Wednesday, April 25, 2007

Thrice Lucky?

Thrice lucky. That must be the motto of Osamu Kaneko hard-nosed ebullient founder and President of real estate advisory and management firm Da Vinci Advisors KK (TSE Code 4314), now with a market cap of YEN 175bn, and Mr Kaneko still holding 25%. Not bad for a company with no sales in 2004. Such is the power of using leveraged finance in the acquisition of real assets.

But it wasn;t always so, as the title of this post - "thrice lucky" - suggests. For Mr Kaneko spent the 1970s and bubble years with Bubble-King themselves, Haseko Construction (TSE Code #1808), as head of their US ops. From first-hand experience, I can recall Haseko's presence in the Japanese enclave of Fort Lee, NJ cynically known as "Fort Ree", to the working class lads of Edgewater (pronounced "Ej-wooda" to purists ), during the height of the last US real estate bubble in late 80's. They had constructed several monstrous towers majestically atop the hills overlooking the Hudson. Unfortunately, it was at a time when many others had done precisely the same, only sooner, while others were still in the process of doing the same, many of whom would never finish. Whether this project was their undoing, or the acquisition of Japanese land at never-to-be-seen-again prices, Haseko, as it was, is, no more. Strike-one!

Next, in the 1990s, came "Sunterra", the self-proclaimed King of time-shares, arising out of the ashes of Signature Resorts, whereupon Osamu (affectionately known as "Sammy") was Chairman. Maybe its cultural, maybe its my occasional unabashed snobbishness, but there is something about "time-shares" that creeps me out. Maybe its because I like my own space. Maybe its because I my economic sensibilities are offended when someone parcels up something as pedestrian as an apartment, and peddles for 300 to 500% of face. I thought hotels exist for this purpose, and to this day fail to see the allure of the timeshare. But Sammy was the timeshare King, with all the Radio Pyongyang prognostications about growth, value, ideas, blah blah, until in 1999 things went horribly pear-shaped, leading to eventual Chapter-11, and shareholder lawsuits. Strike Two.

In 1998, perhaps because Sammy knew more than he told to the unfortunate Sunterra shareholders of the time, he extricated himself from day-to-day management oversight, and founded Da Vinci KK, eventually IPO-ing in Dec 2001. While he needed to wait a couple of years before property values bottomed following the collapse of the bubble, cleaning up and recap of the banks, and the return of foreign carpet-baggers to Japan, the phrase "being in the right place at the right time" was rarely more apt. Inheritance law changes, asset sales and de-leveraging by all manner of corporations, securitisation and emergence of REITs, all happened in a relatively short period of time culminating in the launch of large managed fund that would secure steady management fees for years to come once the funds were deployed. Coincidental to this was one of THE most spectacular post-bubble ramps seen in Japan with DavVinci's share price vaulting ten-fold from YEN20,000 to YEN 200,000 during CY 2005, including a 4th quarter leap from YEN 60,000 to 200,000!! This assault was led by JP Morgan who, in the market, had amassed more than 20% of the outstanding shares that represented perhaps one-half of the float. Such is the power of the largest marginal investor, they it must be said that by mid December one retail mania had gotten hold of the theme, they presciently sold more than half of their monstrous position very near the top.

But this is history, left for the reader to make his or her own judgments. What has my attention today is that an apparent DaVinci subsidiary has been active in the secondary markets, acquiring a 10% position in the Ohtani's TOC (through presumed Davinci sub Algrave YK), and vocally opposing the ostensible YEN 800/share "take-under" from the family (see yesterday's poetical epitaph). Today, DaVinci offered YEN 1100/share for the same. Note that the Ohtani's have the effective control of TOC, though their take-under offer was apparently so insulting, and left so much juice, they will likely be required to pay-up in order to take it private, and there remains the possibility of other bidders emerging.

But perhaps for non-merger arbs, looking forward, it is more interesting to note that the same DaVinci vehicle, Algarve YK, that is spoiling the Ohtani's party, has also emerged as the holder of 9%+ stake of asset-rich Toei Corp (TSE Code# 9605) which in addition to its large holdings of TV Asahi and Toei Animation (equal to 40% of current market cap), owns a very large and reasonably valuable film library of Japanese animation and a massive amount of under-valued and under utilized real estate through out Tokyo in the form of offices and movie theatres. Presumably, Sammy sees what asset-investors have seen for the better part of a decade: the break-up value inherent in a number of venerable asset-rich companies. Whether an iconolastic outsider from Indiana State University with a chequered past will be more successful than those before are IMHO even-odds at best, but those are much better than one would have gotten from the bookies at any time in the past.

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