Activist investor ValueAct Capital Partners LP has built a stake of over USD 1.1 billion in Nintendo, 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 gaming company.

ValueAct, which first began buying the stock in April 2019, grew the position in Nintendo, known for its gaming consoles and for having turned characters like Mario and Donkey Kong into international hits, 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.

ValueAct has picked up about 2.6 million shares, or about a 2 percent stake, in Nintendo. Shares of the Japanese company rose more than 2 percent as trading started in Tokyo.

"We are aware that ValueAct is holding a stake and we've been engaged in dialogue with them. We don't disclose content of our dialogue with our investors," a Nintendo spokesman said.

A spokesman for ValueAct declined to 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 prefers to work with management behind the scenes.

Its partners could offer relevant guidance and experience to help Nintendo after having served on boards at Adobe and Microsoft, the firm's letter said, stopping short of asking for board representation.

U.S. activist investors are increasingly looking 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, which has USD 12.3 billion in regulatory assets under management according to a recent filing, took a 7 percent stake in chip and display materials maker JSR Corp and last year ValueAct partner Rob Hale joined the board of Olympus, marking a milestone in corporate governance.

ValueAct said Nintendo had 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, Disney+, Tencent Interactive Entertainment and Apple Music," the letter said.

The investment in Nintendo ranks among the biggest bets ValueAct has made since announcing a USD 1.2 billion investment in US bank Citigroup in 2018. While there is much communication between the bank and the hedge fund at the highest levels, ValueAct does not have a board seat.

ACTIVISM IN JAPAN

As US investors turned their attention to targets in Japan, ValueAct has been among the most successful, helped by its more low-key tactics, industry analysts said.

While top management in Japan has been historically wary of brash US investors, ValueAct said its experience at Nintendo has been different.

Management has been "welcoming to those who take the time to understand the unique Nintendo way," it said in its letter.

Activist campaigns in Japan have remained steady with 14 being waged this year, the same as last year, data from Activist Insight shows. Elsewhere the novel coronavirus has dampened activity, with investors saying calls for mergers or different capital allocation would not be welcome now.

ValueAct's investment in Nintendo may invite some comparisons with Third Point, another US activist, which last year launched a campaign at Sony, urging the company to spin off its semiconductor business and sell off stakes in Sony Financial and other units.

Nintendo and Sony compete in the gaming areas.

The new investment is also the first blockbuster investment announced since long-term partner Mason Morfit took over as ValueAct's chief executive officer from founder Jeffrey Ubben earlier this year.

The pair first told clients about the succession planning three years ago when Morfit was made chief investment officer. Ubben remains with the firm and is concentrating on its impact investing fund, the ValueAct Spring Fund.