls for shareholders’ support at the EGM to say no to the management’s plans and demand immediate actions to restore shareholder value.

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June 15, 2021

RMB Demands Faith’s Statutory Auditors Investigate the Board Resolution to Reject RMB’s Shareholder Proposal for a Spin-off IPO of Nippon Columbia

CHICAGO - RMB Capital (“RMB”), a Chicago-based independent investment advisory firm and a long-term shareholder of Faith Ltd. (4295 JP, “Faith”) that owns approximately 10% of the firm’s total outstanding shares, demands that Faith’s statutory auditors conduct an investigation of the company’s recent rejection of an RMB shareholder proposal. 

The Kyoto District Court (“the Court”) confirmed the legitimacy of RMB’s shareholder proposal to spin-off Nippon Columbia (“the Proposal”) at the 29th annual general shareholders’ meeting at Faith, scheduled for June 2021, in its ruling issued on June 7th, 2021.

However, Faith’s board asserts it “does not accept the ruling of the Court” without providing any further reasoning in its press release on June 11th, 2021 and continues to damage RMB’s shareholder rights. While established precedents, including the decision by the Court, as well as widely accepted academic theory, accept a flexible scope of shareholder proposals, RMB believes Faith’s ignorance of shareholder rights poses a serious threat to the public listing system of companies in Japan, and even to capitalism in the country itself.

To address this issue, RMB demands the statutory auditors at Faith investigate the items below and disclose their findings immediately to the general shareholders of Faith:

• Details of the board meeting discussion that led to rejecting the Proposal on May 18, 2021.
• Details of the individual board members’ statements at the board meeting; in particular, how Mr. Shigeyuki Mito, a legal attorney, advised the board in respect of the legitimacy of the Proposal and the legal risk in rejecting it.
• Details of the individual statutory auditors’ statements at the board meeting; in particular, how Ms. Takako Sugaya, a legal attorney, advised the board in respect of the legitimacy of the Proposal and the legal risk in rejecting it.

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June 10, 2021

Kyoto District Court Confirms Validity of RMB’s Shareholder Proposal at Faith for a Spin-off IPO of Nippon Columbia

CHICAGO - RMB Capital (“RMB”), a Chicago-based independent investment advisory firm, is a long-term shareholder of Faith Ltd. (4295 JP, “Faith”) and owns approximately 10% of the firm’s total outstanding shares.

The Kyoto District Court (“the Court”) confirmed the validity of RMB’s shareholder proposal to spin-off Nippon Columbia (“the Proposal”) at the 29th annual general shareholders’ meeting at Faith, scheduled for June 2021 (“the AGM”). The court’s ruling was issued on the petition for provisional disposition filed by RMB in May. The Court declined RMB’s request to add the Proposal at the AGM due to time constraints, however.

The Court’s ruling confirms that Faith’s board has unfairly refused to include the Proposal and that the board’s decision is inappropriate and unlawful and suppresses shareholders’ opportunity to discuss this important managerial decision at the AGM. RMB believes the Court’s decision implies Faith’s board completely lacks a law-abiding spirit and effective corporate governance system, both of which need to be addressed immediately to protect the interest of minority shareholders. Further, RMB demands that Faith’s independent directors investigate the board’s decision-making process in rejecting the Proposal, then disclose the details of that investigation to the shareholders immediately.

RMB hopes to realize the spin-off IPO of Nippon Columbia and improvement in the compliance and corporate governance system at Faith through the nomination of the outside director proposed by RMB as the AGM item # 4, on which RMB once again calls for minority shareholders to support, along with item # 3 (share repurchase proposal).

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May 26, 2021

RMB Capital Filed a Petition for Provisional Disposition at Kyoto District Court to Confirm Validity of RMB’s Shareholder Proposal at Faith

CHICAGO - RMB Capital (“RMB”), a Chicago-based independent investment advisory firm, is a long-term shareholder of Faith Ltd. (4295 JP, “Faith”) and owns approximately 10% of the firm’s total outstanding shares.

Faith’s board has unfairly refused to include RMB’s recent shareholder proposal to spin-off Nippon Columbia (“the Proposal”) at the 29th annual general shareholders’ meeting at Faith, scheduled for June 2021 (“the AGM”). RMB believes the board’s decision is inappropriate and unlawful and suppresses shareholders’ opportunity to discuss this important managerial decision at the AGM. To confirm the validity of the Proposal, RMB filed a petition for provisional disposition at Kyoto District Court.

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May 11, 2021

RMB Capital Proposes a Spin-Off of Nippon Columbia and Other Measures to Increase Value at Faith Ltd.

CHICAGO - RMB Capital (“RMB”), a Chicago-based independent investment advisory firm, is a long-term shareholder of Faith Ltd. (4295 JP, “Faith”) and owns approximately 10% of the firm’s total outstanding shares. RMB has filed shareholder proposals for the 29th annual general shareholders’ meeting at Faith, scheduled for June 2021 (“the AGM”).

Management is responsible for the sluggish stock performance

RMB is deeply disappointed with Faith’s management, who is responsible for the underperformance of the Faith’s stock price in recent years. Since the stock swap consolidation of Nippon Columbia Co., Ltd. (“Nippon Columbia”) in 2017, Faith’s market capitalization decreased by more than 20% due to the management’s failure to improve shareholder value, despite their stated commitment to achieve the goal.

• While Nippon Columbia’s music label business consistently generates profits, the lackluster venture investments at parent Faith keep losing money.
• Faith fell into the pitfall of the conglomerate discount and is not receiving a fair valuation due to its unrelated, non-core businesses, such as legacy content and shopping point operations.
• Excess cash is not effectively used to improve corporate value.
• Ineffective corporate governance failed to encourage management to implement shareholder value improvement measures.

RMB has filed three shareholder proposals at the AGM to address these issues and improve Faith’s shareholder value.

Proposal 1: Spin-off IPO of Nippon Columbia

• RMB proposes to distribute Nippon Columbia shares as a dividend in kind (spin-off) to existing shareholders and to list Nippon Columbia on the Tokyo Stock Exchange as an independent entity.
• Existing shareholders would hold newly-listed Nippon Columbia shares in addition to Faith shares without any incremental capital contribution.
• RMB believes Nippon Columbia will have better valuation as a single entity, given the music industry in Japan is expected to resume growth in coming years on the back of the streaming market expansion.
• The overseas music labels are valued at much higher multiples as the global music industry resumed growth. For example, the Warner Music Group (WMG) trades for approximately 20 times in EV/EBITDA while Universal Music Group (UMG) is expected to go public at approximately 30 times in EV/EBITDA.
• Faith, which owns 100% of Nippon Columbia, trades below the net cash value on its book, indicating the market sees no value in its businesses.
• However, Nippon Columbia is clearly an excellent operation with its music copyright licensing and artist management businesses. It consistently generates annual revenue of approximately 14 billion yen since the full consolidation by Faith in 2017, and has recorded decent earnings despite the COVID pandemic.
• RMB believes the total market value of Nippon Columbia and Faith would easily be doubled from the current value, and could be as much as 2,000 yen per share if Nippon Columbia is listed and valued at a conservative 10 times multiple in EV/EBITDA.
• Further, we expect Nippon Columbia would achieve sustainable shareholder value growth in the long-run as an independent public entity with faster business development opportunities and flexible financing options.

Proposal 2: Aggressive share buyback

• RMB proposes a share buyback program of up to 2 million shares (approximately 14.5% of the total outstanding shares) or 1.8 billion yen.
• RMB believes this program is feasible given the excessive cash amount at parent Faith (approximately 3.4 billion yen as of March 2020).

Proposal 3: Nominating an outside board member from RMB

• RMB proposes nominating an additional outside director from RMB who truly represents the minority shareholders’ interest and contributes to improve shareholder value.
• RMB believes Mr. Masakazu Hosomizu (partner of RMB) is well qualified as an outside director who can work for shareholders to improve the shareholder value of Faith, given his track record of actively engaging with executive teams at several public companies on behalf of minority shareholders.
• Mr. Hosomizu received 33.1% of the approval vote during the 27th annual general shareholders’ meeting held at Faith in June 2019. He was supported by minority shareholders, including prominent domestic and overseas institutional investors, despite the opposition of management.

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December 21, 2020

RMB Capital Urges Faith Ltd. to Enhance Shareholder Return

CHICAGO - RMB Capital (“RMB”), a Chicago-based independent investment advisory firm, is a long-term shareholder of Faith Ltd. (4295 JP, “Faith”) and owns approximately 10.7% of the firm’s total outstanding shares.

RMB, as a responsible investor in Japan, has been engaging with the management of Faith to improve its corporate value. In 2018 and 2019, RMB filed shareholder proposals at Faith’s annual general shareholders’ meetings (AGMs) and demanded corporate governance improvement and shareholder return enhancement at the firm. As a result, Faith added independent directors and installed a nomination and compensation committee while implementing share buybacks twice.

RMB particularly appreciates the value of Nippon Columbia, Co., Ltd., which is a subsidiary of Faith and has an operation which RMB believes has solid profitability and growth potential on the back of its 110 years of history. RMB has been proposing that the management of Faith focus its management resources on the music and entertainment businesses at Nippon Columbia.

However, management at Faith did not follow RMB’s proposals, but instead consistently burned capital on the venture businesses that do not see any clear path to profitability, resulting in slow earnings performance. The stock price of Faith has remained well below its intrinsic value, and the value of the net cash and the marketable securities that the firm holds exceeds 140% of its own market capitalization, which RMB believes is an irrationally high figure. Despite this situation, management of Faith has not taken any action to enhance shareholder returns since May 2019.

Given this background above, RMB recently made the following proposals to the management of Faith.

1. Dividend increase (September 2020): Triple the dividend payout from current 10 yen per share (5 yen interim, 5 yen year-end) to 30 yen per share (15 yen interim, 15 yen year-end)
2. Share buyback (November 2020): Buyback 10% of the total outstanding shares with up to 1.5 billion yen capacity

Throughout 2020, Faith has achieved earnings better than last year, even with the uncertainty of the COVID-19 pandemic. Further, RMB believes Faith has a potential to receive higher attention from Japan’s general equity investors, as Nippon Columbia’s famous composer Yuji Koseki and his music were featured in a popular and widely watched NHK network drama program this year. Under these circumstances, RMB believes the management of Faith can improve the value of the firm by mobilizing the unused pile of cash on its books, which RMB feels will result in compelling shareholder returns. RMB demands the board at Faith take these necessary actions to achieve this.

 

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July 22, 2019

RMB Capital Proposals Received Support by the Majority of Minority Shareholders at the Annual Meeting of Faith Inc.

RMB Capital (“RMB”) had filed shareholder proposals regarding a dividend increase and outside board director for the 27th annual general shareholders’ meeting at Faith Inc. (4295 JP), which was held in June 2019. Although these proposals were voted down at the meeting, the dividend increase proposal received 27.55% of shareholder votes while the outside board director proposal received 33.07% of shareholder votes. Given the large ownership of the founder/CEO, RMB’s proposals effectively received the support of the majority of the remaining shares, crossing the “majority of minority” threshold. We believe these results demonstrate shareholders’ support of RMB’s efforts to press management further for corporate governance reform and shareholder return improvement.

RMB hopes the management considers the voting results seriously and initiates necessary actions to enhance the shareholder value at Faith.

 

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May 12, 2019

RMB Capital Explains Shareholder Proposals at Faith Inc. Regarding a Dividend Increase and Outside Director

RMB Capital (“RMB”) filed shareholder proposals regarding a dividend increase and outside board director for the 27th annual general shareholders’ meeting at Faith Inc. (4295 JP), which is scheduled to take place in June 2019. RMB explains the background and rationale for its proposals below.

RMB’s analysis

RMB identifies the following factors that have been driving down the share prices of Faith:

1. Faith’s capital structure policy is not rational, and its excess cash is not deployed appropriately.

2. The effectiveness of its corporate governance system is in doubt.

RMB has been engaging with the management of Faith and has discussed the following solutions in the past:

• Revisiting its capital structure policy and enhancing shareholder return, including through a dividend increase

• Accepting an RMB-recommended outside director to improve Faith’s corporate governance

Accordingly, RMB filed shareholder proposals on increasing dividends and appointing an outside board member to help fulfill these recommended solutions.

Details of RMB’s proposals

1. Proposed dividend increase of 380 yen per share (a total of approximately 5 billion yen)

Faith made Nippon Columbia a 100% subsidiary through a stock swap deal in August of 2017. We estimate Faith should have paid approximately 5 billion yen of cash to Nippon Columbia’s shareholders if the deal had been a cash tender. During the acquisition, Faith’s management explained they wanted the shareholders of Nippon Columbia to stay on as Faith’s shareholders and enjoy an improvement of corporate value at the post-merger Faith, all while management implemented business expansions including further acquisitions using this saved cash. Two years have passed, and Faith management has not implemented any business expansion plans while leaving the cash unused. As a result, no increase of the corporate value was achieved, and shareholders saw Faith’s share prices decline by as much as 30% since the merger announcement, given the lower capital efficiency at the firm.

RMB thinks the management should return the entire 5 billion yen of cash that was saved in the stock swap acquisition of Nippon Columbia to the shareholders, since management did not follow through on its promise made two years ago.

2. Appointment of an outside board member

Appointing an outside director who is truly independent from the management is crucial to secure the effectiveness of the corporate governance. RMB’s proposed candidate, Mr. Masakazu Hosomizu (partner and portfolio manager at RMB) has been delivering opinions and proposals to Faith’s management as a minority shareholder and is qualified as a truly independent outside director. The above candidate received 19.3% of the approval vote during the 26th annual general shareholders’ meeting last year, with support from other minority shareholders including both domestic and overseas institutional shareholders. The nomination and compensation committee, which was formed in December, should respect the minority shareholders’ opinion and follow appropriate nomination processes, including an interview with the candidate.

 

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January 14, 2019

RMB Capital Welcomes Faith’s Decision to Install a Nomination and Compensation Committee

On December 28, 2018, Faith, Inc. (4295 JP) disclosed in its Corporate Governance Report that the firm had installed a nomination and compensation committee. RMB Capital has been proposing that Faith take this action for years and welcomes Faith management’s decision to do so. We firmly believe that the standard of corporate governance at Faith will be further elevated by the installment of its nomination and compensation committee. We hope Faith management will take further actions to enhance shareholders’ value of the firm going forward.

 

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June 26, 2018

RMB Capital Files Proxy Solicitation Against Faith, Inc.

RMB Capital (“RMB”), an independent investment and advisory firm with approximately $9.1 billion in assets under management (estimated as of March 31, 2018), initiated a proxy solicitation to approve an RMB-nominated outside board member at Faith Inc.’s (4295 JP) 26th Annual General Shareholders’ Meeting scheduled for June 28, 2018.

The proxy solicitation, filed on June 15, 2018, encourages Faith shareholders to vote for Item 4 (“Appoint Shareholder Director Nominee Hosomizu, Masakazu”). As noted in a previous press release, RMB proposed the nomination of Masakazu Hosomizu, partner and portfolio manager of RMB’s Japan equity strategies, as an outside director in order to provide oversight of Faith’s executive team from the perspective of minority shareholders, and to further the company’s corporate governance practices. Japan’s heightened corporate governance code was recently enacted to align interests between the country’s shareholders and businesses.

However, the board of directors at Faith declined RMB’s proposal without proper due diligence, refusing to interview Hosomizu and failing to provide shareholders with any logical reason for its decision to deny RMB’s proposal in its proxy letter to shareholders. Given these facts, RMB filed for the proxy solicitation to support its board nominee. Regardless of the outcome at the upcoming shareholders’ meeting, RMB intends to be a long-term shareholder and continue its efforts to improve Faith’s corporate governance.

There is no definitive conclusion that relying on RMB’s suggestions and proposed candidate will have any positive or negative impact on Faith.

 

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June 19, 2018

RMB Capital Initiated Proxy Solicitation at Faith to Approve an RMB-Nominated Board Member

RMB Capital initiated a proxy solicitation on June 15, 2018 to vote for the Item 4 (Appoint Shareholder Director Nominee Hosomizu, Masakazu) at the 26th Annual General Shareholders’ Meeting of Faith, Inc. (4295 JP) scheduled on June 28, 2018.

As in our press release on June 5, 2018, RMB proposed to nominate Masakazu Hosomizu, a partner of RMB, as an outside director of Faith (a) to monitor the incumbent executive team from the viewpoint of minority shareholders, and (b) to enhance the corporate governance system at Faith.

However, the board of directors at Faith refused RMB’s proposal without going through proper processes, such as interviewing the nominee, and opposed RMB’s proposal without any logical reason in its proxy letter to the shareholders. Given the situation, RMB decided to initiate proxy solicitation to support our board nominee. RMB intends to be a long-term shareholder of Faith to improve the firm’s corporate governance regardless of the outcome of the shareholders’ meeting.

 

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June 12, 2018

RMB Capital Proposes New Director for Faith

RMB Capital (“RMB”), an independent investment and advisory firm with approximately $9.1 billion in assets under management (estimated as of March 31, 2018), asks Faith Inc. (4295 JP) to adhere to Japan’s heightened corporate governance code, which was enacted to align interests between the country’s shareholders and businesses.

Masakazu Hosomizu, portfolio manager of RMB’s Japan equity strategies since 2011 and recently named partner, has been a vocal activist for structural reform in his native country, appreciating how crucial it is for sustainable growth and economic prosperity. Known as the third arrow of Abenomics (Prime Minister Shinzo Abe’s comprehensive economic and social reform movement, which also includes monetary easing and fiscal stimulus), structural reform is a broad initiative that encompasses policies related to taxes, labor, higher education, and corporate governance.

RMB’s Criticism of Faith

Hosomizu, with the support of RMB’s investment committee, has been vocal and persistent in his criticisms of Faith’s corporate governance. Among the concerns is Faith’s approach to allocating capital, which is inconsistent and inefficient. RMB had publicly expressed opposition of Faith’s intention to use a stock-swap deal in acquiring Nippon Columbia, several months prior to the transaction date of August 1, 2017. RMB cited the stock swap’s flawed valuation methodology, dilution of shareholder value, and lack of necessity given Faith’s cash on hand. Faith has not put its cash to use on any strategic investments since then—rather, it recently announced a 5% share buyback program that would return cash to shareholders. While the buyback is beneficial to shareholders, it contradicts Faith’s prior position about conserving cash for strategic initiatives.

RMB questions Faith’s strategic plan for its business. It characterized the acquisition of Nippon Columbia, a central player in Japan’s music industry, as an initiation of consolidations in a fragmented sector. Yet, in its presentation to analysts during a May 2018 meeting, Faith announced investments in disruptive innovations, including block chain technologies. Faith’s financial statements and earnings projections demonstrate the effect of ill-conceived business plans, as its management expects up to a 66% decline in consolidated recurring profits this fiscal year. The lack of clarity and discipline in capital spending decisions puts shareholders in a risky position going forward.

RMB’s Proposal to Help Faith

On April 25, RMB proposed sending Hosomizu to fulfill the role of external director on Faith’s board, citing the aims to protect shareholders’ interests, further the company’s adoption of Japan’s corporate governance code (which includes the stipulation that publicly traded Japanese companies must have at least two outside board members), and ultimately improve Faith’s corporate value. Without a nomination committee, Faith’s board of directors did not have a defined process for reviewing the proposal and refused to entertain the notion of an interview between the board and Hosomizu.

Faith’s Flawed Response

Faith publicly responded to RMB’s proposal in a May 22 press release, including multiple claims that are wholly rejected by RMB at this time.

1. Faith’s alternative “outside director” candidates: Faith announced its nomination of three other candidates who could serve as outside directors on its board. However, all of these candidates have ties to Faith and cannot be considered independent—an auditor of Nippon Columbia (Faith’s 100% subsidiary), a director of Yoshimoto Kogyo (a business partner and shareholder of Faith), and a corporate advisor to Pasona Group, which was founded by an ex-board member of Nippon Columbia and itself had Faith’s founder as a previous board member.

2. Concern over “a specific shareholder”: Faith expressed skepticism about whether Hosomizu would represent the interests of all minority shareholders or just those of a specific shareholder. RMB maintains that the specific shareholder who warrants concern is Hajime Hirasawa, the founder CEO and largest shareholder of Faith with a 34% ownership stake. The other 66% of ownership is held by minority shareholders, who don’t currently have representation in Faith’s corporate governance structure.

3. Role of an outside director: Faith demonstrated a lack of understanding about the role and value of outside directors. Its assertion that Hosomizu “does not understand the firm’s business policy” was based solely on the fact that Hosomizu has a different opinion. Its claim that an outside director such as Hosomizu would create chaos shows a complete disregard for Japan’s corporate governance code—and is also an indication that Faith lacks confidence in its board’s ability to function properly. Finally, its statement that Hosomizu should present “realistic, concrete business plans” is erroneous; Japan’s corporate governance code clearly states that the role of outside directors is to monitor companies’ management. It is the responsibility of management to develop business plans.

There is no definitive conclusion that relying on RMB’s suggestions and proposed candidate will have any positive or negative impact on Faith.

 

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June 5, 2018

RMB Capital Proposed a New Outside Director to Faith

RMB Capital (“RMB”), an independent, Chicago-based investment management firm with approximately $9.1 billion in assets under management (estimated as of March 31, 2018), filed its ownership of more than 11% in Faith Inc. (4295 JP) in August 2017 and filed its shareholder proposal to send Masakazu Hosomizu, RMB partner and portfolio manager, as an outside director to the board of Faith on April 25, 2018. RMB believes its proposal would protect minority shareholders’ interest and enhance corporate governance at Faith and eventually improve the corporate value of Faith.

1. Need to monitor the Faith management’s capital policy from the shareholders’ viewpoint

RMB is concerned about Faith management’s capital policy, which has been inconsistent. About a year ago, Faith’s management conducted a stock-swap deal to fully acquire Nippon Columbia, which caused a significant dilution of shareholder value. Management has not made any strategic investments with the spared cash. Instead, they recently decided to return capital through a 5% share buyback program. Further, management’s description of their strategic investment policy has been shifting as well. Last year, they claimed to initiate consolidations in Japan’s fragmented music industry, where Nippon Columbia is a central player. However, in their May 2018 analyst meeting presentation, this statement is replaced with investments in what they call “destructive” innovation, including block chain technologies. It could be “destructive” for minority shareholders if management hastily invests the cash in wrong places and overpays beyond the capital cost.

Validating the above concern, the losses at Faith’s content segment have been widening in recent years under the name of new business developments, and management expects as much as 66% decline in the consolidated recurring profit this fiscal year. RMB is skeptical about whether Faith’s management has a disciplined investment policy, has evaluated the results of their investments in business development, and is prepared to share those results with shareholders.

Under these circumstances, RMB believes sending its proposed candidate as an outside director to monitor management’s decision-making process would be in the best interests of Faith’s minority shareholders.

2. Need to build a strong corporate governance system

RMB’s concern about Faith’s corporate governance system only increased through negotiation related to its proposal. More specifically, RMB found the board’s decision-making process is not transparent and reflects a flawed corporate governance system. Because Faith does not have a nomination committee, the board had to take initiatives to consider RMB’s proposal. RMB requested an interview between its candidate and Faith’s board of directors—namely, outside directors—that would enable Faith to evaluate RMB’s proposed candidate. However, this request was refused, preventing the ability to gain information for minority shareholders.

In a May 22 press release, Faith announced its nomination of three candidates for new outside directors. However, RMB is skeptical about the independence of these candidates, who include an auditor of Nippon Columbia (a 100% subsidiary of Faith) and an outside director of Yoshimoto Kogyo (a shareholder and business partner of Faith), as well as a corporate advisor to Pasona Group, which was founded by an ex-board member of Nippon Columbia and had Faith’s founder as a board member.

As such, RMB believes Faith is failing to uphold a core tenet of the corporate governance system with its selection of outside directors. RMB’s proposed candidate would represent the minority shareholders’ interest as an outside director.

RMB believes Faith’s May 22 press release (“Board’s opinion regarding a shareholder proposal”) is totally baseless and unacceptable.

1. The founder CEO is “the specific shareholder” to worry about.

Faith’s management indicated it is skeptical about whether RMB’s candidate would consider the interests of all minority shareholders and not just those of a specific shareholder.

RMB believes “the specific shareholder” management should worry about is Hajime Hirasawa, the founder CEO and the largest shareholder of Faith with a 34% ownership. A strong corporate governance system has to be installed to control the interest of such a “specific shareholder.” At Faith, however, there are no nomination and compensation committees that oversee management, and its outside directors are not functioning as intended by the Corporate Governance Code. RMB’s proposed candidate is truly independent from the founder CEO.

2. We should respect diverse opinions.

Faith’s management asserts that RMB’s proposed candidate “does not understand the firm’s business policy” only because he has different opinions. However, RMB believes diverse opinions are valuable in constructive discussions to improve the corporate value of Faith.

3. Outside directors are not required to present “realistic, concrete business plans.”

Faith’s management misunderstands the role of outside directors.

Corporate Governance Code by Tokyo Stock Exchange defines the roles of outside directors in its Principle 4-7 as: i) Provision of advice on business policies and business improvement based on their knowledge and experience with the aim to promote sustainable corporate growth and increase corporate value over the mid- to long-term; ii) Monitoring of the management through important decision-making at the board including the appointment and dismissal of the senior management; iii) Monitoring of conflicts of interest between the company and the management or controlling shareholders; and iv) Appropriately representing the views of minority shareholders and other stakeholders in the boardroom from a standpoint independent of the management and controlling shareholders.

Faith’s statement that RMB’s proposed outside director should present “realistic, concrete business plans” is problematic. As clearly stated in the Corporate Governance Code, the role of outside directors is to monitor management. It is management’s responsibility to present “realistic, concrete business plans.” Furthermore, the three outside director candidates proposed by Faith’s management have not presented any “realistic, concrete business plans”—nor should they be required to.

4. Outside directors are not likely to put management “in chaos.”

The role of outside directors is to monitor management through a functioning corporate governance system while representing the views of minority shareholders and other stakeholders. RMB’s proposed candidate meets the qualifications to fill the position and has a clear understanding from past discussions with the management. Further, because the board decision is made by a majority voting, management will not “be in chaos” as long as it presents plans that are reasonable from the viewpoint of minority shareholders and other stakeholders.

 

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June 8, 2017

RMB Capital Provides Follow-up on Tender Offer Proposal to Nippon Columbia

RMB Capital has provided background information regarding its tender offer proposal to Nippon Columbia (ticker code: 6791 JP).

(1) The background of our tender offer proposal

We believe Nippon Columbia is a very attractive entertainment business in Japan, with its 100 years of history as Japan’s oldest record label that owns historic artist assets. We believe the current stock price is significantly undervalued considering the firm’s tangible and intangible assets and profitability, however. The current market capitalization is about 9.5 billion yen, of which net cash represents 4.6 billion yen (48% of market capitalization), resulting in an enterprise value of 4.9 billion yen. The firm generated approximately 2 billion yen of free cash flow during the previous fiscal year, which could pay off the enterprise value within 2.5 years. We believe the stock swap proposal by Faith, Inc. (estimated at 780 yen per share) ignores the intrinsic value of Nippon Columbia and is unfair. It is clear that the board of directors at Nippon Columbia did not consider the interest of minority shareholders at all.

We are concerned that the board of directors did not pursue better buyout conditions through other potential buyers. The stock swap was announced on March 28th, 2017 or the last trading day to be granted with the shareholders’ rights. Any shares acquired by potential buyers through the market or tender offer after the announcement date would not be granted voting rights at the shareholders’ meeting in June this year, and these shares would be subject to the stock swap once the deal is approved. By timing the announcement, we believe the board of directors at Nippon Columbia gave up the chance to pursue better conditions for minority shareholders.

Against the above background, we decided to propose a cash tender offer to the board of Nippon Columbia at 790 yen per share, which is better than the Faith’s offer, and have proposed to cancel the stock swap so that the board may search for potential buyers, including us.

(2) Our response to the board of directors at Nippon Columbia

We supplied the following answers to questions from the board of directors at Nippon Columbia regarding our proposal of a tender offer.

1. The purpose of the tender offer:

We plan to hold the shares as an investment and may make important proposals from time to time.

2. The business plan after the tender offer:

We support the incumbent management of Nippon Columbia and its business plan, as well as “the new 360-degree strategy” at Faith, Inc. We do not expect any significant changes in the management and business plan at Nippon Columbia while planning to express our opinions through discussions with the executive team. We believe we can contribute to growth in its business through synergies with our domestic and overseas network in the entertainment and technology industries.

3. Our tender offer price:

Our proposed tender offer price of 790 yen per share represents an 11.6% premium over the market price of 708 yen per share on the proposal date. It is above 780 yen per share, a price implied by the stock swap proposal by Faith (the average share price of Faith for one month prior to the stock swap announcement on March 28th of 1322 yen per share, times the stock swap ratio of 0.59). It will be paid in cash, not by illiquid common shares of Faith. Our proposed price is within the DCF price range from 770 yen to 1080 yen, which was estimated based on the information disclosed by Nippon Columbia.

 

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May 31, 2017

RMB Capital Proposed Friendly Tender Offer to Nippon Columbia

RMB Capital informed the board of directors at Nippon Columbia (ticker code: 6791 JP) that we are interested in making a tender offer to part or all of the common stock of Nippon Columbia at the price of 790 yen per share, provided the board of directors accepts the conditions below.

1. Cancel the stock swap contract signed with Faith, Inc.

2. Give full support to our tender offer

3. Give full support to our due diligence process

 

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May 8, 2017

RMB Capital Made Shareholder Proposals Upon AGMs of Faith and Nippon Columbia

RMB Capital opposes Faith’s (4295 JP) stock swap acquisition of Nippon Columbia (6791 JP) and made the following shareholder proposals ahead of their annual general shareholders’ meetings (AGMs) in June.

Proposals to Faith:

1. Termination of stock swap contract

2. Cash tender offer of Nippon Columbia

Proposals to Nippon Columbia:

1. Termination of stock swap contract

2. Proposal of cash tender offer

3. Formation of a new independent committee and appointment of new legal and financial advisors

More details on “3. Formation of a new independent committee and appointment of new legal and financial advisors”:

At Nippon Columbia, we believe the third-party committee did not function well to secure a fair process, resulting in an unfair stock swap contract, which is not in the best interest of Nippon Columbia’s minority shareholders. To secure a truly fair process, we propose (1) formation of a new independent committee by the independent director, (2) appointment of new legal and financial advisors by the independent committee, and (3) negotiation by the independent committee.

1. Formation of a new independent committee by the independent director:

Nippon Columbia stated it obtained an opinion from a third-party committee, which they believe is independent. However, these committee members were picked by the interest-conflicted board from the pool of candidates nominated by Iwata Godo, the legal counsel which serves for the interest-conflicted board. As such, we believe the process of forming the committee was flawed. To secure a truly fair process, the independent director should take initiatives to form a new independent committee without the influence of the interest-conflicted directors and the legal counsel.

2. Appointment of new legal and financial advisors by the independent committee

The existing third-party committee did not hire its own legal and financial advisors and relied solely on the advice and valuation analysis by Iwata Godo and Plutus Consulting, which serve for the interest-conflicted board. Under these circumstances, we believe the opinion of the third-party committee was influenced by the interest-conflicted board, making the entire process severely flawed. The newly formed independent committee should appoint its own legal and financial advisors to gain unbiased advice and valuation analysis.

3. Negotiation by the independent committee

Negotiation of the transaction was done by two directors at Nippon Columbia without three other directors sent from Faith. One of them was a director and Chief Financial Officer, who was appointed by the directors sent from Faith, however, and she is supposed to work for Faith Group after the transaction. We believe the transaction condition was flawed due to the involvement of the director whose interest potentially conflicts with that of minority shareholders. A newly formed independent committee should lead the negotiation to secure a truly fair process.

 

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April 21, 2017

RMB Capital Opposes Faith’s Acquisition of Nippon Columbia Through Stock Swap

Founded in 2005, RMB Capital is an independent, Chicago-based investment management firm. We manage more than $6 billion of assets in global equities, fixed income, and other asset classes and strategies, guided by our long-term investment philosophy. We serve a diverse client base of high-net-worth individuals and families, as well as institutional investors such as endowments and foundations. RMB Capital owns more than 5% of Faith (4295 JP) and Nippon Columbia (6791 JP) as filed in October 2015 and in June 2016, respectively.

We support Faith’s plan to fully consolidate Nippon Columbia

Faith is an innovating information technology company that has provided many services including the global standard of mobile phone ring tone coding. Founded in 1910, Nippon Columbia launched Japan’s first phonographs, first long-playing records, and the world’s first compact discs. As the oldest record label in Japan, the firm owns several historic music properties created by Shirley Yamaguchi and Hibari Misora, and is an influential entertainment business in Japan with its strength in rock music and animation songs.

We started investing in Faith and Nippon Columbia in 2010 and 2014, respectively, and have been engaging with the management as a friendly shareholder. We support Faith’s plan to fully consolidate Nippon Columbia, believing both firms will generate further synergies going forward.

However, we oppose the stock swap acquisition

As a shareholder of both Faith and Nippon Columbia, however, we oppose the stock swap consolidation plan for the following reasons:

1. For the Faith shareholders, issuing new stocks at the price below the book value, despite a large amount of cash on book, is not the best option. The price-to-book ratio of the shares of Faith is about 0.8 times, as of March 28th, 2017. On the other hand, Faith has about 6 billion yen of cash at the parent firm and about 14 billion yen of cash at the consolidated level.

2. For Nippon Columbia shareholders, the Faith stocks are very illiquid in the market and are not an ideal payment. In addition, we believe the stock swap ratio is flawed as explained below.

We believe the stock swap ratio is flawed

We believe the swap ratio was unfairly depressed by unreasonable use of DCF valuation of Faith stocks, which was much higher than the market price.

1. Based on the disclosed information, we estimate the DCF valuation of Faith stocks from 2,000 yen per share to 2,440 yen per share (average 2,220 yen per share), which is much higher than the market price of 1,300 yen per share on the stock swap announcement date. If the management used such a non-existent price, the resulting swap ratio is unfairly low for Nippon Columbia shareholders.

2. We believe DCF valuation should be used only to factor synergy values and expectation for future price appreciation associated with the stocks that will be delisted. In this deal, DCF should be used only for the valuation of Nippon Columbia, not Faith.

3. Based on the disclosed information, we estimate the DCF valuation of Nippon Columbia stocks from 770 yen per share to 1,080 yen per share (average 925 yen per share). The price range indicates a premium from 14.8% to 61.0% (average 37.9%), which is comparable to recent acquisition deals in Japan.

4. If we use the market price of 1,300 yen per share for Faith stocks and above DCF valuation 925 yen per share for Nippon Columbia, a new stock swap ratio will be 0.71, which is 20.3% higher than the proposed 0.59.

Further, we believe the valuation of Nippon Columbia is unfairly low due to the excessively pessimistic earnings forecasts, which is explained in the disclosure: “(management) expects operating profit will decline by 60.5% year over year in fiscal year ending March 2018 at Nippon Columbia.”

Our proposal: A cash tender by Faith to acquire Nippon Columbia shares

As an alternative, we propose that Faith initiate a cash tender offer to acquire Nippon Columbia shares for the following reasons:

1. The acquisition process will be more transparent through a tender offer with better disclosure.

2. The shareholders’ value of Faith will not be impaired without a stock issuance of as much as 40% of the outstanding shares at the price below the book value.

3. By using the excess cash, the shareholders of Faith can expect an appreciation of the stock price with the reduced asset size and better capital efficiency.

4. The shareholders of Nippon Columbia will be rewarded with a fairer valuation under a transparent tender offer process and can receive cash instead of illiquid stocks of Faith.

We believe corporate governance did not work properly at both companies

We believe corporate governance did not work properly at the boards of both companies during their decision-making process. More specifically, we believe the independent board members, who are supposed to represent minority shareholders, did not properly check the conflict of interest. As the Corporate Governance Code clearly requires, independent directors have a duty to monitor potential conflict of interests by executives. Such monitoring function is strongly expected when a controlling company consolidates its publicly listed subsidiary, a situation where interests of minority shareholders are at risk.

Mr. Yasuyuki Higuchi (CEO of Microsoft Japan, representative director at Panasonic from April 1st) is an independent director at Faith and Mr. Yasuyuki Nanbu (founder of Pasona Group) is an independent director at Nippon Columbia. We believe they are responsible to explain their view on the stock swap transaction and how they fulfilled their monitoring duties to protect interests of minority shareholders.

(An excerpt from the Corporate Governance Code issued by the Tokyo Stock Exchange follows).

Principle 4.7 Roles and Responsibilities of Independent Directors

Companies should make effective use of independent directors, taking into consideration the expectations listed below with respect to their roles and responsibilities:

iii) Monitoring of conflicts of interest between the company and the management or controlling shareholders; and

iv) Appropriately representing the views of minority shareholders and other stakeholders in the boardroom from a standpoint independent of the management and controlling shareholders.

We demand boards of both companies reconsider the plan

Upon the delisting of Nippon Columbia, which we believe is a historic event in Japan’s entertainment industry, we demand boards of both companies reconsider the plan in order to implement the full consolidation through a fairer and more appropriate way. We plan to make related shareholder proposals upon the annual general shareholders’ meetings at both companies in June.

 

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About RMB Capital 

Headquartered in Chicago, RMB Capital is an independent investment advisory firm that serves high-net-worth individuals and families as well as institutional investors. Its businesses include wealth management, family office services, asset management, and retirement plan consulting. Its asset management business specializes in long-term, concentrated, active investing strategies with coverage that spans the market-cap spectrum and the globe. To learn more about RMB, visit rmbcapital.com.

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Media Contact:

Masakazu Hosomizu
RMB Capital
japan@rmbcap.com