Elliott builds activist stake in 146-year-old Japanese conglomerate

The activist fund Elliott Management has become one of the largest shareholders of Dai Nippon Printing — a 146-year-old Japanese conglomerate with a huge but unheralded global share in components of electric vehicle batteries and smartphone screens.

The stakebuilding adds to only a handful of investments that Elliott has previously made in Japan — with Masayoshi Son’s SoftBank Group and Toshiba the most prominent. People close to the fund characterised it as an experiment in extracting trapped value that could pave the way for significantly more activity.

Elliott has quietly increased its investment in DNP over the past few months, according to people familiar with the situation, and now holds a stake of a little less than 5 per cent worth about $300mn, making it the third-largest external shareholder.

People close to DNP said Elliott’s initial engagement with the company, which has a market capitalisation of $6.3bn and currently trades where it did 20 years ago, has focused on a series of demands: a more aggressive share buyback scheme, the sale of its sprawling real estate holdings and an accelerated disposal of its extensive portfolio of shares in other Japanese companies.

DNP confirmed Elliott’s investment but declined to comment on details of its engagement with individual shareholders.

If Elliott’s campaign is successful, it could bolster other shareholder campaigns in a market that has already drawn the likes of Dan Loeb’s Third Point and Oasis Management. Earlier this month, US hedge fund ValueAct called on shareholders in Seven & i to back a tax-free spin-off of the conglomerate’s 7-Eleven convenience store business.

Activists, both foreign and domestic, see Japan’s equity market as being rich with targets: about half of companies are trading below their book value, and, according to analysts, more than a third of non-financials sit on hoards of cash that represent more than 20 per cent of their equity.

DNP is planning a meeting in March to present the main pillars of a new medium-term business strategy to investors. The company said it would listen to the voices of Elliott and other shareholders in compiling the strategy.

That process, said other holders of DNP shares, could in theory help refocus the market’s attention on a company with a potentially much greater value given its status as one of Japan’s “hidden treasures”, with outsized market share in niche areas.

These include the metal masks used to make small OLED screens of the type used in Apple and Samsung smartphones. A Nomura Securities report described DNP’s global share as so large “that the market is almost an oligopoly”, with no major competitors.

Similarly, DNP developed over a number of years a technology that produces pouches to contain lithium-ion in electric vehicle batteries. The company now has 70 per cent of the global market, with its end customers including GM, Volkswagen, Renault, Ford and Nissan.

The company, with business interests also ranging from printer ribbons to food packaging and book shops, has followed a classic pattern of many older Japanese companies. It has amassed an unwieldy portfolio of cross-shareholdings in other listed companies that now represents more than 30 per cent of its total assets.

As well as unnecessarily trapping value, these holdings are widely regarded as a heavy drag on good corporate governance and efficient capital allocation.

A report by Institutional Shareholder Services, published ahead of DNP’s annual shareholder meeting last June, recommended a vote against the reappointment of the company’s 89-year-old chair, Yoshitoshi Kitajima, and his son, Yoshinari, who is president. The two, who were both reelected, hold a stake of less than 1 per cent in the company between them. ISS had claimed the responsibility lay with them for DNP’s alleged capital misallocation.

Although the company had previously said it would address its cross-shareholding issues, ISS found it had allocated 36.8 per cent of its net assets to stakes in other companies.