Portfolio Idea Playing Out — 6736.T

A quick update on a recent portfolio addition

Given several fresh developments, I am sharing a quick update on Sun Corporation (6736.T). I initially shared on Sun a couple of weeks ago; you can find the pitch summary here. For those unfamiliar with the investment thesis, Sun Corporation presents an attractive ‘discount to NAV' setup due to the involvement of several activist investors. One of the activists, Leopard Activist Management, has already publicly pressured management to distribute the company’s stake in CLBT to equity holders. Another firm, the prominent Asia-focused activist hedge fund Oasis Management, owns 19% and holds one board seat.

While Sun’s management has previously stated that it would consider various alternatives to maximize shareholder value, the company’s recent communication and lack of value-realizing actions seem to indicate otherwise. As an illustration of this, on May 31, Sun released a new investor presentation (see here), providing an overview of the company’s financial results and medium-term plans/outlook. Nothing new was shared on the capital allocation front, including no details or mention of the potential CLBT stake monetization. Management also highlighted its intentions to pursue growth investments over the medium term (see several slides below). So it seems that management, with its minimal ownership stake, is self-entrenched and unwilling to pursue the monetization of Sun’s stake in CLBT.

Another negative aspect is the lack of any actions/announcements from the highly reputable activist investor Oasis Management. Given Oasis’ track record of aggressive activism (highlighted here), the fact that the activist has still been sitting on its hands, despite the wide discount to NAV, is somewhat puzzling.

However, there have been several positive developments indicating increasing activist pressure, suggesting that a potential value-realizing transaction might still be in the cards:

• In early June, Leopard Activist Management updated its activist campaign website, adding a new section (to the best of my knowledge) called ‘AGM.’ In this section, Leopard urges Sun’s equity holders to vote against the incumbent management during the AGM scheduled for June 25. Leopard has highlighted that Sun’s stock price plummeted 19% in late May after management had published a ‘no-news’ agenda for the June AGM, reflecting “shareholders’ lack of trust in Sun’s management” to resolve the undervaluation.

• Another, more important development came today as a new player, True Wind Capital, entered the field, launching a tender offer for up to 19% of Sun Corporation’s outstanding shares at ¥4400/share. The tender will expire on July 22. The offer is subject to a 17% minimum participation condition. True Wind has outlined that it intends “to start sincere and constructive dialogue with [Sun’s] management and board of directors” after the tender offer. Sun Corporation shares have jumped 19% since the announcement and are currently trading just below the tender offer levels.

Let’s explore the second point in a bit more detail. I expect the tender offer to garner limited participation given that the offer still comes at a large 48% discount to NAV. Given the minimum participation condition, I think the tender offer is unlikely to go through successfully.

Nonetheless, this seems to be a positive development for the investment thesis:

• True Wind Capital is a reputable investment firm with approximately $2 billion in AUM, founded and led by two ex-KKR professionals who co-founded KKR’s Global Technology Group. True Wind’s intention to join Sun’s shareholder register is indicative of the firm’s view of Sun’s underlying value and the seemingly solid chances of realizing it. The involvement of a new player also gives further confidence that Sun’s management will face increasing pressure to engage and find a compromise with the activists.

• Another interesting aspect is that True Wind is highly familiar with Sun Corporation’s key holding, CLBT. True Wind’s co-founder has been sitting on CLBT’s board of directors since its 2021 IPO, with the firm holding a 6.5% stake in CLBT. In this context, note that Sun’s management has previously highlighted that an in-kind distribution of CLBT shares would be classified as dividend income and thus taxable at the shareholder level. True Wind’s experience with CLBT might suggest that some sort of tax-efficient carve-out of the stake might be possible.

These aspects, coupled with the substantial remaining upside, have slightly increased my conviction in the setup. I will be awaiting the June 25 AGM as well as any further announcements from the management or activists. For now, I have maintained my position in Sun Corporation.