A Hedge Fund Calls for $4 Billion Payout From Japan's KyoceraBy and
Kyocera should sell giant KDDI stake, Oasis Management says
About half the proceeds should be returned to shareholders
A Hong Kong hedge fund stepped up its pressure on Kyocera Corp., calling on the Japanese electronics maker to pay back more than $4 billion to investors.
Kyocera should sell its 1.02 trillion yen ($8.3 billion) stake in phone carrier KDDI Corp. and give about half the proceeds to stock owners including his fund, Seth Fischer, chief investment officer at Oasis Management, said in an interview. Kyocera is the largest shareholder in KDDI and shares the same founder, Buddhist priest and billionaire Kazuo Inamori. Having such a large investment is equivalent to years of profits and too risky, according to Fischer.
As Prime Minister Shinzo Abe seeks to increase dialogue between investors and management and reduce so-called cross-shareholdings, funds such as Oasis are stepping in to test whether companies are prepared to heed this advice. Fischer won’t find an ally in Kyocera Chairman Emeritus Inamori, who told Bloomberg last month the investment in KDDI was a reserve against hard times and executives should say no to what he called selfish requests from shareholders.
“They should be selling that security and putting 100 billion to 200 billion yen of those proceeds into cash, which is about one or two years of Kyocera’s earnings, as a safety buffer,” Fischer, 43, said by phone from Hong Kong. “They should be investing 300 billion yen of that money in their existing growth businesses,” he said. “And the rest of their money, that they do not need, they should return excess cash to shareholders.”
Kyocera owned 12.8 percent of KDDI’s shares as of Sept. 30, according to the phone company’s website. The holding amounts to 46 percent of Kyocera’s market value and has a dividend yield of 2.2 percent. Kyocera’s shares yield 1.9 percent. Inamori founded Kyocera in 1959 and established one of the predecessors to KDDI in 1984. Kyocera’s shares fell 0.2 percent on Wednesday in Tokyo, against a 0.7 percent drop for the benchmark Topix index.
“Being an investor in Kyocera is being an investor half in KDDI and half in Kyocera,” Fischer said. “I’d prefer to take some of that capital and reinvest it in Kyocera."
His fund said it owned about 1 percent of Kyocera’s voting rights in March, according to a letter to investors obtained by Bloomberg earlier this year. Oasis doesn’t disclose its assets under management. The fund has 50 percent to 60 percent of its money in Japanese equities, Fischer said. He’s betting Abe’s governance overhaul will make companies more capital efficient and investor friendly, and says he’s the most bullish on Japan in many years.
The nation’s corporate governance code, started in June, says companies with stakes in other listed companies that aren’t held purely as investments should examine the economic rationale annually, considering both risks and returns, and explain it to shareholders.
“Kyocera can’t comment on individual listed stocks, and its policy and standards for cross-shareholdings are already in the corporate governance report,” Elly Yoshikawa, a Kyoto-based spokeswoman for Kyocera, said by e-mail.
Kyocera holds certain shares to help business relationships and make profits from the holdings, the company said in its latest such report. Investments are sold if they don’t make economic sense, it said.
Fischer, who called for operational changes at Nintendo Co. before they were unveiled in March, says he dislikes being called an activist and prefers the term “engaged investor." He’s doing what Abe’s government expects of shareholders by having robust discussions with management, he said.
Japan has about 85 trillion yen in cross-shareholdings, according to an estimate by UBS Group AG in September. Such investments accounted for about a third of the stock market in 1991 and have since dropped to about one-tenth, according to Nomura Holdings Inc. The nation’s three largest banks unveiled targets for cutting the holdings this month, their firmest commitment yet.
“Cross-shareholdings are a license to laze,” said Nicholas Smith, a Tokyo-based strategist at CLSA Ltd. “They are a clear demonstration of a calculated and cynical disregard for shareholders and a lackadaisical attitude towards returns that ultimately picks the pockets of employees and society as a whole. Of course they should be sold.”
Fischer, who served in the Israeli army prior to entering finance, says his fund isn’t seeking a quick buck. He’d be just as happy if Kyocera invested all the KDDI proceeds in parts of its business with attractive growth prospects, he said. The caveat is executives must be able to find good uses for the money.
Japan Inc. will probably face more investor proposals in the 2016 shareholder-meeting season, and money managers will consider their votes more carefully to meet standards started last year, according to Fischer. He declined to rule out Oasis attempting a proxy fight at Kyocera’s meeting if the company doesn’t consider selling its KDDI shares.
“Everything is on the table,” he said. “As a shareholder you think about the best long-term interests of the company.”
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