Nece Case

Nece Case Study

Perry Capital is evaluating its position in NECE. Fundamental valuation of NECE (Exhibit 1) shows that intrinsic share value is approximately 8900 Yen/Share. This is more than 3 times than current share price. As a private equity firm, one would consider this an attractive investment. The intrinsic value is calculated based on Perry's EBITDA multiple estimates. Current share price in the market is much lower than its intrinsic value. Much of it is due to NECE's continued investments in business units that are creating negative earnings, and its failure to cut down costs. While NECE is strong fundamentally, it fails to convert that success operationally. Given estimated growth rates of 2008-2010, we projected it to 2013 using average growth rate of 2008-2010. Exhibit 3 shows that Communications division will continue to drag the overall profitability of the business unless a major restructuring takes place.

Significant qualitative components accounted for NECE's low stock price. Japan's homogeny is a strong concern for any foreign investor in Japan. NECE was at a risk of delisting due to concentrated share ownership as part of a law in the constitution of Japan. Delisting would eliminate liquidity. It is also an accepted practice to incorporate a "poison pill" or other actions that dilute a foreign investor's stake in a Japanese company. Corporate governance is also weak, especially in regards to minority shareholders and government scrutiny. These issues lead to a lack of due diligence in effective corporate operations and profitability.

Regarding the impact of a parent's ownership of a subsidiary company, based on the R-squared results of the below regression analysis of the 6, 12, and 24 month periods, we see that the subsidiary performance as explained by the parent is low (exhibit 3); the success of the parent does not explain the success of the subsidiary. The strongest of the three subsets is in 24 months when the R-squared is still a weak 34%. In fact, based on the results of the differences in performance of P and Sub., we see that over time, the Sub's underperformance gets worse - 7%, 23% and 59% underperformance in 6, 12 and 24 months, respectively. Little effect noticed due to the percentage of ownership within the range of 70%-87%. While subsidiaries are subject to some benefits as an autonomous, publicly traded