AVI and the Hulic cross-holding: a fight over capital allocation (2020)

The capital-allocation question put to a cheap holding company

At the centre of this contest is the question of where a company that earns steadily in its core business ought to put those earnings. Teikoku Sen-i holds a solid business in fire hoses and disaster response, yet has kept a substantial part of what it earns in cash and in Hulic shares — financial assets. What the activists pressed on can be seen as a single point: can you speak of capital efficiency while carrying, at three-tenths of total assets, a shareholding whose synergy with the business you cannot explain? A capital structure sheltered by Fuyo-group cross-holdings was the ground on which an answer to that question could be deferred.

Looking only at the fact that the proposals were all defeated, the company’s position appears to have held. Yet the record — support rates above 20%, and the baton passing from Sparx to AVI and on to Dalton and NAVF — leaves a different question open: how long the shield of cross-holding remains effective. Now that reducing strategic shareholdings and disclosing capital efficiency are broadly expected of listed companies, how far can a cheap holding company go on explaining a structure in which it keeps assets unrelated to its business? The issue around Teikoku Sen-i extends beyond who won a given shareholder meeting, and appears to remain open.