By Svea Herbst-Bayliss
BOSTON (Reuters) - Activist investor ValueAct Capital Partners LP has built a stake of over $1.1 billion in Nintendo (T:7974), according to a letter seen by Reuters, a bet that digital software distribution and the development of new entertainment products will fuel growth at the Japanese consumer electronics company.
ValueAct, which first began buying the stock in April 2019, grew the position during the stock market sell-off in February and March, according to the letter sent to its investors.
Nintendo's future is bright, ValueAct wrote in its letter, adding there is potential for growth both in the software business and room for the company to transform itself into a broader entertainment company.
Nintendo is known for its gaming consoles that often compete with Sony Corp (T:6758)'s and Microsoft (NASDAQ:MSFT)'s products.
Nintendo's shares, traded in the United States, rose 5.7% to change hands at $55.90. The company was not immediately available for comment.
San Francisco-based ValueAct said it has had several meetings with members of Nintendo management and that it believes in the vision the company's chief executive, Shuntaro Furukawa, has shared with ValueAct and with others.
Unlike other investment firms that push for change publicly and often ask for board seats at target companies, ValueAct does not mention that it asked for representation.
But its partners could offer relevant guidance and experience to help Nintendo after having served on boards at Adobe (NASDAQ:ADBE) and Microsoft, the firm's letter said.
U.S. activist investors are increasingly looking abroad to target Japan's cash rich companies and this marks the third investment ValueAct has made in Japan in the last four years.
Only a few weeks ago ValueAct took a 7% stake in chip and display materials maker JSR Corp (T:4185) and last year ValueAct partner Rob Hale joined the board of Olympus, marking a milestone in corporate governance.
ValueAct said Nintendo has not prospered as much as video game software companies like EA and Activision as the industry's fortunes improved over the last decade. But it said the company was now going through a digital transition that was sure to pay off.
Additionally ValueAct said the company has a chance to become an entertainment company. "We believe Nintendo will be one of the largest digital media services in the world, in a category with the likes of Netflix (NASDAQ:NFLX), Disney+, Tencent Interactive Entertainment and Apple (NASDAQ:AAPL) Music," the letter said.
ValueAct is known for working behind the scenes with management and not making noisy demands in public.
Two years ago, the firm announced an investment in Citigroup (NYSE:C) that was valued at $1.2 billion in another letter to its own investors. While there is much communication between the bank and the hedge fund at the highest levels, ValueAct does not have a board seat.