Morgan Stanley backs Japan MBO

Morgan Stanley's private equity arm in Asia will today launch a tender offer to take control of and potentially delist Japanese lingerie retailer Ten Arrows.

Tomorrow has acquired two companies - Southern Eagle and Otto - which collectively own 27.8% of Ten Arrows. The two companies, which are currently owned by members of the Hayashi family who founded Ten Arrows, will then make a tender offer for the remaining 72.2% of the company valued at ¥11.33 billion ($105.4 million), or ¥800 per share.

Tomorrow is a company owned by an investment fund advised by Morgan Stanley Private Equity Asia (MSPEA).

The deal is structured as a management buyout and once it is completed, the founders of Ten Arrows will acquire a 49% stake in the business at an undisclosed price.

Current CEO Katsuya Hayashi will continue as CEO and the board of directors of Ten Arrows has approved the deal. No clarity was available on how the board of Ten Arrows will be re-constituted after the takeover.

Ten Arrows is based in Kobe in Japan and is currently listed on the Osaka Securities Exchange. It has been loss-making for four consecutive years. It was established in 1975 and sells ladies' innerwear, using a door-to-door sales service. Its sales have been declining over the past 11 years, which the company attributes to the door-to-door sales method losing popularity, intensifying competition in the lingerie sector and an aging distributor base.

The management of Ten Arrows said it is now necessary to radically restructure the company and spend money on developing both new suppliers and new distribution channels. The company is likely to be loss-making during the foreseeable future and will not be able to achieve forecast financials. Further it feels it must be closely held in order to be able to make quick decisions. All these factors are driving the decision to work with MSPEA to take the company private.

Daiwa will be making the tender offer on behalf of Southern Eagle and Otto, while Ernst & Young has done an analysis of the offer price on behalf of the acquirers. In the three-month period to September 16, which is the date the deal was announced, the share price traded between a low of ¥498 and a high of ¥600. The offer price translates to a premium of 61% to the low and 33% to the high.

A comparable companies valuation analysis based on Ten Arrows’ peers, gives the company an equity value ranging from ¥599 to ¥855 per share on an Ebitda multiple basis. A discounted cash flow valuation yields a value in the range of ¥646 and ¥908.

The offer price is a premium of 55% over the simple average of the share price over the past month and a premium of 42% over the simple average of the past 12 months.

KPMG was appointed by the board of Ten Arrows to carry out a valuation analysis. Its assessment suggests a value in the range of ¥518 to ¥535 per share based on market prices over the past six months; between ¥681 and ¥1,010 based on a discounted cash flow analysis; and ¥929 based on the asset value of Ten Arrows.

Since MSPEA began investing in the region in 1993 it has deployed $1.35 billion across projects and has been particularly active in China, South Korea and Taiwan. This is the first investment in Japan by MSPEA III, which closed in October last year.