In conclusion, I would like to explain that the impact from increasing interest rates is insignificant. The reason is that we have been able to conduct M&As at appropriate valuation. The details are as follows.

First, many of our past M&A transactions have been financed through borrowings. In many cases, the condition was eight-year equal repayment.

The source of repayment of this fund is solely dependent on the free cash flow (FCF) of the target company. In other words, it is assumed that the free cash flow of the company joined the group by M&A (although each case has its characteristics) will be able to repay the amount paid for the consideration = the borrowing within eight years.

Based on the assumption that the target company has going concern, this condition (repayment within eight years) corresponds to an investment yield conversion of at least 12.5% per annum (100 divided by 8). Besides, centering on amusement arcades and karaoke, the target companies have grown a lot after joining the group with synergy effects as already reported, which means that the FCF has grown strongly, too, with that growth.

As a result, the recoupment period was 5 years (20% yield), 4 years (25%), 3 years (33%), etc., in some cases of M&A in the past. These are yields including debt and corresponding to our weighted average cost of capital (WACC). We believe that they are significantly above the level required of listed companies.

In addition, since our interference is suppressed as the majority of our M&As are financed by debt and the majority of the debt costs are slightly more than 1% only, the return on equity investment excluding debt spikes and is much higher than the above figures. This is the return corresponding to our cost of equity, and we believe that we have been able to manage at a significantly higher level.

Getting back to the interest rate, this means that we are managing funds, raised at an interest rate of about 1%, at the above yield. Therefore, in an extreme case, even if our borrowing rate suddenly rises to 2%, we would still be able to secure a substantial margin.

From a comparative perspective, let me explain a case in which negative effects from increasing interest rates are significant. It is a case where the investment yield is low. For example, let us take a look at a case where the yield is 5%.

When an M&A project with a yield of 5% (which means the recoupment period of consideration paid for M&A is 20 years) is financed with a borrowing with an interest rate of 1%, if the interest rate rises to 2%, the margin goes from 4% (5%-1%) to 3% (5%-2%), and although the margin itself remains plus, the return itself is reduced by 25% (3% ÷ 4% -1) and the project’s contribution to earnings is reduced by 25%, too (in real, it will be lessened a bit by tax shield). Thus, by ensuring conducting M&A at an appropriate price, we have a large buffer against interest rate fluctuations.

In terms of the amount of interest paid, even if interest rates were to rise by 1% against the balance of interest-bearing debt of 48.6 billion yen as of the end of the third quarter of the fiscal year ending January 31, 2025, the increase in interest paid would only amount to 0.486 billion yen annual increase. In this case, EBITDA for the fiscal year ending January 31, 2025 would decrease from 21.2 billion yen (forecast as of December 24, 2024) to 20.7 billion yen and the growth rate of EBITDA would decrease from +60% to +58%, of which impact on our long-term growth strategy quite limited.

As a result of M&As at an appropriate price, our cash flow indicators are at the highest level compared to other companies that engage in continuous roll-up M&A in mature industries.

(Compiled from “Capital Growth Strategies Report”, page 22)

At present, under the situation where there are many projects that will generate further cash flow by reinvestment, we do not accumulate the cash flow of the target companies which is increased by M&A but make it resource for further investment. We do not try to maximize FCF as of today when it is possible to invest. Therefore, we use operating cash flow to see the investment performance in this way.

There is a significant difference from an investment safety perspective between acquiring a company with EBITDA of 1.0 billion yen for 5.0 billion yen and acquiring the same company for 50.0 billion yen. However, in both cases, it would only be recorded as EBITDA +1.0 billion yen on the PL.

Thus, although we believe that our primary value is in cash flow because indicators of cash flow do not show our intrinsic performance on PL, we have been conducting M&A with a sense of speed, such as by ranking first in the number of M&As among listed companies for two consecutive years, and as a result, our PL has grown significantly. This is because we have secured appropriate M&A and high yields.

The cash flow of companies which joined us by M&A is further expanded through synergies and PMI. With this strong cash flow base, the stability of our strategy is well secured against increasing interest rates.