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A UK-based activist fund has become a top shareholder in a leading Japanese tyremaker, betting it can pump up returns, shrink its balance sheet and even push for a sale as the global car sector goes through a period of rapid disruption.
Palliser Capital is expected to announce on Friday at the Sohn Conference annual gathering of hedge fund managers in Hong Kong that it has taken a roughly 3 per cent stake in Toyo Tire in the past six months, according to people familiar with the matter.
Palliser has made a series of big bets on Japan, including building stakes in property company Tokyo Tatemono and Keisei Electric Railway, which runs trains in the capital. The UK fund, which was founded by two former Elliott Management executives, has waged a high-profile campaign for Anglo-Australian miner Rio Tinto to unify its dual-listed share structure. Such a move was rejected by shareholders last month.
With Toyo, the fund is pushing for a streamlined balance sheet and the release of excess capital, with the goal of returning $900mn to shareholders. Palliser is also urging the company, which has a $3bn market capitalisation, to set up a special committee. With a majority of outside directors and independent advisers, it would review all strategic options, including a sale or going private.
Japan’s auto suppliers have become targets for activist investors who are banking on corporate governance reform forcing companies to improve capital allocation and pushing carmakers to buy subsidiaries and parts providers. Intense competition with Chinese EV groups has also created the need for bigger and stronger suppliers.
Toyota Motor’s plans to take its largest subsidiary private for about $42bn have boosted that belief. A number of its smaller suppliers have been targeted by funds linked to Yoshiaki Murakami, the country’s most high-profile activist, with investors betting valuations can be rapidly increased.
A significant part of Palliser’s argument revolves around a 20 per cent stake in Toyo Tires held by Mitsubishi Corporation, a hugely influential Japanese trading house. Mitsubishi became its biggest shareholder after Toyo was hit by a data falsification scandal a decade ago.
The incident made the company unduly conservative in its financial guidance and leverage, say the same people, and Mitsubishi’s stake is viewed as a potential overhang for the stock.
Mitsubishi told the FT: “We have no changes to our policy of holding Toyo Tire shares and will continue to contribute to the enhancement of Toyo Tire’s corporate value in the future.” Toyo did not immediately respond to a request for comment. Palliser declined to comment.
The company is trading at a large discount to peers despite beating them on a host of profit metrics, according to people familiar with Palliser’s thinking. Its share price has risen nearly 20 per cent this year, to close to ¥2,850. Palliser thinks it can hit as high as ¥4,200 if it implements the recommended measures.
Despite the growing pressure, engagement between Palliser and Toyo has been constructive, said the same people.
Toyo enjoys a strong position in the premium tyre market, with a 40 per cent market share in the US for SUVs and light trucks. More than 90 per cent of its sales are from replacement tyres, far higher than those of its rivals, suggesting a strong attachment to the brand.
