3D Investment Partners Issues Open Letter to Sapporo’s Board of Directors Reiterating Concerns Regarding the Company’s Severe Lack of Capital Discipline Amid Repeated Large-Scale M&A Impairments

TOKYO--( BUSINESS WIRE )-- 3D Investment Partners Pte. Ltd., the asset management company of 3D OPPORTUNITY MASTER FUND (collectively referred to as “3D,” "we" or "our"), is a major shareholder of Sapporo Holdings Limited ("Sapporo" or the "Company") (2501.T). Today, we have sent an open letter (the "Open Letter") to Sapporo’s Board of Directors (the “Board”) reiterating our concerns regarding deficiencies in capital discipline that have impaired corporate value over many years.

The Open Letter also includes a list of questions that we believe the Board and the Audit & Supervisory Committee should address in advance of Sapporo’s 101st Annual General Meeting of Shareholders (the "AGM"), scheduled to be held in March 2025, to ensure that shareholders have sufficient information to make informed voting decisions.

Concerns Over Sapporo’s Lack of Capital Discipline

Our concerns regarding Sapporo’s lack of capital discipline are based on the following points:

• The Company continues to maintain its real estate business, which generates a return on invested capital (“ROIC”) significantly below its cost of capital.
• The Company’s operating profit margin is the lowest level among its global competitors.
• All major overseas acquisitions in the Company’s core Alcoholic Beverages business have resulted in significant impairment losses.

For nearly three years, we have engaged in constructive dialogue with Sapporo’s Board and management to share our perspectives and offer recommendations for addressing these issues. We have urged Sapporo to maximize investable resources through a review of its business portfolio and the improvement of profit margins in the Alcoholic Beverages business. Furthermore, we have called for greater capital discipline and the establishment of a reinvestment strategy aimed at achieving high ROIC, which is essential for the long-term growth of corporate value.

Most recently, in our letter dated February 6, 2025 (the “February 6 Letter”), we expressed strong disappointment and concern over Sapporo’s announcement on January 30, 2025 that it recorded an impairment loss of JPY 13.9 billion on the goodwill of Stone Brewing ("Stone"), which the Company acquired in 2022 for approximately JPY 25.1 billion.¹ This impairment was a major factor in the approximately 12% year-over-year decline in net profit for fiscal year 2024.

Repeated Failures in Capital Allocation and Irreversible Erosion of Corporate Value

Unfortunately, the Stone impairment was not the first time Sapporo destroyed shareholder capital through acquisitions. In fact, Sapporo has recorded impairment losses on all of its acquisitions of overseas alcoholic beverage businesses, including Sleeman Breweries, Sapporo Vietnam, Anchor Brewing (“Anchor”), and Stone. The cumulative impairment losses from these acquisitions amount to approximately JPY 38.0 billion, with Anchor alone accounting for JPY 11.9 billion due to the decision to shut down its operations in 2023. In our experience, such an uninterrupted track record of failure is unprecedented in the alcoholic beverage industry and should be cause for serious reflection and concern on the part of the entire Board.

Sapporo’s history of failed capital allocation is of great and immediate concern. According to Sapporo’s public disclosures, the Company is currently planning to effectively divest its real estate business, the expected proceeds from which are equivalent to at least 70% of Sapporo’s market capitalization.² While Sapporo’s Board has stated that it is considering various strategies for reinvesting the proceeds, it has indicated a strong intention to allocate a significant portion to growth investments in the Alcoholic Beverages business, including large-scale M&A.

While we acknowledge the Board’s efforts to unlock the value of Sapporo’s real estate assets, we are deeply concerned that, without more effective oversight and enhanced capital discipline, the Company’s past capital allocation failures are likely to be repeated.

Request for Public Responses to Our Questions

We believe that Sapporo’s current Board, particularly its Audit & Supervisory Committee members, lack the expertise and capital discipline required to maximize the sale price of the Company’s real estate assets and to appropriately reinvest the proceeds. In our view, continued misallocation of capital could lead to irreversible destruction of corporate value.

Accordingly, in our February 6 Letter, we requested further explanations regarding the root causes of these issues. Our goal was to engage in private discussions with the Board, consistent with the principles of Japan’s Stewardship Code, to identify and address these problems.

However, the Board has yet to provide a substantive response to our February 6 Letter. Consequently, we are issuing this Open Letter, which is copied below, imploring the Board to answer the questions we previously posed.

We call on the Board to engage in self-reflection and to provide public responses to our questions for the benefit of all shareholders. The Board must also clearly explain the corrective measures it plans to implement to address the lack of capital discipline. Sapporo’s shareholders have a legitimate interest in receiving answers to these questions ahead of the upcoming AGM so that they have sufficient information to make informed decisions and, if necessary, hold the Board accountable for its failures of oversight and capital discipline.

The full text of the Open Letter, along with the list of questions directed at the Board and the Audit & Supervisory Committee, is copied below.

February 18, 2025

Sapporo Holdings Limited
4-20-1 Ebisu, Shibuya-ku, Tokyo
Attn: Board of Directors
(Cc: Mr. Hiroshi Tokimatsu, Executive Group Managing Officer)

1 Temasek Avenue
#20-02A Millenia Tower, Singapore
3D Investment Partners Pte. Ltd.

Dear Board of Directors,

We write to express our continued frustration and concern with the Board’s lack of a timely and substantive response to our inquiries regarding the root causes of the Company’s acquisition failures and lack of capital discipline.

As we have repeatedly pointed out, Sapporo’s consistent suboptimal allocation of capital has resulted in impairment losses on all of the Company’s overseas alcoholic beverage acquisitions. Unless Sapporo identifies the root causes of its past acquisition failures, establishes a proper oversight framework, and implements strict capital discipline, we fear that the Company will continue to misallocate capital, leading to further, and possibly irreversible, destruction of corporate value.

As one of Sapporo’s largest investors, we believe we have a responsibility to work on behalf of other shareholders, with whom our interests are aligned, to ensure that the Board properly addresses this critical issue of capital discipline.

Accordingly, we initially shared in our letter dated February 6, 2025 (the “February 6 Letter”) a list of questions aimed at understanding the root causes of the failed investment in Stone Brewing (“Stone”) and the Company’s lack of capital discipline. The Board has refused to answer those questions. The Board also failed to substantively address the requests outlined in our letter dated February 14, 2025 (the “February 14 Letter”). Then, on February 17, 2025, Sapporo published the “Notice Regarding the Board of Directors’ Opinion on Shareholder Proposals,” in which it formally opposed our proposals to enhance the composition of the Board at the Company’s 101st Annual General Meeting of Shareholders (the "AGM").

With Sapporo planning to divest a substantial portion of its real estate assets and realize hundreds of billions of yen in proceeds in the near future, establishing strict capital discipline and formulating an appropriate capital allocation policy is more critical than ever. However, we believe the current Board, particularly the Audit & Supervisory Committee members, lacks the necessary expertise to maximize the sale price of Sapporo’s real estate assets and appropriately reinvest the proceeds. We believe that many other shareholders share these concerns.

Accordingly, we are today making our concerns public and sharing our questions for the Board with other shareholders. All shareholders have a legitimate interest in receiving answers to these questions ahead of the AGM so that they have sufficient information to make informed voting decisions and, if necessary, hold the Board accountable for its failures of oversight and capital discipline.

We therefore request that Sapporo publicly respond to the attached questions by February 28, 2025,

We look forward to continuing to engage with you on these critical matters.

Sincerely,

List of Questions

Questions for Sapporo’s Board of Directors

1. What measures did the Board take at each stage of the Stone Brewing (“Stone”) acquisition process (identification, evaluation, negotiation, approval, execution, and integration) to minimize potential losses and maximize the likelihood of success?
2. At the time of the 2022 acquisition of Stone, the U.S. craft beer market was already in decline, and the failure of Sapporo’s previous acquisition of the U.S. craft beer company Anchor Brewing was evident. Given this situation, please explain, using quantitative data, the basis on which the Board was convinced that acquiring Stone would contribute to corporate value enhancement.
3. Despite Stone’s declining sales and continued unprofitability at the time of the acquisition, Sapporo acquired the company at a price-to-book ratio of approximately 3.4 times³. How did the Board justify this acquisition price? Additionally, please describe the company’s post-acquisition profitability plan, its projected timeline, and the reasons why this plan ultimately failed.
4. The Board insisted that thorough due diligence was conducted on the Stone acquisition, synergies were identified, and past failures would not be repeated. However, in January 2025, Sapporo recorded an impairment loss of JPY 13.9 billion related to the acquisition. What specific actions did the Board take to prevent this impairment loss?
5. Sapporo has recorded impairment losses on all of its overseas acquisitions, including Sleeman Breweries, Sapporo Vietnam, Anchor Brewing, and Stone. Given these past failures, why was the Board confident in the success of the Stone acquisition? Furthermore, compared to previous failed acquisitions, what additional measures did the Board implement in the evaluation and execution process of the Stone acquisition? Why did these additional measures fail to produce effective results?
6. Sapporo has incurred impairment losses on every overseas M&A deal. What are the root causes of these failures? From the perspectives of human resources, expertise, strategy, process, and oversight mechanisms, what corrective actions should be taken to prevent future capital allocation failures? How does the Board plan to address these issues? Additionally, what specific preventive measures has the Board implemented based on past capital allocation failures?
7. Has the Board held any members of management accountable for failed acquisitions? Are any current directors responsible for these failures? What actions has Sapporo taken regarding the management and divisions responsible for these losses? Furthermore, what additional measures does the Board plan to take to prevent repeated acquisition failures and capital allocation missteps?
8. Given the large amount of capital that will be available from the planned real estate divestiture, how does Sapporo intend to revise its M&A evaluation process, capital allocation decision-making framework, and personnel in charge of these areas?
9. How can shareholders be assured that the Board will establish strict capital discipline and prevent the recurrence of past capital allocation failures?

Questions for Sapporo’s Audit & Supervisory Committee

1. What role did the Audit & Supervisory Committee play in the Stone acquisition process? Please describe the specific activities conducted by the Committee in connection with this acquisition. Furthermore, why did the audit at the time of the acquisition fail to prevent the impairment loss recorded after the acquisition?
2. What due diligence did the Audit & Supervisory Committee conduct when approving the acquisition of Stone? In particular, please explain the results of the accounting audit related to intangible fixed assets and goodwill.
3. How did the Audit & Supervisory Committee evaluate Stone’s past and future business performance and corporate value? How did the Committee verify the appropriateness of the acquisition price determined by the Board? Additionally, did the Committee identify any discrepancies, impairment risks, or other concerns during the evaluation process? When and how did the Committee recognize the impairment risk?
4. In light of Sapporo’s upcoming multi-billion-yen real estate divestiture and capital reallocation, what additional measures will the Audit & Supervisory Committee implement to ensure proper oversight, considering past failures?
5. Toru Miyaishi, the Chairman of the Audit & Supervisory Committee, specializes in corporate management, human resources, marketing, and DX/IT. Given these limited areas of expertise, does the Committee believe it possesses sufficient expertise, appropriate leadership, and a well-structured organization to effectively fulfill its oversight duties and reduce future losses and impairment risks? Please explain why the Committee believes this to be the case.
6. Why was Mr. Miyaishi selected as Chairman of the Audit & Supervisory Committee? Mr. Miyaishi is an internal director who held key positions at Sapporo Breweries during past failed acquisitions. Given his involvement in these failed deals, he bears significant responsibility. Typically, the Audit & Supervisory Committee requires a high degree of independence, and the same principle applies to the Committee Chair. How does the Committee assess Mr. Miyaishi’s lack of independence?
7. Is the selection process and criteria for the Audit & Supervisory Committee Chair appropriate? What should be the required level of independence and expertise for the Committee Chair? Similarly, what should be the required level of independence and expertise for Committee members?
8. To properly audit the legitimacy and appropriateness of decisions related to the maximum price realization of the real estate divestiture and the allocation of the proceeds, Audit & Supervisory Committee members must have high independence and expertise in real estate, asset sales, M&A, and capital allocation. How does the Committee plan to address the current lack of independence and expertise within its members?
9. How can shareholders be assured that the Audit & Supervisory Committee will effectively fulfill its oversight function and prevent the Board from repeating past capital allocation failures?

About 3D Investment Partners Pte. Ltd.

3D Investment Partners Pte. Ltd. is an independent Singapore-based Japan focused value investing fund manager founded in 2015. 3D Investment Partners Pte. Ltd. focuses on partnering with managements who share its investment philosophy of medium- to long-term value creation through compound capital growth and a common objective of achieving long-term returns.

Disclaimer

This press release is provided for informational purposes only and does not constitute an offer to purchase or sell any security or investment product, nor does it constitute professional or investment advice. This press release should not be relied on by any person for any purpose and is not, and should not be construed as investment, financial, legal, tax or other advice.

3D Investment Partners Pte. Ltd. and its affiliates and their related persons (“3DIP”) believe that the current market price of Sapporo does not reflect its intrinsic value. 3DIP acquired beneficially and/or economic interests based on its own idea that Sapporo securities have been undervalued and provides attractive investment opportunity and may in the future beneficially own and/or have an economic interest in, Sapporo securities. 3DIP intends to review its investments in Sapporo on a continuing basis and, depending upon various factors including, without limitation, Sapporo's financial position and strategic direction, the outcome of any discussions with Sapporo, overall market conditions, other investment opportunities available to 3DIP, and the availability of Sapporo securities at prices that would make the purchase or sale of Sapporo securities desirable, 3DIP may, from time to time (in the open market or in private transactions), buy, sell, cover, hedge, or otherwise change the form or substance of any of its investments (including the investment in Sapporo securities) to any degree in any manner permitted by any applicable law, and expressly disclaims any obligation to notify others of any such changes.

3DIP provides no representation or warranty, either expressed or implied, in relation to the accuracy, completeness, or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets, or developments referred to herein. 3DIP expressly disclaims any responsibility or liability for any loss howsoever arising from any use of, or reliance on, this press release or its contents as a whole or in part by any person, or otherwise howsoever arising in connection with this press release. 3DIP hereby expressly disclaims any obligation to update or provide additional information regarding the contents of this press release or to correct any inaccuracies in the information contained in this press release.

3DIP disclaims any intention or agreement to be treated as a joint holder (kyodo hoyu sha) under the Financial Instruments and Exchange Act of Japan, a closely related party (missetsu kankei sha) under the Foreign Exchange and Foreign Trade Act with other shareholders, or receiving any power or permission to represent other shareholders in relation to the exercise of their voting rights, and has no intention to solicit, encourage, induce or require any person to cause other shareholders to represent such voting rights.

3DIP does not have the intention to make a proposal, directly or through other shareholders of Sapporo, to transfer or abolish the business or assets of Sapporo and/or Sapporo group companies at the general shareholders meeting of Sapporo. 3DIP does not have the intention and purpose to engage in any conduct which constricts the continuing and stable implementation of business of Sapporo and/or Sapporo Holdings group companies.

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¹ Sapporo’s 99th Securities Report
² As of February 17, 2025, Sapporo’s market capitalization is approximately JPY 555.5 billion. Meanwhile, the total value of its real estate business is estimated to be around JPY 400 billion, according to a Nikkei article dated December 20, 2024, titled "Sapporo Holdings' $2.6bn in real estate draws interest from Mitsui Fudosan, KKR"
³ The company disclosed in its 99th Securities Report that the acquisition price for 100% of Stone's shares was approximately USD 180 million. Additionally, in the announcement dated June 24, 2022, the company disclosed that Stone's consolidated net assets as of the end of December 2021 were USD 53 million. Thus, the price-to-book ratio is estimated to be approximately 3.4x.

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