BREAKINGVIEWS-Elliott's Toyota bet already looks golden

By Hudson Lockett

HONG KONG, Jan 23 (Reuters Breakingviews) - A U.S. hedge fund has picked the right target, the right opponent, the right argument and the right time with its challenge to insiders’ $36 billion bid to take Toyota Industries 6201.T private. Having helped successfully press Akio Toyoda and other Toyota group insiders for a higher offer, Elliott Investment Management led by Paul Singer has now upped its stake in Industries to about 6.7%, according to a disclosure on Thursday. The move underscores that there is more to gain from this campaign in Japan than just return on investment.

The shareholding of nearly 7% recalls a similar stake taken by Elliott in its bid to block an intergroup merger at Samsung in 2015. While shareholders narrowly waved through that deal after the South Korean group sent them fruit baskets, the environment for activism today in Japan appears more evolved. With its latest bet, Elliott is already winning: the take-private consortium, which includes Toyota Motor 7203.T and unlisted real-estate firm Toyota Fudosan, raised their proposal by 15% last week to 18,800 yen per share.

Back-of-the-envelope maths suggest Elliott paid around 16,650 yen per share across September and October for its original stake of 5.01%. That shakes out to a cost of purchase of around 255 billion yen, about $1.6 billion at current exchange rates. Even at the revised offer price, that would amount to a return of about 33 billion yen on the activist's initial stake.

But as of Friday afternoon in Tokyo, shares in Industries were trading at 19,600 yen, 4% above the tender offer price. That represents a potential barrier to insiders’ deal: if minority shareholders want to cash out their shareholdings, they would do much better to sell into the market if they can find buyers than take the tender offer. A Breakingviews estimate suggests the consortium's higher offer still undervalues its target by 39%.

Elliott can’t take sole credit for share price resistance, nor for the revised tender offer. An open letter in August from the Asian Corporate Governance Association flagged obvious deficiencies in the deal. The U.S. fund, though, is due recognition for doubling down on its bet.

Even if the tender is successful at the current offer price, a larger stake could play to Elliott's advantage in court by bolstering its claim to speak on behalf of minority shareholders. Either way, the fund will have still broken new ground as an activist in Japan by taking on an iconic conglomerate and proven itself a trustworthy partner to other minority shareholders—as well as banking a return. That makes a bigger stake well worth the cost.

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CONTEXT NEWS

U.S. activist firm Elliott Investment Management has increased its stake in Toyota Industries to 6.65%, up from 5.01%, according to a filing made on January 22.

The rise in the activist’s stake comes after a consortium led by Toyota Motor on January 14 raised its offer for the listed forklift maker to 5.65 trillion yen ($35.6 billion), or 18,800 yen per share, up from 16,300 yen, as part of a plan to take the firm private.

Toyota Industries shares were trading at 19,600 yen in afternoon trading in Tokyo on January 23.