Matsuya - An SFP Pre and Post-Mortem

Once in a while, whether by happenstance or serendippity, one does hit the proverbial bulls-eye. A few readers were kind enough to pay a compliments to yours truly over posts related to SFP Value Realization Fund and their Russian Roulette fun-and-games with one of my long-favored shorts, Matsuya Co Ltd (8237) published in late 2007 under the title Matsuya (8237) - Good Luck - (You'll Need it....!!), which painted a scenario eerily close to that which came to pass. I reprint it here by request...

Matsuya (8237) - Good Luck ! ( You'll Need It....)

Symphony Financial Partners 'SFP Value Realization Fund, is a buyer of what, to a growth or GARP-investor is micro-cap and nano-cap detritus. It does so in large, concentrated and, once-acquired, unmarketable sizes. This comes with the attendant benefit of creating what (I have termed as) "market-impact options" where once a position is acquired, the manager can typically use their persistent and concentrated buying-power that results from unused leverage, self-generated market-to-market profits, topped-up with cash from additional subscriptions to their Fund, to goose the prevailing stock-prices of companies in which The Fund already has large positions. Fortunately (mostly for SFP management) investors have been none-too-inquisitive about such practices, so long as they've been able to report P's rather than L's when crunch-time (at quarter-end) arrives.

Their biggest (reported) commitment to-date has been the lamest and least-profitable of remaining department stores, Matsuya Co. Ltd. (TSE Code# 8237), which seemingly has absorbed perhaps a fifth to a quarter of the fund's gross long assets. The rationale for said position is a belief (which I have no reason to doubt) that their flagship Ginza store is worth far more as a veritable hole-in-the-ground, than it is as a time-honored Tokyo shopping and dining destination. Optimistic rumor has it that the block-long site-alone is worth upwards of USD$1.5billion, set against a current market cap of $1.1 bn.

Now I will admit to being a sucker for such "hidden asset stories", particularly in under-covered small and mid-cap names. And I am not alone for there is a (or used to be) an entire slew of funds focused on the so-called hidden asset game in Japan. So much for efficient markets, I guess. But given that some of these funds have been in existence for a decade and half, with fees far outstripping any investment return, it might be wise to ask the question: Is it a reasonable expectation for a carpetbagging gaijin portfolio investor to be successful in pressuring a time-honored Japanaese company to restructure or otherwise disassemble itself for the short-term parochial profit of foreign cage-rattlers?

Many - mostly those accruing management fees from their investors on Saturdays & Sundays - take an optimistic view as one might expect them to. They see positive change, management that is more sympathetic to "creating shareholder value" (the vernacular for asset stripping), despite the sh*t-kicking that activists have received on TOC (8841), Bulldog (2804), J-Power (9513), Fuji TV (4676), amongst other forays.

What IS true, once one dispenses with the hyperbole, is that some good companies continue to evolve into even better companies, but I, personally, harbour large doubts as to the overlap between these enterprises, and the low-hanging rotten no-growth fruit targeted by Steele, SFP, and other seekers of embedded-value-on-the-cheap.

I do not pretend to know the inner workings of Matsuya. So obscure is it - despite its billion$$+ mcap - no one has written a research report on it in a decade. But it appears to be a time-honored way of life for the minority family owners and its extended constituencies, rather than a business that appears to be voluntarily willing to commit ritual suicide and so shutter itself in favour of yet another, large-scale glass & steel real-estate development by Mori Trust or similar. The time-honored web of corporate and personal obligation extends deep and far, but this is not visible to those who see it as US$1.5bn parcel of land.

It is currently held by a cross-section of TeamJapan, that for all intent owns it for legacy reasons, but is still NOT likely to sell Matsuya Co. Ltd. to the foreign devils, else the same thing kharmically boomerangs upon them in the future. And even if someone pays full-market value for the site, there are the legacy pension costs, outstanding short-term and long-term debts to settle, inventories to write down, and redundancy costs for full-shuttering, thereby decrementing net proceeds to common shareholders by a large dollup. But SFP must surely have taken this into consideration. Right? Their investors should hope so.

In the meantime, aside from the paltry shares being repurchased by the company itself, SFP is the only buyer, and their stake - painfully acquired at ever-higher prices - is unimaginably large relative to what might be realizable in the market were something errr ummm unforeseen to happen, such as, for example, their largest investor were to redeem their interest in SFP Value Realization Fund in order to allocate, for example, to the Enhanced-Leverage Super-Senior Mortgage Salvation and Redemption Turnaround Fund (Euro-Class). Any estimate is, of course, a whimsical exercise, but my guess is that they would be very lucky to realize an average sale price of YEN1000/shr (or 50yen on the 100) in the market were they to become a distressed seller, under current market conditions.

I could of course, be wrong. SFP might have a trade-buyer in hand, one keen to acquire the site, and ready to "pay-up" for any and all shares, at a "fair price" far-above my estimate. But, investors would be wise to pay attention to the interim risk here, which is that there appears to be a large fat-tailed accident waiting to happen, as the race between the patience of SFPs investors, and the success or failure of their very large punt comes to an end. Personally, I would wager that SFP's investors lose patience before Matsuya's management gives up the proverbial ghost. Anyone with the bull-side of this story, please do divulge the particulars...
Posted by "Cassandra" at 11:24 AM

I followed this up in the fall of 2009 with a sort-of Post Mortem entitled "Every Day Has It's Dog", and is worth a read too, though it held little interest to most given the prevailing Bailout Rage and mass-finger-pointing at the time.