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This is going to be the first ever idea here on MIJ that’s getting M&A-ed. Unlike most other companies it’s the “M” and not the “A” that is happening. Which is honestly feels quite rare in Japan so… wow.
Shin Maint and Sanki Services jointly announced a merger between the two companies a few days. And I say “behemoth” but this is relative to the rest of the players out there. In absolutes they’re not huge, but precisely why it’s interesting because there’s so much room for growth left.
Timing wise, its been fortuitous that I’ve actually spoken to both companies in the last month. So I think I can provide some more context.
If you recall my [earlier write-up on Sanki Services] I suspected that an acquisition was a solid possibility. Shin Maint had been increasing it’s stake in Sanki over a period of time. It was a key part of the thesis and why I preferred Sanki over Shin Maint. I did not expect this to be a merger but in hindsight, both still have their founders on the board/management and I guess this was the best way to do it.
So that being said, I’m going to share my thoughts on a few points on this merger, and several angles that haven’t been discussed yet. I’ve spoken to both companies on several occasions and this is the perfect excuse to share my notes on both - I think you’ll learn some interesting insights.
I’ll be discussing:
Summary of the transaction, key things to know
Shin Maint
Potential Synergies between the two
Key risks to the Merger
Pro-forma valuation and forecasts
So what now? Closing thoughts
1 share of Sanki shares will be converted to 1.92 Shin Maint Shares.
This will involve a new issue of 11,179,572 Shin Maint shares and the conversion is to take effect 1 Dec 2026. Sanki shares in turn will be delisted from 27 Nov 2026. Also note that Shin Maint’s current ownership of 630,000 of Sanki shares will not be subject to this conversion.
This means that Sanki will be ‘acquired’ at a current valuation of 7.5x LTM EV/EBIT and based on my estimates [they no longer provide guidance] closer to 6.2x NTM EV/EBIT.
The tricky part is that this is not a fixed figure. We’re going to have a strange situaiton here because the JPY value of this conversion is dependent on the stock price of Shin Maint on the 1st of December! And if Shin Maint’s stock price goes up, the goodwill based on purchase price accounting is going to be higher. In Japan, J-GAAP requires you to amortise goodwill, which will have an impact on accounting earnings. You might say who cares? - Japanese investors do!!!
So this is an all equity transaction involving an issuance of Shin Maint shares valued at ~8.5x EV/EBIT at the current price. Which looks "fine” in the context of Shin Maint’s own valuation but consider that prior to the announcement Sanki was vying for a 30%+ earnings CAGR over the mid-term as they see a large school project go online (see my write up on them for details), which would have been faster growth than what Shin Maint is expected to do. So on the whole I think it’s a fair multiple IMO.
In terms of management the founder of Sanki and current Chair will become the chairman of the new entity. The founder the Shin Maint will assume the role of CEO.
The board will also be split 50/50 from both sides making it a merger of equals. In that spirit the entity will be names Sanki Shin Maint (Hereby: SSM) and will be listed on the TSE Growth Exchange. Furthermore they are still expected to run as separate entitites.
Just from a purely strategic perspective, I like this deal alot. One of the initial reasons why I thought Sanki should’ve been valued higher when I wrote about them is that there is only a few companies that can provide maintenance services with Nation wide coverage. This merger will create a giant in a highly fragmented industry.
Idealogically too this merger makes alot of sense. Both have cited that the maintenance market, which is hiiiighly fragmented was ripe for consolidation. Both companies have been reporting their willingness to pursue M&A in the industry as the labour shortage gets tighter over time.
To understand the synergies between the two I’ll highlight what Sanki is good at and what Shin Maint has been good at and why this can create a huge opportunity.
To answer that question we need to understand Shin Maint as a business.
To give some context to this transaction, lets first talk about Shin Maint. This company is one that I’ve followed for a few years. Let me just start off by saying that I’ve liked Shin Maint, it’s business model and execution. The whole reason why I wrote about Sanki was because of Shin Maint’s equity stake which I saw as a strong nod of approval for Sanki’s business.
I have spoken to Shin Maint several times and feel that this has a robust business that has a sustainable growth trajectory. I have felt the quality of Shin Maint was better but Sanki had the better Risk/Reward from the point at which I bought. For the sake of brevity I would like to describe Shin Maint to my readers here but it won’t be a full write up. (If you want to know more I suggest you read this write-up by Iggy here.)
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