Activist fund targets Japan rail company with $12bn stake in Tokyo Disneyland owner

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A Japanese rail operator holding a nearly $12bn stake in the owner of Tokyo Disneyland is being targeted by a UK-based fund, as part of intensifying efforts by shareholders to release value trapped in corporate Japan.

Palliser Capital’s campaign comes at a time when Japanese companies are under intensifying pressure to raise value, increase their price-to-book ratios and improve governance.

Investors have sharpened their focus on large crossholdings of shares between groups in Japan and other non-core holdings that could unlock value if sold.

Palliser, a company led by former employees of activist fund Elliott Management, holds a 1.6 per cent stake in Keisei Electric Railway, which runs trains around Tokyo and includes one of the main lines from Narita airport into the city centre. Keisei has a 22 per cent stake in Oriental Land, the ¥8.58tn ($57bn) listed property group which owns Tokyo Disneyland.

Keisei’s stake in Oriental was valued at roughly $1.3bn on its balance sheet for the full year that ended in April due to accounting conventions in Japan, even though its current market value is close to $12bn, an amount twice the current market capitalisation of the railway company itself.

The fund is pushing for the railway company to reduce its stake in Oriental Land and use the proceeds from the sale to focus on the core business of running and modernising its railway, according to people with knowledge of the situation.

The fund is expected to deliver a presentation on its plans for a Keisei campaign on Tuesday at the 13D Monitor Active-Passive Investor Summit, a hedge fund activism conference in New York.

Japanese authorities are also trying to push companies to improve governance standards and lift corporate values. The chief executive of the Japan Exchange Group, the company which controls the Tokyo Stock Exchange, said last week that it would be setting up a “name and shame” regime designed to improve companies’ capital efficiency.

Palliser’s presentation says that the distortion caused by the accounting treatment makes it impossible for Keisei’s management to properly allocate capital.

Keisei did not immediately respond to a request for comment.

As Keisei’s eighth-largest shareholder, Palliser has been engaged in what it describes in the presentation as “patient, respectful and collaborative engagement”, with Keisei’s management. Palliser’s stake in Keisei allows it to make a shareholder proposal at the next annual meeting in June.

Yet the rail company has been reluctant to reduce its stake in Oriental Land, which it has told Palliser is not non-core and which it holds because the businesses are complementary, according to sources close to Palliser.

John Seagrim, a Japan equities broker at CLSA said that the Keisei stake in Oriental Land was one of the biggest valuation anomalies in corporate Japan.