Kaname Capital Sends an Open Letter of Inquiry Regarding Opportunistic MBO by Founder of Proto Corporation¹

TOKYO--( BUSINESS WIRE )-- Kaname Capital (hereinafter referred to as "we" or "our firm") owns more than 8.34% Proto Corporation (hereinafter referred to as “Proto” or “the Company”) and has been actively investing in the Company since September of 2022.

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We believe that the Company’s proposed privatization is being led by the wrong person with a faulty process at the wrong price. ¥2,100 is a 79% discount to our intrinsic value calculation of ¥3,778 per share, a material undervaluation of the business which is unacceptable for the reasons we outline below.

The purpose of this letter is to:

• Raise awareness among our fellow shareholders about the problematic nature of the proposed MBO in terms of purpose, process and price.
• Force the Special Committee to answer eight questions regarding our concerns about the purpose, process and price of the MBO.
• If unable to answer our questions, realize the next step is to reopen the bidding process with proper due diligence to attract better operators that can generate more corporate value and therefore bid a higher price.
• encourage employees and customers to come forward with any relevant information to help the true owners of the Company – its shareholders - reset the strategic planning for the Company in an open and transparent manner. If you have any credible information to share, please contact us at contact@kanamecapital.com (anonymous submissions are welcome).

After years of identifying operational weaknesses and seeking constructive dialog, we have been continuously denied access Chairman and Founder Hirokazu Yokoyama (hereinafter Chairman Yokoyama). Despite multiple avenues to value creation as a public company, we view the Special Committee’s acceptance of Chairman Yokoyama’s MBO bid a failure for the following reasons: he is neither the best nor should be the only bidder. It is our strong view that after years of mismanagement Chairman Yokoyama has proven an inadequate operator and therefore unfit as 100% owner. The hurried process is conflicted, opportunistic and largely meant as a tax reduction scheme. Lastly, the stated MBO price of ¥2,100 for Proto is a dramatic 79% discount to our calculation of ¥3,778 in intrinsic value. For all these reasons, we believe the MBO process should be stopped and re-opened to allow better alternative owners to bid with a more transparent process that will likely achieve a higher price for all shareholders.

We believe that, given Proto’s competitive advantage in the domestic used car platform business, the Company could achieve a share value of ¥3,778 per share based on its current earnings power as a listed company. This is 79.9% higher than the MBO price of ¥2,100. While the MBO price appears to include a 67.87% premium over the latest closing price, the reality is that the share price had fallen by more than 20% due to fictitious transactions conducted by a former employee, which were uncovered in October last year. As a result, the actual premium is only around 40%. Furthermore, even at this level, the EV/EBITDA multiple is only around 5–6x, significantly undervaluing the Company’s platform business compared to 14.5x for similar domestic companies and 16x for international peers.

That said, we believe that Proto Corporation's undervaluation is due to financial mismanagement caused by Chairman Yokoyama’s conflicts of interest, as well as a stagnant corporate culture that has allowed repeated scandals. Instead of focusing on growing the core platform business, Chairman Yokoyama has engaged in a series of acquisitions with little synergy, including a gift certificate shop, a professional basketball team, and tourism-related media. Furthermore, he has expanded into hobby-driven businesses such as tomato and strawberry farms and a hamburger shop. This is nothing short of founder-driven self-indulgence, which has led to a significant discount on the Company's JPY 20 billion in net cash holdings. The market was rightly skeptical that cash resulting from the core business would be misused and therefore had no value.

Since June last year, we have urged the Company to establish a Strategic Review Committee to reassess its business portfolio and develop new growth strategies within its core business, such as auto loans, peer-to-peer auctions and better pricing models. However, the Board of Directors failed to explore avenues to maximize corporate value as a listed company and instead succumbed to the interests of one major shareholder, ultimately supporting the MBO. This MBO appears to be an escape route for Chairman Yokoyama to conceal his management failures and avoid accountability.

The Ministry of Economy, Trade, and Industry (METI) issued guidelines on fair M&A practices in June 2019, outlining best practices to ensure fairness in MBOs. However, in cases like this, where the acquirer already owns 38% of the shares, a strong Special Committee is required to reign in potential abuse. Here, we see weakness. As mentioned earlier, this MBO was initiated immediately after the discovery of fraudulent transactions, which caused the share price to drop by over 20%. The MBO was then announced within just two months, without conducting a proper market check. We suspect the debt used to purchase the remaining shares will be consolidated into the operating company and materially lower Chairman Yokoyama’s inheritance tax liability. In matters of process and price, the Special Committee failed to appoint its own independent advisors or obtain a fairness opinion. Furthermore, as the Tokyo Stock Exchange is set to revise its Corporate Governance Code this spring regarding exactly this type of behavior, this MBO appears to be a last-minute attempt to avoid future regulatory protections for minority interest holders.

We are equally troubled that this is a pure founder-led MBO with no private equity partners. Given that the same founder-CEO who has led the Company’s underperformance is now 75 years old, it is questionable whether privatization under his leadership will truly enhance corporate value. As shareholders being forced to exit before full corporate value has been achieved, we have serious concerns that this MBO is designed only to serve Chairman Yokoyama, giving us pause that it will have a negative potential impact on employees and customers.

We have made this open letter public to raise awareness among other investors about this problematic MBO and to encourage the Special Committee, employees and customers to come forward with any relevant information to help reset the process in a more open and transparent manner. Rather than aligning with major shareholders, Proto Corporation’s Board of Directors should actively seek the best possible owner for the benefit of all stakeholders. As a precedent for other listed companies, we must not allow MBOs to serve as an escape route from corporate accountability. We call for your support and involvement in addressing this issue.

If you have any information to share, please contact us at contact@kanamecapital.com (anonymous submissions are welcome).

Key Questions in Our Open Letter

Section 1: MBO is a Bad Conclusion; Yokoyama is Not the Best Owner

(1) Is there a rational basis for a 75-year-old founder-CEO to pursue an MBO?
(2) Why was an MBO chosen instead of establishing a Strategic Review Committee?

Section 2: MBO procedure is Conflicted and Broken

(3) Is Director Kajiura truly independent?
(4) Were there conflicting compensation agreements with independent directors?
(5) Why was no market check conducted?
(6) Will the Special Committee allow due diligence if there is an alternative bidder?

Section 3: ¥2,100 is the wrong price

(7) Why was the MBO rushed?
(8) Why was Sum-of-the-Parts (SOTP) analysis not used?

Conclusion: We ask the Special Committee to ask themselves if this MBO has anything at all to do with value creation. We think not. To us, it looks like a cynical tax dodge, using a flawed process to get control of a public company that has already suffered material and willful mismanagement only to be taken private at the wrong price via a flawed process. If there is even a hint of these concerns, the best antidote is a market check and accompanying due diligence to give a chance to a more capable owner to offer a better price.

¹ The letter is written in both English and Japanese. In the event of discrepancies between the two versions, the Japanese language is considered authoritative.

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