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Steel Partners sells off stakes in Bull-Dog and Kikkoman; TCI is holding paper losses in J-Power

Earlier today, the Nikkei reported that Steel Partners has sold off all of its shares in the Bull-Dog Sauce Company, as well as Kikkoman. A year ago, Steel Partners held about 10% of Bull-Dog shares, and launched its takeover offer in May. After the Supreme Court declared that Bull-Dog’s anti-takeover defense measures were legal, Steel Partners brought in about 2 billion yen from the company when it bought back its stock warrants. It has been speculated that Bull-Dog has spent up to 70% of its sales revenue from the past year on boosting its cross shareholdings.

According to the paper, Steel Partners also made about 2 billion yen from its investment in Kikkoman. Although we don’t know the reasons exactly why Steel has decided to pull out of its Kikkoman position, it is certain that Kikkoman is gearing up to spend quite a bit of money on a new ketchup factory in China as well as 6 or 7 soy sauce factories in South America, China, North America, Oceania, Southeast Asia and Eastern Europe. The construction is expected to cost tens of billions of yen and bring Kikkoman’s production volume near the range of an annual 1 million kiloliters.

Back on April 1, the Nikkei published a piece entitled Firms Begin To Dismantle Takeover Defenses As Benefits Remain Unclear, which highlighted the fact that there have been no successful hostile takeovers in Japan, that courts tend to be friendly to management, that takeover measures hurt share value, and that poison pill measures can be quite costly to a firm.

Six days later, the Nikkei published a piece entitled More Firms Adopt Takeover Defenses That Seek Shareholders’ OK which stated that 443 firms had adopted anti-takeover measures by the end of FY2007.

Finally, it’s worth noting that just as Steel Partners exits now from its Bull-Dog chapter with a profit, that The Children’s Investment Fund is estimated to be holding 16 billion yen in paper losses deriving from its investment in J-Power. Today’s Yomiuri tells us, “If TCI refuses to obey the government order (to stop purchasing shares in J-Power), the fund or its executives may face a fine or prison term of up to three years.”

J-Power has no anti-takeover measures in place.

Steel Partners cuts its bid price for Bull-Dog; Shares trading lower

Yes, Steel Partners is still going after Bull-Dog. No, there is no longer a premium attached to the bid price. Steel Partners has cut its bid price to 425 yen per share, and the issue is trading at 522 right now. Yesterday, trading on Bull-Dog was halted after the share price fell by its daily limit.

Steel Partners has extended the bidding period for Bull-Dog shares to August 10.

Steel Partners Loses an Appeal; Bull-Dog Loses About $15 Million

Yes, the Steel Partners vs Bull-Dog Sauce saga is still in the news. Earlier today, the Supreme Court of Japan rejected Steel Partner’s appeal against previous rulings that backed up Bull Dog’s anti-takeover defense plans. The Supreme Court, which backed away from the extreme language used by the Tokyo High Court in its previous appeals ruling, stated that treating Steel Partners differently to other shareholders “does not necessarily go against principles of equality if the shareholders’ collective interest is threatened.”

Although the Supreme Court did not issue an opinion on whether or not Steel Partners’ actions made it an “abusive quirer,” as the Tokyo High Court had previously said, the ruling did state that Bull-Dog’s actions were justified, because, “The company merely did not have any rules in place beforehand, but this does not mean that measures to address such situations are not allowed.”

Thus, the shareholder vote stands. Perhaps this could be a show of shareholder power? We would love to know what Scott Callon of Ichigo Asset Management would have to say on this.

In the end, Bull-Dog (unsurprisingly) got the legal backup it so dearly paid for. Although the firm has left its sales projections for the current fiscal year unchanged at 17 billion yen, it has revised its earnings forecast down from a 500 million yen profit to a loss of 980 million yen.

About 2.3 billion yen was paid out to Steel Partners in order to dilute their share in the company. We will be eagerly waiting to see Bull-Dog’s final numbers for this fiscal year…

More on Steel Partners and Bull Dog from Stippy and Japan Inc.

We’ve recently added the Japan Inc website to our list of links. If you haven’t read it before, check it out - as the byline reads, the site (and the accompanying print magazine) focuses on business, technology and people. There also happen to be some online personal ads in case you’re lonely.

I’m mentioning the site now because this week’s edition of Terrie’s take deals with Steel Partners, their attempted hostile takeover of the Bull Dog sauce company, and the resulting lawsuit/appeal/court rulings. Actually, as Terrie puts it, he is commenting on what someone else wrote on this same issue over at stippy.com.

So first, let’s look at the Stippy article, which is titled “Japan High Court Rules Against Saucy Gaijins“. The author starts by giving us some background information and then, concerning the Tokyo District Court’s decision to allow Bull Dog to issue equity warrants to all shareholders but buy back those from Steel Partners with cash rather than shares, asks this:

[W]asn’t the idea of a free market just that, it was free, and equal rules and fair competition by all ultimately drives up the value of the economy and the companies which are a part of it?

Well…not exactly. That’s not really the legally developed idea of a free market at all, unless you’re an anarchist (even a Libertarian would have to admit to some level of laws and regulations). Markets are also free to set limits on what constitutes “free and equal.” The principle of “equal rules and fair competition” thus does not leave out the possibility of defending against destructive forces, which is what this court case was about; the court ruled that Steel Partners was “abusive” in its dealings with Bull Dog shares. I’m certainly not saying that I support the court’s decision in this case (because I don’t - the court’s decision was basically insane), but there are two points to be made: 1) The idea of a free market is just that, an idea. As such, it is a slightly different concept in everyone’s mind, and thus exists in reality only as shadows on the wall of a cave. 2) Nothing even resembling an actual free market exists anywhere, and especially not in Japan.

That said, I don’t find the court’s decision surprising at all. It had the 80% support of Bull Dog shareholders to fall back on, as well as the business community’s distaste for hostile takeover bids, which must have been a strong silent pressure.

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All Shareholders not created equal: Tokyo High Court

Corporate law does not deny discrimination of some shareholders in an economic sense or in terms of voting rights fluctuations.

Tokyo High Court Presiding Judge Satoru Fujimura, in his ruling against Investment Fund Steel Partners last week.

Tokyo High Court Upholds Decision Against Steel Partners

On June 28, the Tokyo High Court rejected a petition from Steel Partners requesting that an injunction be placed against the Bull Dog sauce company, in order to bar it from issuing equity warrants as part of a ‘poison pill’ plan intended to dilute Steel Partners’ holdings in the company.

Steel Partners appealed that ruling immediately, and this afternoon it was announced that the court sided once again with Bull Dog. Steel Partners has still not withdrawn its takeover bid.

Bull Dog’s deadline comes and goes; Steel Partners’ tender offer still on the table

The management of Bull Dog had set today as the deadline for Steel Partners to withdraw its tender offer or be subject to a poison pill scheme designed to reduce its holdings in the company from about 10 to about 3 percent, but Steel Partners has refused to budge. The hedge fund says it has no reason to give up on the takeover bid before a ruling on an appeal by the Tokyo District Court is handed down. Steel Partners is challenging the legality of Bull Dog’s plans, and has expressed confidence that the court will agree with the fund.

Tokyo High Court Rejects Injunction Against Bull Dog

Earlier this afternoon, the Tokyo High Court handed down its ruling on the injuction that Steel Partners had saught against Bull Dog’s proposed ‘poison pill’ plan for diluting the hedge fund’s holdings in the sauce maker, and it ruled on the side of Bull Dog.

Reuters explains the logic behind the ruling:

The Tokyo District Court ruled that the issue of share warrants does not violate the principle of shareholder equality as long as the economic interest of shareholders is maintained.

Lawyers have said Japanese corporate law does not protect the size of a stake relative to other shareholders’ stakes, just its monetary value.

The logic there may seem fuzzy, but it should be kept in mind that judges in Japan rule on the letter of the law, and almost never inject their own interpretation.

Warren Lichtenstein, the manager of Steel Partners, had this to say:

We believe the company’s scheme, if allowed to be carried out, would be detrimental to the legal framework of corporate Japan. (It) would weaken international faith in the integrity of the Japanese capital markets, and would not only deter investment in Japanese companies but also undermine Japan’s efforts to become a global centre.

On the one hand, he could be very correct. On the other, if firms start to feel safe from the threat of hostile takeover, we may see a reversal in the trend of companies deciding not to go public with their shares due to fears of unsolicited takeover bids.

Steel Partners plans to appeal the ruling.

Fear in the air: Cross-shareholdings up, firms afraid to go public

Let’s talk about whether or not people here in Japan are listening to Warren Lichtenstein, the manager of the Steel Partners Japan Strategic Fund. Back on June 12, he was quoted in Bloomberg as saying, “After 15 years of recession, Japan is now waking to a completely different world. As long as we can find interesting opportunities to invest our capital to get good risk-adjusted returns, we will do it more and more.”

That certainly got some attention. So much attention, in fact, that we’re starting to see headlines like this: Equity Financing Tumbles As Firms Worry About Unsolicited Takeovers and Cross-Shareholdings Rose For 1st Time In FY06.

No doubt, these trends were in place well before Mr Lichtenstein spoke in Tokyo two weeks ago, but they are (at least in part) a reaction to what Steel Partners has been doing in Japan. Major banks have reportedly begun increasing their cross-holdings, perhaps in an attempt to secure that lenders keep coming to them.

To be fair, fear of being the target of an unsolicited takeover attempt is not the only reason that the amount of funds raised through IPOs is expected to fall 70% in the first six months of 2007. The Nikkei also attributes the drop to, “The prospects for higher interest rates, which is prompting [companies] to issue straight bonds earlier than initially planned.”

But which one got the headline?

Another thing Mr Lichtenstein said while in Tokyo:

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Warren Lichtenstein on the Bull Dog Vote

After this afternoon’s vote at the Bull Dog shareholders’ meeting, Steel Partners Japan Strategic Fund manager Warren Lichtenstein made the following comments in a written statement issued by the company:

We are disappointed that the proposed “SARs” (stock acquisition rights) have been approved. We believe that this anti-takeover measure will materially harm the Company’s value and question why the Board is using Company assets - that could otherwise be used for the Company’s growth - to oppose a bid by a supportive, long-term shareholder to acquire more shares in the Company. Such a scheme, if allowed to be carried out, would be detrimental to the legal framework of corporate Japan, would weaken international faith in the integrity of the Japanese capital markets and could deter investment in Japanese companies and Japan’s national economy as a whole.

Now all eyes turn to the Tokyo District Court, and whether or not it decides that Bull Dog’s plans are actually legal.

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