TOKYO–(BUSINESS WIRE)–Sapporo GK:
January 29, 2020
To all parties concerned
Company Name: Sapporo GK
Managing Partner: Sapporo ISH
Executor of Managing Partner: Takaaki Fukunaga
Contact: Fortress Investment Group (Japan) GK
Contact for Media Relations: Ai Saito, Kekst CNC
Tel: +81-3-5156-0189 or +81-80-4818-4822
E-mail: [email protected]
While Sapporo GK (hereinafter referred to as the “Tender Offeror”) commenced the tender offer for the common shares of UNIZO Holdings Company, Limited (Code No.: 3258, Tokyo Stock Exchange) (hereinafter referred to as “Target”) on August 19, 2019 (hereinafter referred to as the “Tender Offer”), the Tender Offeror decided as of today to change the conditions of purchase, etc. through the Tender Offer.
Accordingly, the Tender Offeror hereby announces that the amendments shall be made to the “Announcement of Commencement of Tender Offer for Shares of UNIZO Holdings Company, Limited (Securities Code: 3258)” dated August 16, 2019 (including the portions amended by the “Announcement Regarding Amendments to the Press Release titled ‘Announcement of Commencement of Tender Offer for Shares of UNIZO Holdings Company, Limited (Securities Code: 3258)’ due to Changes of Conditions of Tender Offer” dated September 5, 2019, September 20, 2019, October 2, 2019, October 17, 2019, October 25, 2019, November 11, 2019, November 15, 2019, November 29, 2019, December 13, 2019, December 18, 2019, December 27, 2019 and January 20, 2020, respectively), as follows:
Portions to be amended are underlined.
1. Purpose, Etc. of Tender Offer, Etc.
(1) Overview of the Tender Offer
Thereafter, the Tender Offeror has been carefully considering various factors in addition to what is described below, including the tender offer commenced by Chitocea Investment Co., Ltd. on December 24, 2019 for the Target’s shares (the “Chitocea TOB”), the status of tenders by the Target’s shareholders for the Tender Offer and the prospects of shareholders tendering into the Tender Offer to be made hereafter, from a comprehensive perspective, the Tender Offeror determined that it was necessary to extend the Tender Offer in response to the Chitocea TOB. Therefore, on January 20, 2020, the tender offer period was determined to be extended to February 4, 2020, which is the last day of the Chitocea TOB period (hereinafter referred to as the “11th Change of Tender Offer Conditions”).
Thereafter, the Tender Offeror has been carefully considering various factors in addition to what is described below, including the tender offer commenced by Chitocea Investment Co., Ltd. (“Chitocea”) on December 24, 2019 for the Target’s shares (the “Chitocea TOB”), the status of tenders by the Target’s shareholders for the Tender Offer and the prospects of shareholders tendering into the Tender Offer to be made hereafter, from a comprehensive perspective, the Tender Offeror determined that it was necessary to extend the Tender Offer in response to the Chitocea TOB. Therefore, on January 20, 2020, the tender offer period was determined to be extended to February 4, 2020, which is the last day of the Chitocea TOB period (hereinafter referred to as the “11th Change of Tender Offer Conditions”).
On January 28, 2020, Urchin Holdings I Pte. Limited (hereinafter referred to as “Urchin”), an affiliate of funds managed and advised by Blackstone posted on the website of PR TIMES a press release titled “Blackstone Update on UNIZO Holdings (Securities Code: 3258); Blackstone Intends to Launch Tender Offer for Shares in UNIZO at JPY5,600 per Share, subject to UNIZO Consent” (hereinafter referred to as the “Blackstone Announce”). In this release Urchin announced that following recent developments in respect of the Target, including the commencement of the currently outstanding tender offer by Chitocea, it has reassessed its position in respect of the Target and announced its intention to cause its wholly owned subsidiary, Urchin BidCo GK, to launch a tender offer to acquire up to all of the outstanding common shares of the Target, at a price of JPY5,600 per common share (hereinafter referred to as the “Urchin TOB”), subject the Target’s consent and entry into an agreement between Urchin and the Target by April 30, 2020 setting forth, in further detail, certain additional terms in respect of such offer.
Thereafter, after carefully considering various factors in addition to what is described below, including the tender price of the Chitocea TOB (JPY5,100 per share), the status of tenders by the Target’s shareholders for the Tender Offer and the prospects of shareholders tendering into the Tender Offer to be made hereafter, from a comprehensive perspective, on January 29, 2020, the Tender Offeror decided to increase the purchase price per Target Share for the Tender Offer (the “Tender Offer Price”) to JPY5,200 from JPY4,100. Please note that although Urchin announced its intention to launch the Urchin TOB at a price of JPY5,600 per common share, according to the Blackstone Announce, Fortress considers that the likelihood of the Urchin TOB actually occurring is low, and therefore the above-mentioned contemplated price of JPY5,600 should not be seriously regarded, for the following reasons: (i) the Urchin TOB has not yet been commenced; (ii) the commencement of the Urchin TOB is conditioned upon the Target’s consent to the Urchin TOB and other conditions and, taking into consideration the contents of the Target’s press releases in the past, the fact that Fortress considers it unlikely that the Target will consent to the Urchin TOB. Accordingly, the tender offer period was determined to be extended to February 13, 2020, which is the day when the period of ten (10) business days will have elapsed counting from January 29, 2020 on which the Amendment to the TOB Registration Statement regarding such change was filed, pursuant to applicable laws and regulations (together with the above-mentioned change of the Tender Offer Price, hereinafter referred to as the “12th Change of Tender Offer Conditions”).
Fortress believes that (1) the Tender Offer is advantageous for the Target’s Shareholders, as the Tender Offer Price of the Tender Offer, after this 12th Change of Tender Offer Conditions, is higher than the tender offer price of the Chitocea TOB, (2) Fortress’s plans for the Target will result in job growth at the Target, given that Fortress intends to maintain the employment and employment conditions of the employees of the Target and will be aiming to increase the scale and scope of the Target group’s hotel management business by combining the Target group’s hotel operations with MyStays Hotel Management Co., Ltd (hereinafter referred to as “MyStays”) and (3) Fortress’s plans will appropriately preserve the interests of the Target’s creditors by causing the Tender Offeror or the Target group, after the Target becomes a wholly-owned subsidiary of the Tender Offeror, to procure funds necessary for a refinancing from one or more financial institutions and to refinance the existing Target’s interest-bearing debt, so that all of the creditors after the refinancing would be provided the same collateral pool. In conclusion, Fortress believes that the Tender Offer, together with Fortress’s plans for the Target after the Tender Offer, is superior for all stakeholders of the Target, when compared to the Chitocea TOB. For the contents of the plans concerning the refinance mentioned in (3) above, please refer to the “(iv) Fortress’s Plans for the Business and Synergies as Sponsor” below.
(i) Details of the Target’s Previous Proposal to Tender Offeror
After reviewing the details of the Chitocea TOB, as described in the tender offer registration statement filed by Chitocea on December 24, 2019 (the “Chitocea TOB Registration Statement”), Fortress determined that it was possible that the Chitocea TOB, and post-TOB plans, disclosed in the Chitocea TOB Registration Statement could be substantively similar to a plan that the Target proposed to Fortress in September 2019 (the “Target’s Plan”). Therefore, the Tender Offeror determined that additional details of the Target’s Plan, and Fortress’s views of such plan, could be helpful for the shareholders of the Target to make decisions on whether or not to apply for the Tender Offer or Chitocea TOB, even though Fortress has already disclosed a description of the Target’s Plan in its amendment of the Tender Offer registration statement filed on October 2, 2019.
Specifically, in discussions and negotiations with the Target to raise the Tender Offer Price, the Target’s management, in a meeting between the Target and Fortress held at its offices on September 5, 2019, proposed a written 6-page plan whereby approximately JPY98.2 billion in proceeds from the sale of four US office buildings owned by the Target group would be used, not to reduce the debt of the Target group, but would instead be used by a company owned by the Target’s employees and others to purchase all of the equity shares and the TK interests in Sapporo GK, which owned all of the shares of the Target at the time. The Target told Fortress that Fortress must agree to the Target’s Plan immediately or else the Target would begin negotiations with The Blackstone Group (a fund operated or advised by Blackstone Singapore Pte. Ltd. or its affiliate; hereinafter referred to as “Blackstone”). Details of the Target’s Plan are as follows:
1. The Tender Offeror would raise the Tender Offer Price to JPY5,000 and procure the funds necessary for the Tender Offer from funds managed by Fortress through investments with a total amount of approximately JPY171.7 billion (bridge capital of JPY124.9 billion and equity capital of JPY46.8 billion).
2. After the Tender Offeror owned 100% of the Target, the Target made a loan of JPY124.9 billion and paid a management fee of JPY4.2 billion to the Tender Offeror, and then the Tender Offeror was to reimburse JPY129.1 billion (the sum of the bridge capital of JPY124.9 billion and JPY4.2 billion) to the equity investors of the TK interests as a part of the redemption of the capital contribution of TK interests.
3. An SPC owned by Employees and others (the “Employee SPC”) would acquire all of the interests in the Tender Offeror and all of the TK interests of the Tender Offeror at JPY93.6 billion (twice the amount of the original equity capital of JPY46.8 billion). The Employee SPC would pay this amount of JPY93.6 billion under a deferred payment scheme where JPY50 billion would be paid in March and JPY43.6 billion would be paid in June. As the Tender Offeror would own 100% of the Target, the Employee SPC would in turn own 100% of the shares of the Target indirectly through the Tender Offeror by owning all of the TK interests of the Tender Offeror, and the Employee SPC would have access to the Target’s cash and assets. Thereafter, the Employee SPC would utilize the proceeds generated by the sale of four US office buildings (685 Third Avenue and 40 W 25th Street in New York, and 1325 G Street and 1100 First Street in Washington DC) as a source of funds for these deferred payments. In addition, the Employee SPC would pledge its 100% ownership of the Target shares as collateral for its obligations for the benefit of the Tender Offeror to secure the payment to Tender Offeror’s investors.
4. After the series of transactions set out in 1. Through 3. above, the ultimate result was to be that JPY222.7 billion of the Target group’s cash would be used by June 2020 to make the repayment of the investment capital of the Fortress-managed funds.
Fortress noted that the sale of these US assets and planned use of sales proceeds under the Target’s Plan would substantially reduce the Target group’s tangible assets and most likely result in the Target having a negative consolidated tangible book value (calculated as the book value of all assets minus intangible assets, debt and other liabilities). Fortress also noted that the Target group faced significant debt repayments over the next 27 months (according to the Target’s annual report for the fiscal year ended March 31, 2019 (herein, the “Target’s 2019 Annual Securities Report”), JPY277 billion of debt (JPY25 billion of bonds and JPY252 billion of loans) is due by March 31, 2022) and thus Fortress believed, from the prospective of the financial soundness of the Target Group, that it was important for the Target to maintain a cushion for its secured and unsecured creditors. Fortress additionally noted that the Target group, as of March 31, 2019 (based on the Target’s 2019 Annual Securities Report), had outstanding unsecured corporate bonds of JPY104 billion plus outstanding unsecured corporate loans of at least approximately JPY211.9 billion, and the Target’s Plan would have substantially reduced the amount of assets available to repay existing creditors. The Target explained that these loan and bond agreements did not include a change of control clause (FN) or other contractual protections for unsecured creditors. However, even if the Target group’s unsecured creditors do not have such rights under their agreements, as a potential sponsor of the Target, Fortress considers it important to consider the interests of all stakeholders of the Target, including employees and shareholders as well as its creditors, and the Target’s Plan seems likely to harm the interests of the Target group’s creditors and negatively impact the business of the Target group.
(Note) “Change of Control Clause” is a clause in a contract that prohibits, or otherwise creates a termination right or accelerates termination of the contract, upon certain material events such as a change in the controlling persons of one of the contractual parties or a material change in the management structure, or that requires a party undergoing such material event to give prior notice to or receive prior consent from the other party to the contract.
(ii) Details of Tender Offeror’s Counter Proposal and Target’s Response
Given the concerns listed above in (i), Fortress did not agree to the Target’s Plan. Rather, on September 5, 2019, Fortress attempted to discuss with the Target several alternative plans, including an alternative corporate reorganization plan (the “Alternative Plan”), which would involve refinancing all outstanding debt of the Target group, as well as a merger and other consolidation of corporate entities that would enable all of the Target group’s assets in Japan to be collectively held in one entity for the protection of the Target’s creditors.
Under the Alternative Plan, Fortress intended that the Target group’s hotel operations would be combined with MyStays, thereby increasing the scale and scope of the Target group’s hotel management business. The intent was to retain all employees and ultimately expand business activities, potentially allowing the Target group to access third party JREIT capital in the future.
The Target refused to hold discussions on the Alternative Plan, and on September 9, 2019, the Target unilaterally stopped all negotiations with Fortress. Fortress believes that the Target instead began negotiations with Blackstone and other sponsors, in order to find a sponsor that would support the Target’s Plan. In its September 27, 2019 press release, the Target disclosed that it had been negotiating with Blackstone regarding a proposed scheme whereby an Employee Ownership Company would have a call right to acquire the equity interest in the Target at 2.0 times Blackstone’s equity commitment within 15 months after the completion of the squeeze out. We believe that this disclosure indicates that some plan similar or equivalent to the Target’s Plan was discussed between the Target and Blackstone.
Furthermore, according to certain news and other reports (FN), the Target has initiated a formal marketing process for all of its US assets, and over the past three months the Target has entered into purchase agreements for three of its significant US assets (685 Third Avenue and 40 W 25th street in New York City, and 1325 G Street in Washington DC). It was said that these sales are expected to generate over approximately JPY76 billion in proceeds. From such news as well as other sources, we assume that the Target is proceeding with some plan similar or equivalent to the Target’s Plan.
(Note) As reported in articles on the “Crain’s New York Business, “The Real Deal” and “Washington Business Journal” news sites (among others), on September 19, 2019 (Crain’s), November 6 and 7, 2019 (Real Deal) and October 21, November 15 and December 27, 2019 (Washington Business Journal).
(iii) Chitocea TOB Structure and Disclosure
In addition, on December 24, 2019, Chitocea, a company 73% substantially owned and controlled by the Target’s employees (FN), commenced the Chitocea TOB. According to the Chitocea TOB Registration Statement, Chitocea was incorporated in December 2019 with the paid-in capital of JPY10,000 and the necessary funds for the Chitocea TOB would be up to approximately JPY174.8 billion. These necessary funds are to be provided by the issuance of the preferred stock of Chitocea (the “Preferred Stock”) amounting to up to JPY45 billion to LSREF6 UNITED INVESTMENTS S.ÀR.L., in which LSREF6 Affiliate Finance (Cayman), LLC (an affiliate of Lone Star Real Estate Fund VI, L.P. (“LSREF6”) (one of the funds advised by Lonestar (which shall collectively mean Lone Star Global Acquisitions, Ltd. (which is registered with U.S. SEC as an investment advisor) or its subsidiaries and affiliates, and the funds to which these entities provide investment advisory services))) makes contributions, and the borrowings amounting to up to JPY130 billion from KF Solutions (“KF Solutions”), a LSREF6’s investment firm in Japan (the “Loan”). According to the Chitocea TOB Registration Statement, except for the issuance of preferred stock to LSREF6 and the Loan from KF Solutions, Chitocea seems not to plan to procure any meaningful funds necessary for the Chitocea TOB. As such, if both the Chitocea TOB and the two-step acquisition contemplated to be performed thereafter are successfully completed, Chitocea will gain 100% control of the Target without substantially investing any of its own funds. Instead, it would become possible for Chitocea to utilize the cash and deposits and other assets held by the Target group in order to pay the redemption money for the Preferred Stock to LSREF6 and to repay the Loan to KF Solutions.
(Note) According to the Chitocea TOB Registration statement, as of December 24, 2019, Chitocea and LSREF 6 UNITED INVESTMENTS S.ÀR.L. owned common stock of Chitocea equivalent to 73% and 27%, respectively, of all issued and outstanding common stock of Chitocea, with voting rights of Chitocea being held 37.3%, 60.6% and 2.1% by a Second Stock Ownership Company, Limited, Third Stock Ownership Company, Limited, and Fourth Stock Ownership Company, Limited, respectively, each of which is entirely owned by Employees of the Target Group.
Also, in the October 10, 2019 press release titled “Notice of Revision in Consolidated Earnings Forecast for the Fiscal Year Ending March 31, 2020” (the “October 10 Press Release (Earnings Forecast)”), the Target stated: that it made a downward revision as to the consolidated operating income for the six months ended September 30, 2019 by 10.1%; that the prices of real estate in Japan have peaked; that rents in some cities in the United States are on a downward trend; that in the hotel sector in Japan, the pace of growth in the number of hotel guests from abroad has slowed; that Japanese guest numbers are on a downward trend; and that overall room capacity as well the construction of new hotels is continuing, leading to a worsening in the supply-demand balance. Further, the Target stated that it would complete its capital recycling program ahead of schedule and repay debt to lower interest expenses, considering such changes in the business environment.
Meanwhile, according to the Chitocea TOB Registration Statement, after the two-step acquisition, the Target is expected to provide joint and several guarantees of the JPY130 billion loan by KF Solutions (we noticed that the interest rate of the Loan was not disclosed, despite the fact that it is to become a material recourse obligation of the Target). According to the Chitocea TOB Registration Statement, the Loan shall become payable six month after the initial drawdown date (in a lump sum). As a result, assuming borrowings of the maximum amount of JPY130 billion from the Loan, the Target group’s debt burden (including the joint and several guarantee obligations as to the Loan) will increase significantly to approximately JPY662.2 billion (the amount obtained by adding JPY130 billion of the joint and several guarantee obligations as to the Loan to the balance of loans and bonds as of September 30, 2019, as stated in the Target 2nd Quarterly Report for 43rd Fiscal Year filed by the Target on October 30, 2019), and therefore the Tender Offeror estimates that the Target group will face further pressure to pay back approximately JPY407 billion of debt for the period from March 31, 2019 to March 31, 2022 (the amount obtained by adding JPY130 billion of the joint and several guarantee obligations as to the Loan to the amounts of loans and bonds scheduled to be repaid within three years from March 31, 2019, as stated in the Target’s 2019 Annual Securities Report).
The Chitocea TOB and the joint and several guarantee obligations assumed by the Target incidental thereto clearly runs counter to the Target’s stated plan announced in the October 10 Press Release (Earnings Forecast) to reduce debt, will reduce corporate value and, therefore, Fortress believes that the Target should neither have agreed to or endorsed the Chitocea TOB.
Additionally, according to the Chitocea TOB Registration Statement, it is planned that Chitocea will be entitled to exercise the call options of up to JPY45 billion of the Preferred Stock to be owned by LSREF6 in consideration for cash (that is, Chitocea will be granted a redemption right). In what Fortress believes is a clear omission of material facts, the Target has not disclosed the amount of funds that would be required to redeem the Preferred Stock, in the event of such redemption. Fortress believes that Chitocea would exercise its right to redeem the Preferred Stock for the reasons outlined below, but the Target has not disclosed the redemption terms of the Preferred Stock, including the redemption price. However, based upon the contents of the Target’s Plan previously proposed to Fortress and its negotiations with Blackstone, Fortress believes that there is a possibility that such redemption amount will be for substantially more than the investment of up to JPY45 billion to be made by LSREF6.
According to the Chitocea TOB Registration Statement, it is contemplated that if Chitocea does not redeem the Preferred Stock held by LSREF6 within a certain period, then LSREF6 can obtain 99.99% control of Chitocea by means of the exercise of a call option on the common stock of Chitocea. Fortress believes that this arrangement is substantially inconsistent with the Target’s extremely peculiar claim that, in determining whether or not an acquisition proposal would contribute to maintaining and increasing its corporate value, it is material that some “structure” to ensure the employment of the Target’s employees be in place and that the Target continues to be a worthwhile workplace for its employees—a claim that supposedly formed the basis for the repeated requests to Fortress to add a company substantially controlled by the Target’s employees as a contracting party to the relevant agreement, in order to perform the contractual obligations thereunder for the protection of the employees after the completion of the Tender Offer.
Fortress Investment Group (Japan) GK
Media Relations: Ai Saito, Kekst CNC
Tel: +81-3-5156-0189 or +81-80-4818-4822
E-mail: [email protected]
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