Distribution of TEL Shares
TBS’ stake in Tokyo Electron (TEL) cannot be rationalised as a means of strengthening a business relationship between the two companies, as no such relationship exists. As we understand it, TBS’ business ties with TEL are limited to a capital infusion conducted 54 years ago and TEL’s occupancy of a TBS-owned building. A transaction that occurred more than half a century ago, and which has no bearing on the current performance of the company, is not an adequate justification for such a large shareholding. Nor is TEL’s occupancy of a TBS building.
TEL accounts for 19% of TBS’ assets and as such poses a large risk for shareholders and stakeholders. The quality of TEL’s business is not disputed, nor is TEL’s success and the positive impact it has had for all TBS shareholders. However, shareholders would have benefited to the same extent had they held shares in TEL themselves. The fairest, and most efficient, structure for shareholders to gain exposure to TEL is to own the shares directly. Thereafter shareholders can make an informed decision on the risk characteristics of TEL, appropriately evaluating whether they wish to bear such risk, and form their own conclusions on the merits of an investment in TEL.
It is a flawed argument to suggest that TBS is not exposed to undue, and uncontrollable, risks from its investment securities. A 50% decline in TEL’s share price would see TBS’ assets fall by 10%. Such a decline for the entire investment securities portfolio would reduce TBS’ assets by 27%. TBS management can do nothing to mitigate this risk, as the erratic nature of stock markets is out of their control.
TBS shareholders should receive an uplift on the distributed TEL shares, to the extent that the market places a discount on their valuation when held by TBS. TBS trades on a 33% discount to our estimate of intrinsic value, and, by definition, shares removed from this structure would have a no discount. While the gain is short-term, the narrower discount that TBS should trade on is permanent and should increase TBS’ corporate value over the long-term.
The distribution of TEL shares is a first step in the reduction of TBS’ discount, and in no way would such a small distribution damage TBS’ capital strength. The modesty of this partial distribution is highlighted when comparing TBS’ post-distribution balance sheet to its peers, and to its current standing.