Why investors should watch Nintendo’s share base

One of the ancient mysteries that hovers over Nintendo: why a company that so prides itself on the accessibility of its games, has such an impenetrable shareholder register.

With a minimum trading lot of 100 shares and a price hovering around ¥30,000, potential retail investors would need about $27,000 just to get a fingernail into the Kyoto-based games maker — a sum that could equally buy a brand new Switch console and about 500 copies of Super Mario Odyssey. A share-split, surely, is long overdue.

Another question — and one analysts have almost given up asking — is whether, after many years of steady reductions in cross shareholdings elsewhere in the market, the Bank of Kyoto would consider selling down its stake in Nintendo. The holding is the largest in a 277-strong portfolio of listed Japanese stocks whose combined value, oddly enough, is about twice the market capitalisation of the bank itself.

For many decades, the non-answer to both these questions has been to shrug and conclude that Kyoto — the ancient capital of Japan and arguably the country’s greatest concentration of corporate conservatism — does things differently. And yet, somewhat miraculously, something very important seems to have changed.

On Friday last week, in an unusually intense flurry of corporate machination, Nintendo announced that the Bank of Kyoto, along with several other banks tightly bound to the Kyoto region, would be selling a combined 2.79m in Nintendo shares (in Bank of Kyoto’s case, about 16 per cent of its Nintendo holding). To soften the blow, Nintendo said it would buy back up to 1m shares and that it would also cancel 10m treasury shares. On top of all that, it is placing up to 1.79m shares with retail investors in what it is touting as an effort to diversify its investor base towards Japanese retail. That is the sort of thing it might particularly want to do if it foresees (as many do) the steady emboldening of foreign activist funds.

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On the face of it, this is a moment that screams to be interpreted as real progress for corporate governance standards and basic good market practice. Getting Tokyo-based companies to budge a few millimetres forward on governance is one thing; getting them to do it in Kyoto is something else.

The bit that has caused particular excitement is the note that accompanied Nintendo’s announcement where it explained that Bank of Kyoto’s decision to sell its Nintendo shares was “in the context of how companies deal with their policy crossholdings becoming the subject of greater focus”. As Japan takes corporate governance more seriously, in other words, even Bank of Kyoto needs to be seen to adjust a portfolio that until now looked untouchable.

And it has done, say the governance cheerleaders, because of rules introduced last year that now oblige companies to justify cross-shareholdings at this year’s round of annual general meetings in June. Many will cite words to the effect of “maintaining business relationships,” as they do so. But that will be much harder for the likes of Bank of Kyoto, whose stock portfolio is overwhelmingly weighted (by market value) to companies with either zero or very low net debt. Bank of Kyoto, as analyst Travis Lundy puts it in a note published on Smartkarma, a research platform, “does not own the shares of companies which need to borrow”. It could all be contagious: if Kyoto is seen bending to the governance trends, everyone else has cover to do the same.

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But does any of this represent a genuine, long-term shift of behaviour in Kyoto? On the reduction of cross-shareholding front, the next few months will be critical. The period between now and the end of the financial year on March 31 is an obvious one for companies having a tough final quarter (as many are) to realise some profits from selling stakes — while claiming to the company whose shares you are selling, that this is driven by governance.

A much more definitive sign, however, will be proof that Nintendo is serious when it talks about the wish to diversify its shareholder base and increase the ranks of retail investors. The placement it announced last week will be carried out by Nomura, which can be relied on to sell the shares (in those immense minimum lots) to its wealthy clients — retail investors in name only. The real signal of change would come if, as many have suggested over the years, Nintendo did a 10-for-1 stock split to bring its shares down to a level that ordinary people can afford.

Until today that has seemed improbable, and the company has balked at the suggestion. But the tone at the house of Mario has clearly changed. There are no specific plans afoot, said a company spokesman on Thursday, but a stock split is now considered “an option”.




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