Established in 1969, Otsuka Kagu (TSE:8186, Financial) is one of Japan’s largest furniture retailers and operates in a fairly fragmented industry. The majority of the company’s sales are generated in the Kanto region, which includes the greater Tokyo metropolitan area. The population in this region has grown over the last two decades as aging baby boomers have been attracted to the conveniences the city offers.
Otsuka Kagu has been engulfed with a family feud in recent years, which led to a proxy fight over management control between father (the company’s founder and chairman) and daughter (current president). Since our initial investment, we have communicated with the company regarding two main items: 1) the structure of the board of directors, which at one point consisted mostly of the Otsuka family and other non-independent directors, and 2) the inefficient capital structure, as we believed the company retained too much excess capital, depressing shareholder returns.
Under Ms. Otsuka’s leadership, the company issued a medium-term business plan in early 2015 with three main objectives: 1) transform the business model, 2) institute an aggressive shareholder return policy and 3) improve corporate governance. We issued a statement to announce our support for Ms. Otsuka, as we believed that the company and its stakeholders would be in better hands with her and her newly appointed Board. Ms. Otsuka has been an advocate for transparency and independence. The announced dividend policy, which aimed to double the dividend over the next three years, also addressed our long-time concern about Otsuka Kagu’s inefficient balance sheet. Lastly, we believed the plan had a strong focus on improving the firm’s long-term value.
In late March, Ms. Otsuka won the proxy battle and began implementing her medium-term plan. The strategic direction and removal of a major overhang were well received by the market, driving up Otsuka Kagu’s share price. When the shares appreciated to our estimate of Otsuka Kagu’s intrinsic value, we sold our position.
In our opinion, the proxy fight at Otsuka Kagu and its outcome represent a good example of the power of a shareholder’s vote. As active managers in the small-cap equity space, we always seek to exercise our shareholder rights to communicate our views to the companies we hold, with the goal of assisting them as partners toward long-term value creation.
From the Brandes Emerging Markets Value Fund letter for the year ended Sept. 30, 2015.
