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.
Please refer to Faith Activism for RMB’s past press releases on this topic.
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 https://rmbcapital.com.
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