Asatsu-DK (9747): Are the Chances of a Counter Bid by WPP (or Any Other Global Ad Agency) Being Underplayed?

Whereas contested bids used to be a rarity in Japan, recently we had the Fujitsu (6702) bid for Solekia (9867) and the Panasonic (6752) bid for PanaHome. The October 3rd Bain bid for Asatsu DK [ADK] (9747) is part of a growing and welcome trend towards greater realization of shareholder value in the Japanese stock market, with ADK basically a latent asset play. Twenty years ago, ADK did a share swap with WPP (WPP LN), with WPP buying ¥30bil worth of ADK shares and ADK buying ¥20bil worth of WPP shares. Fast forward to now, and WPP’s holding is still only worth ¥30bil, while ADK’s holding is now worth ¥65bil. Add in the ¥20bil in cash on ADK’s balance sheet, and ADK has ¥85bil in liquid assets, against a pre-bid market cap of ¥130bil. In other words, real enterprise value is around ¥45~55bil, depending on the tax take on the sale of the WPP shares.  
Bain’s bid of ¥3,660/shr values ADK at ¥150bil in market cap, and ¥130bil in unadjusted enterprise value, falling to ¥55~65bil after sale of the WPP stake. With Ebitda of ¥7.5bil, this is a price of around 7~8x EV/Ebitda, which while fair for a manufacturing company, is on the low side for a creative industry stock like ADK (cf. Dentsu (4324) trades on 9.2x EV/Ebitda, while WPP itself trades on 8.6x). WPP objected straight away to the bid as being too low, which given that it has a stake of around 24%, represents a significant roadblock to the deal, although it is one that Bain probably anticipated. WPP’s objection is probably less to do with the valuation of ADK and more to do with the fact that WPP has made little return on its investment over a lengthy period. Had Bain offered considerably more, we suspect WPP would still have objected, which is why the initial bid premium of 13% is relatively low. We think Bain is keeping expectations low as to the final take-out price; it expects to have to raise its bid, but won’t want to go too high. 
Reports out on October 5th saw the affair move up a gear with WPP saying that 1) ADK’s termination of the partnership was invalid, therefore it would be contested, 2) WPP would not tender its shares and 3) it is “exploring options”. Major investor Silchester also said that it would not tender its shares, calling the bid too low, while pointing out that the recent sale of WPP shares was not tax efficient.  

Discussion Points 

• Bain’s bid is viewed as too low.
• Counter bids: why are there none?
• ADK’s margins are artificially low; with some serious spring cleaning, profitability could be a lot higher.
• Does Bain’s bid undervalue ADK?
• While this could be a unique opportunity for WPP, ADK’s attractiveness shouldn’t be limited to WPP