1 FINA 2222 Semester 2 2018 Group Assignment (30%) Case study: Rakuten Inc. [TYO: 4755] Capital structure and cost of capital This case was developed by Chloe Ho with some adaptations from The Wm. Wrigley JR Company case in Bruner, Eades and Schill (6 ed.).
2 In February 2017, Rakuten Inc. has just reported a net loss of 5.9 billion yen (approximately AUD72 million) due to a significant decline in operating income for the fiscal quarter ending December 31, 2016.1One morning in February 2017, the following conversations took place between an investment director, Hajita and an associate, Airi, both from Kansai Financial Group, an investment bank which specializes in M&A advisory, merger arbitrage, and capital restructuring. Hajita: “I’m willing to bet that if we could convince Rakuten Inc.’s board to pursue capital restructuring by issuing debt, we could help them create additional firm value. If we could successfully pitch this strategy to them, they may choose us to manage this deal and if we do a good job, we could secure future deals with them. Airi, get me in touch with the CFO of Rakuten Inc. I’m also going to need some projections on changes in credit ratings.”Airi completed her commerce degree from UWA in 2015. She now works to provide financial analysis for her boss, Hajita who pitches to clients and secures deals. Airi recalls from her Corporate Financial Policy course at UWA that a leveraged recapitalization could affect firm’s share price, cost of capital, and earnings per share. Background Rakuten Inc. is mainly engaged in the Internet Service segment and FinTech segment. The Internet Service segment operates various electronic commerce (EC) sites, such as Internet shopping mall Rakuten Ichiba, travel reservation sites, portal sites, digital content sate, sells advertisements, provides messaging, communication services and others. The FinTech segment provides banking and securities services, credit cards related services, life insurance and electronic money services through Internets. Having the largest market share in the domestic e-commerce market, the Rakuten Ichiba enjoys a strong business base. –Thomson ReutersEstimating the effects of a leveraged recapitalization on share price Since the equity issuance in 2015, Rakuten share price has been on a declining trend (Exhibit 1).2This is another reason why Hajita proposed a leveraged recapitalization, which could create immediate value for Rakuten. Airi would need to prepare an analysis to show the source of value creation from a leveraged recapitalization. Corporate tax rate in Japan is currently 30.89%.