JASDAQ Rejects Nova’s Report

25 Responses to “JASDAQ Rejects Nova’s Report”

1. Adamu on October 6th, 2007 12:53 am

   Where did you get that report from? I can’t see immediately on the JASDAQ site where it is.

   The report claims that the person at the company that actually knew how to file the reports properly “was hospitalized” so the corporate communications staff has been taking care of Investor Relations (sounded like a good idea at the time I am sure) and hence that “takes too much time” to file the reports on time.

   Anyway, the last page of the report has NOVA’s detailed explanation of just what they’ve been doing with their stock:

   They hired a “consulting company” (Roots I believe) to help them procure cash. On July 20, the company asked to be lent 10 million shares because they explained “it is likely NOVA could procure cash using its stock.”

   NOVA was supposed to get 750 million yen through a “share lending transaction” on July 29, but the consultants told them they needed 12 million MORE shares to close the deal.

   NOVA intended to appropriate some of the original 10 million for the new request, but since they “needed the funds by the end of the month no matter what” and had no other way to meet the demand by the end of the month, they handed over the 12 million new shares on the condition that the original 10 million would be returned.

   But the actual deal was for 11 million shares, so NOVA thought it would get 11 million (of the 22 million handed over so far) after the deal went through. However, only 3 million were returned on August 2.

   Then, on August 8 BNP Paripas submitted a significant shareholding report that it had acquired 8 million NOVA shares. (It took time to receive “final confirmation” on this from Saruhashi and NOVA, resulting in a late-night filing of a change in major shareholders)

   On August 10, NOVA submitted a supplemental report that the 8 million BNP-owned shares were part of the 11 million share lending agreement.

   JASDAQ demanded an explanation of the situation from NOVA on Sept. 10, and NOVA submitted the report on the 11th stating that they expected the missing 8 million shares to be returned immediately.

   On Sept 19, the consultant submitted a report to the effect that the 8 million shares were under a share lending agreement, but since NOVA had not entered such agreement, it submitted a report on Sept. 20 stating that as of that time it was demanding the return of the shares.

   Got all that? Sorry if people are already aware of this, but it’s the first place I have seen a detailed explanation in one place so I figured I’d summarize. Do you think NOVA got taken for a ride?

2. sbaf on October 6th, 2007 2:14 am

   Given the new deadline for the report (Oct 19), there may not actually be a company left to report about, since it is four days after this months pay day and the chances of employees getting paid are (undoubtedly) slim. My guess is that up to half of their teachers may just stop showing to work that day.

3. NOVAの解約トラブルQ&A みんなはこうして解約した。 on October 6th, 2007 9:06 am

   nova ニュース…

   JASDAQ Rejects Nova’s ReportEarlier today, JASDAQ formally rejected Nova Corp’s 改善� �告書, or business improvement report. According to the Asahi Shimbun, Nova told JASDAQ, “ＮＯＶＡが今回出した� �告書は、１１月中に開示…

4. Ken Worsley on October 6th, 2007 10:13 am

   sbaf: Fully agreed

   Adam: I had seen the timeline described before, and Roots is the firm that was handling transactions on July 20 and 29, according to the significant shareholder changes.

   I do think Nova got taken for a ride. They simply don’t know what they’re doing.

5. df on October 7th, 2007 7:41 pm

   What do you think the chances of Nova getting picked up are? I recall Benesse got a sweetened deal to take over Aviva some years back and I hear Aviva has been turned around. Any news on a similar move with Nova (not by Benesse but another company)?

6. Ken Worsley on October 7th, 2007 7:45 pm

   DF,

   Very slim. Look at what one would be getting from buying Nova,

   Nova failed to pay salaried staff last month and now owes them about 440 million yen ($3.8 million).

   Nova lost about 3.07 billion yen in net profit for financial 2006 (consolidated).
   Nova lost about 2.50 billion yen in net profit for financial 2007 (consolidated).
   Nova lost about 2.50 billion yen in net profit in the first quarter of financial 2008 (April-June 2007).
   During that first quarter of financial 2008, Nova lost 4.5 billion yen in operating profit. It had to sell off over 9 billion yen in assets in order to ‘earn’ that loss of 2.5 billion yen in net profit.
   That quarterly report covered April-June 2007. The sanctions imposed by the Ministry of Trade, Economy and Industry went into effect on June 14 and last until December 14.
   The selloff of about 9 billion yen in assets from April-June 2007 meant that the value of Nova’s assets on July 1 was 16.4% less than a year ago. It also had zero (0) yen in securities listed on its balance sheet. Convertible assets (cash or cash equivalents) were down over 30% from the year before.
   5 billion yen in refunds to customers.
   According to a filing last Tuesday with the Kinki Local Finance Bureau, Saruhashi has borrowed cash against 9 million shares that are owned by himself and Nova Kikaku.

   There’s no money left, up to 25% of their schools are set to close, teachers are leaving in droves…there won’t be much left to buy soon.

7. df on October 8th, 2007 8:16 pm

   Thanks for that Ken,

   Nova held (2006), what, 50% of the market eikaiwa market? What will happen to that 50%? Who is best placed to pick it up?

8. df on October 9th, 2007 6:24 pm

   The thing is, Nova will not be able to close. I believe the industry is not able to absorb the market segment which is Nova’s. My call is that someone will get a sweetened deal to take charge of the company to turn it around. There is still a significant market base within Nova. Want a wager, Ken?

9. Ken Worsley on October 10th, 2007 1:14 am

   df, I’m not sure what would make you think I’d take that wager. A 51% controlling stake in Nova is valued at about $12 million right now. There’s no doubt someone could make it profitable; we’ve seen far more impressive recoveries in the world of business. Even at a 25% premium you’re talking $15 million to gain control - it would be a steal if the company had good medium/long term prospects.

   Others have already expressed interest, but have walked away from the table - notably HIS and Benesse. Saruhashi just isn’t going to sell at the market price, and he’s in no position to ask for a premium - there’s the Catch-22. This is a company that used to have a market cap in the neighborhood of $900 million - and now it’s less than $25 million. Why should he sell out? He and Kikaku own over 70% of outstanding, and they’ve refused to budge this far. From this vantage point, it’s hard to see that changing.

   The 50% market share was a best 45% last year, and continuing to decline.

   What are you thinking with ’sweetened deal’? Getting it lock, stock and barrel for less than $25 million? What about the estimated $50-$75 million in debt? I don’t see it being securitized and credit-swapped; not in this environment. It’s beyond junk debt.

   If you have $25 million, there are a lot better ways to get alpha out of it. I’m not saying a purchase and turnaround of Nova is impossible, it’s just not the best move for the money.

10. Garrett on October 10th, 2007 2:55 am

    df, what exactly do you have in mind when you say a “sweetened deal”? And who’s going to sweeten it?

    As for absorbing Nova’s customers, will that really be an issue? Other schools will expand, new schools will open, some of Nova’s customers will just quit going to an eikaiwa, and others will be frustrated.

    The one question that always seems to go unanswered is why anyone would buy Nova. Yes, it could happen, but why?

11. Adamu on October 10th, 2007 11:44 am

    Two new EDINET submissions from NOVA as of yesterday:

    1: They revised upward the amount of paid-in capital at quasi-subsidiary (majority owned by Sa(ru)hashi and Nova Kikaku)Ginga Net from 20 billion yen to 50 billion yen.
    (Also moved its headquarters from Osaka to Shibuya) This is explained as due to a “mistaken entry” in NOVA’s FY2006 financial statement. Seems a little convenient?

    2: They are issuing 7 billion yen worth of stock options (total 200 million shares at 35 yen apiece) to two British Virgin Islands-based investment
    companies in exchange for 70 million cash. The options can be exercised anytime
    between Oct 24 2007 and Sept 30 of next year, and NOVA can “request” that up to 5 million shares
    be exercised per month during that period.

    NOVA apparently intends to use the funds earned by the options to pay personnel expenses, rent,
    and other operating expenses as well as operating expenses for teachers/rent
    to implement a “fundamental revision to the company’s pricing structure including
    payment method for class tuition.”

    Look up 941240 at this URL for more!

12. Adamu on October 10th, 2007 11:52 am

    Btw, the Director of both investment companies is Callumberg LTD

13. Adamu on October 10th, 2007 12:01 pm

    Yomiuri has the story:

    - The issue of options is 3 times their outstanding shares (and the exercise price of 35 is 5 yen cheaper than the recent
    close of 40 per)

    - They cannot request that options be exercised if their share price falls below 35 yen

    - If all options are exercised Saruhashi will become a mere 18% shareholder in the company

    - These funds have pulled a similar scheme in Sept. 2005 with Ichiya, another JASDAQ-listed company involved in suit retailing and Korean BBQ.
    They received free options and bought 456 million shares, and sold 330 million two months later.

14. Ken Worsley on October 10th, 2007 12:28 pm

    There were rumors that they would issue convertible bonds. This is obviously a desperate move.

    Is this the same firm that they tried to issue a bond with a few months back? They found no takers then, and this is just a temporary solution. It could push back the bankruptcy one month. These guys are not legit buyers who are going to come in and do a Ripplewood or KKR. Saruhashi basically signed the company’s death warrant.

15. Ken Worsley on October 10th, 2007 1:38 pm

    My call is that someone will get a sweetened deal to take charge of the company to turn it around. There is still a significant market base within Nova. Want a wager, Ken?

    guess I should have taken you up on that deal ;) Now, with the warrant issue, there’s no chance of someone coming in, taking control and turning it around.

16. df on October 12th, 2007 6:33 pm

    hmmm…my call is NOVA (or its morph) still operating a year from now. Yes, I’ll eat my hat.

17. Ken Worsley on October 12th, 2007 6:35 pm

    It’s not impossible df, but looking at what happened with Ichiya, that could be quite a morph.

18. df on October 12th, 2007 7:18 pm

    Would be quite the comeback I agree. Aside from the lack of cash they would have to have a fine operations team in place - a very, very fine team.

19. Ken Worsley on October 12th, 2007 7:33 pm

    And recruiting that team would be very, very difficult, especially given who might be the owners. People with the skills aren’t very likely to work for a firm with financial ties to those companies in the Virgin Islands.

    Prospects for the industry itself are dim, as large chain eikaiwa is shrinking in terms of ESL industry market share every year. Nova lost billions of yen in FY2006 and FY2007, before the METI sanctions, which shows its business model was already broken. The first quarter of FY2008 was a bloodbath, with 4.5 billion yen in operational profit lost.

    More difficult things have been pulled off in business, but would Nova even find landlords willing to rent to it at this point? Even with a maximum 6.4 billion yen injection, the best Nova can do is clear all existing debts. Then it’s back to square one: and back to the annual loss of 2-3 billion yen, and they no longer have the best of the workforce, which has fled (the CFO, many AGMs, and on and on). All assets are pretty much gone and their own bank won’t lend to them. They might end up dying a slower death due to t he cash injection, but to turn it around? That would take some real skill and real PR skills.

    Not to mention, they could be delisted from JASDAQ. We also don’t know if METI will extend the punitive measures beyond December 14. No one’s talking about that yet, but it’s a possibility. Nova is still out of the kyufukin program, which will always hurt it.

20. df on October 12th, 2007 8:46 pm

    Yes I noticed the shrinking of market share among the top 5 over the last 3 years. While the total value of the eikaiwa market has increased (albeit slightly) there has been a trend toward smaller (?) operations - would be nice to know who they are and what models they are using - nothing too innovative I suspect, not a particularly dynamic sector.

21. Ken Worsley on October 13th, 2007 10:23 am

    df,

    would be nice to know who they are and what models they are using - nothing too innovative I suspect, not a particularly dynamic sector.

    I think that’s true for the most part, it seems as though the small operators are able to put more emphasis on quality from what I’ve heard.

22. df on October 19th, 2007 6:32 pm

    Schools closing…messily. What is your call for November Ken? Still think Nova won’t make it to December?

23. Ken Worsley on October 19th, 2007 7:09 pm

    df,

    I don’t think they will. A lot hinges on what happens with the report that was due today and whether or not the firm is delisted from the exchange. Even if they’re not, it will depend on whether they are able to secure any funding. It’s looking like the deal with the warrants has been exposed as a fraud, and the chances of it happening grow less every day. Even if it were to happen, the money won’t be usable for some time yet. I don’t think there’s much time left.

24. df on October 19th, 2007 7:49 pm

    I see, I didn’t hear about the developments with the warrants. If you are indeed correct then the fun business begins - how is Nova’s market share going to be carved up? Will be interesting.

25. Ken Worsley on October 19th, 2007 8:05 pm

    df,

    The thread here might be worth checking out, it’s a bit more updated than this one: http://www.japaneconomynews.com/2007/10/10/nova-checkmated/

    The gentleman who brokered Nova’s equity warrant deal was arrested last week.

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