Stocks are not merely pieces of paper or pixels on a screen. A share represents fractional ownership in a real business. This fundamental principle informs everything – from how a company’s intrinsic value is assessed to acting on behalf of clients as stewards of their capital. Here’s what that looks like in practice.
The importance of taking an active approach to equity ownership came into sharp focus in a recent situation involving one of our longstanding holdings in Japan. Tsuruha – a Japanese drugstore chain – has been a holding of the Orbis Funds for almost 25 years. Over that time, the company has delivered remarkable growth, and we hold the business in high regard.
In February of last year, however, we became concerned when Tsuruha committed to a three-way “Capital and Business Alliance” with another drugstore chain, Welcia, and its parent company, AEON, without agreeing on a price. The ultimate objective was to pursue a series of transactions in which Tsuruha would first merge with Welcia, followed by AEON taking a 50.9% controlling stake in the newly combined entity through a partial tender offer.
The potential for industry consolidation has long been an enormous opportunity for the fragmented Japanese drugstore industry. The benefits of company mergers can be meaningful, unlocking synergies and cutting inefficiencies. The merger between Welcia and Tsuruha would create Japan’s largest drugstore chain, and is expected to result in ¥50 billion worth of synergies – an increase of more than 50% of the newly combined company’s profits.
Exercising caution
While we welcomed the prospect of such a beneficial partnership, the process seemed flawed from the outset. A merger is a major decision for any company. Shareholders expect the board to carefully scrutinise the price being offered, key terms of the transaction, and to consider competing bids. In this case, it was not clear to us that any such process took place. If it had, how could the board have concluded it was the best outcome among alternatives when no price had been agreed?
We expressed these concerns in four letters to the Tsuruha board from February 2024 to April 2025, and also shared our views on what we believed would be appropriate terms for the merger and tender offer.
Recently, we were disappointed when we learnt the final details of the proposed transactions. The proposed share exchange ratio was less favourable to Tsuruha shareholders than we had expected, and the price of the tender offer – ¥11,400 per share – was well below our assessment of the company’s intrinsic value.
It was clear to us that Tsuruha shareholders should receive a greater share of the benefits of the merger, and that AEON should be paying a greater premium for control. (For context, AEON had purchased a 13.6% stake in a privately negotiated transaction in March 2024 for ¥15,500 per share.)
Taking action
Having been unsuccessful in our efforts to engage privately with the company, our next option was to vote against the merger at Tsuruha’s annual meeting. This is consistent with our approach to proxy voting, in which we aim to act in what we believe are the long-term interests of our clients. In this case, given the lopsided nature of the price and terms, we also went a step further, expressing our views publicly, and called on other shareholders to reject the merger. Despite independent objections from the global proxy advisory firms ISS and Glass Lewis, as well as many other institutional investors, the merger was approved by a narrow margin.
Our intention was not to necessarily stop the merger from going ahead – we still believe strongly that industry consolidation can provide huge benefits to the companies and their shareholders. We had hoped that, had the merger been rejected, Tsuruha, Welcia and AEON would have been forced to renegotiate the deal on terms that would have ensured that Tsuruha shareholders would have gained a fairer share of the benefits.
Our engagement with Tsuruha is just one example of how we put our stewardship principles into action. In 2024, our analysts held more than 800 routine research meetings with over 400 investee or potential investee companies. In some cases – such as Tsuruha – we believed it was necessary to escalate to a more formal engagement in response to areas of concern.
Our Responsible Investing (RI) team has helped develop a process to identify, prioritise, and monitor these cases, leading to a step change in activity in 2023. That momentum continued into 2024, particularly in Japan, and in several instances, it was encouraging to see our involvement contribute to improved outcomes for our clients. Thanks to the close collaboration between our analysts, portfolio managers, and our RI team, we are better equipped than ever to stand up for our clients when action is needed.