Questioning Nintendo's Secondary Offering

On February 23, 2007 after the close of trading in Tokyo, the Nintendo Company (NTDOY.PK) announced that 1.987 million shares of its common stock held by Banks Shareholdings Purchase Corporation through Japan Trustee Services Bank were going to be sold in a secondary offering.

These shares represented the entire stake in Nintendo owned by this government-controlled body, which was established in 2002 to buy stocks from banks. Such stock purchases were designed to prevent the wholesale liquidation of stocks, as banks were required to cut cross-shareholding arrangements with customers. The shares being sold equal about 1.4% of all the outstanding shares of common stock in Nintendo.

This government entity started selling shares in various companies in January 2007. It has until 2017 to unload all its holdings. Data on the size of its holdings in each company is not available.

Bloomberg reported that Ken Toyoda, a Nintendo Company spokesman, said by telephone that Nintendo initiated the sales by approaching the government-body. Reportedly, Nintendo is looking to widen its shareholder base and encourage shareholding by individual investors and it saw this as a way to achieve those objectives. The company noted that the popularity of its DS handheld player and Wii console have caused a growing interest in owning Nintendo stock.

What was Nintendo management drinking when they came up with this idea? Encouraging a large shareholder to liquidate their entire position is stupid and a disservice to all Nintendo shareholders. It artificially increases the supply of stock or float and acts as a significant depressant on the price of the stock.
Management’s portrayal of this as a way to expand the shareholder base is absurd and evidences a total lack of investment knowledge. It strongly suggests that Nintendo management needs to learn the basics about the care and feeding of shareholders.

If they want to increase the number of shareholders, there are at least two actions they need to immediately take. First, they need to institute a stock-split to reduce the current stock price to a lower level. How many gamers and other individuals can afford to pay more than 30,000 yen ($250) for an ownership position?

Second, they need to officially sponsor the issuance of Nintendo shares in the United States where Nintendo has a large and growing fan base. Those shares could then be traded on the New York Stock Exchange or the NASDAQ and the company would enjoy much higher visibility. Currently unsponsored Nintendo ADRs trade in the pink sheets and there are only 50 million such shares registered with the SEC. Their underlying 6.25 million shares represent only about 5% of the total outstanding shares of Nintendo.

At the end of 2006, Nintendo had 866.6 billion yen ($7.2 billion) in cash and deposits and that was up 71.4 billion yen ($595 million) from December 31, 2005. The company clearly has more than enough cash and cash equivalents to simply buy the entire block of stock from the government entity and reduce the number of shares outstanding or use those shares to support the issuance of ADRs in the U.S. The cost of such a purchase would be about 67.3 billion yen ($557 million) as of the day of the secondary was announced and absorb less than 10% of Nintendo’s cash.

Nintendo management can still rectify their grave mistake by instituting a major stock buyback before, during, and after the secondary offering, which is scheduled for early March 2007. It is the only way they can easily make amends for the needless pain they have inflicted on their loyal shareholders by violating the fundamental tenets of maximizing shareholder value.

Disclosure: Author is long NTDOY.PK

NTDOY.PK 1-yr chart:

Comments

[matthew riva:]

The Good Doctor returns. Keep the detailed insight coming. I concur with your sentiments on Nintendo needing to buy back shares instead of having the Banks dump the stock on the market. They could easily sell their stake in both the Seatlle Mariners and Atlanta Hawks to buy back shares, and then split the stock. Many gamers have meager savings, so a lower stock price would be a big help in boosting NTDOY's stock price. Hopefully someone in Osaka hears your voice and acts on your sage advice.
Landman76

2007 Mar 02 12:30 PM

[twoeyes:]

Are there any behind-the-scenes negatives to having the government controlled bank owning shares in the company?

2007 Mar 02 01:27 PM

[akindman:]

Honda (HMC) also gave the same reason (about increasing individual shareholders) for triggering their BSPC unloading. I assumed this was just a generic excuse and not the true rationale, because as you say it seems to make little sense.

2007 Mar 02 01:43 PM

[Steven Towns:]

Good coverage/discussion of this news, but I don't believe it will be as bad as you think -- the impact should be rather limited as opposed to being very hurtful to current shareholders (see further explanation below).

If one is a long-term shareholder, then why not view this as a buying opportunity?

Indeed, as a reader commented, Honda (HMC) is undergoing a similar situation (click here for related story: Honda: Buying Opportunity Coming Soon). They are making the same case as was pointed out, which I believe is genuine, as Japanese companies look to broaden shareholder base, esp. among individuals.

Amidst the current global/Japan sell-off, it looks like a good entry point for both, and especially for Nintendo, during the offering.

At any rate, I wanted to say that it doesn't seem likely Nintendo will buyback shares at this point, since it's concerned about enlarging its shareholder base. Another thought is, why buyback now, when they could have acted earlier and bought at considerably cheaper levels; although of course they might not have expected the market's bullishness. If I remember correctly, they have acknowledged they are considering splitting their ordinary shares to make them more reasonably priced in 100 share units, but in reality, still too costly for some (ex. ¥30,000 x 100 shares [-->US$] = >$25k)　-- but don't forget there's a "mini" purchase system to counter the 100 unit block req. They'll likely boost their dividend too, since they have a very strong balance sheet and FCFs. I wouldn't rule out special dividends.

The forthcoming offering shouldn't be viewed too negatively. It will probably only take a few days for the market to absorb, but beyond that, I don't think much has changed, in fact, there should be more liquidity instead of where before, there was more of a passive holding -- unless institutional buyers grab shares for long positions.

I definitely agree they need to get their ADRs listed on NYSE/Nasdaq. I think this will happen, maybe even by year's end.

Disclosure: I do not own shares of Nintendo.

2007 Mar 02 10:05 PM

[tekhnofiend:]

I just wanted to mention that the problem is not that Nintendo does not offer their stock as ADRs on the NYSE, because they do indeed have 2 ADRs listed. The issue (I'm pretty confident this is the correct picture) is that the ADRs aren't officially sponsored and are pretty low volume as compared to total number of outstanding shares.

2007 Mar 04 10:12 PM