In conclusion, we believe that GENDA’s Entertainment Ecosystem can realize a “conglomerate premium” that more than offsets the conglomerate’s discount for complexity. We provide more details below.
・What is conglomerate discount?
This is a phenomenon in which the corporate value of a company with multiple businesses is valued lower than the sum of the business values of the individual businesses. This basically occurs because investors dislike “incomprehensibility.”
・Why GENDA believes that a conglomerate premium can be achieved.
GENDA hopes to achieve the exact opposite: a “conglomerate premium”. In other words, a state in which the value of the whole group continues to be valued higher than the sum of the values of the individual businesses. The following five points explain why we can achieve this.
(1)Suppression of Volatility: Increase in Corporate value (and increase in stock value by that)
“Individual entertainment companies are undervalued.”
Entertainment is ever-changing, ups and downs and tends to be valued low by investors who avoid volatility from the perspective that “Will what is accepted by the world now be accepted next year and the year after?” “Will it be able to maintain sales profits?” Even if individual businesses are volatile, GENDA will transcend this volatility by forming an appropriate business portfolio. In other words, we aim to create a situation where “we keep growing strongly every year as a group even though an individual business might have a bad year.”
→As it is necessary to tolerate volatility when you invest in each company itself, the expected return goes up and the capital cost is high, too. However, by forming an entertainment conglomerate, the volatility will be reduced as whole GENDA and the capital cost will decrease. The decrease in capital cost, which is the discounted rate of cash flows, will increase the present value of total amount of cash flows and the corporate value will increase.
(2)Optimization of capital structure: Increase in Stock value
“Individual entertainment companies have unnecessary cash.”
For the same reason as (1), individual entertainment companies themselves often have cash which they do not need for the time being to prepare for “future volatility.” GENDA, by managing funds on a group-wide basis, will put the remaining funds into investments for the next growth while preparing for sudden capital needs.
→Based on the “Modigliani-Miller Proposition (MM Proposition),” the first proposition of the MM Proposition theoretically proves that “capital structure has no effect on corporate value in a perfect capital market.”
On the other hand, even if the corporate value remains constant, we can increase the stock value by capital structure. We can do that by utilizing excess funds and debt properly and making the stock structure more appropriate (In reality, the capital market is not perfect, and taxes and bankruptcy risks exist. Therefore, the pursuit of the best capital structure will increase the corporate value as well). In addition, it is possible to do business on a consolidated basis with financial institutions that each company could not meet on their own, making it possible to effectively utilize debt with low capital cost compared to the equity, which also leads to an increase in corporate value.
(3)PL synergies: Increase in Corporate value (and increase in stock value by that)
Realization of countless and cross-selling synergies within the group
As stated in Q2, countless cross-selling synergies are generated, which occur in the contiguous entertainment industry.
→Improved PL of each subsidiary increases cash flow and the corporate value will increase.
(4)Communications with investors: Increase in Corporate value (and increase in Stock value by that)
Detailed and sincere explanations to investors
GENDA is committed to explaining our business to investors around the world. We will continue to make efforts to give investors whom we could not meet if we remained an individual company a better understanding of the attractiveness of each business and that of the group.
→As we expand our investor base around the world, we will be able to meet investors and funds with lower capital cost, and as the capital cost decreases, corporate value will increase.
(5)Branding: Increase in Corporate value (and increase in stock value by that)
We will increase the number of fans of GENDA. By doing that, we will achieve greater effects as a group than if each individual company acted individually in all aspects, including recruitment, opening new stores, purchasing, sales, business tie-ups, M&A, fundraising etc.
→Corporate value will increase due to the improvement of PL and decrease in capital cost of each company in points other than (1) through (4).
With GENDA’s becoming a conglomerate, the occurrence of a conglomerate discount due to certain complexities may be unavoidable. However, we believe that there will be effects of increasing corporate value and stock value as described in (1) through (5) above, including reasons specific to entertainment, and these effects will more than offset the discount, resulting in a conglomerate premium that will keep the value of the whole group valued higher than the sum of the values of the individual businesses.