With Bain Capital first in line to buy a unit of Hitachi (HTHIF) , and CVC Capital Partners launching a bid to take Toshiba (TOSBF) private, it's clear Western venture capitalists are finally making inroads in deals involving "Japan Inc."
Toshiba is considering a US$20 billion offer from CVC to delist it and turn it into a private company. Toshiba's current CEO, former banker Nobuaki Kurumatani, joined the Japanese conglomerate in 2018 from CVC, which is based in Luxembourg. Taking the company private would lift some of the pressure that Toshiba currently faces from hedge funds that hold its stock.
I explained in mid-March how activist investors won a landmark shareholder vote requiring Toshiba to conduct an independent investigation about whether its shareholders have been put under undue pressure, including from government officials, to vote according to management's preferences. It's the first time at a major Japanese company that shareholders have won a motion they proposed at a shareholder meeting.
Toshiba's chairman, Osamu Nagayama, released a statement on Friday that was non-committal about the CVC bid. He says the "preliminary and non-legally binding initial proposal" was "completely unsolicited and not initiated by Toshiba by all means." Toshiba's board, which also includes CVC senior executive advisor Yoshiaki Fujimori, is seeking further detail on the offer, and "will conduct careful review."
CVC is considering tendering an offer at a 30% premium over the closing price before the bid became public knowledge, according to Reuters. That would mark up its closing price of ¥3,830 on Tuesday to some ¥5,000, with the shares already leaping 11.4% to end Friday at ¥4,265.
Hitachi has reportedly selected Bain Capital as its preferential bidder to buy its Hitachi Metals (HMTLY) subsidiary. That means Bain has exclusive negotiating rights on the metals group, which makes specialized steel, metal rolls and ceramics, as well as magnets and high-end car parts, including alloy wheels.
Boston-based Bain has been in discussions with Hitachi to buy its 53% Hitachi Metals holding since last August, according to the Nikkei. The deal, which has driven Hitachi Metals shares up 38.0% since talks began, is likely to rise above ¥800 billion (US$7.4 billion). It would include the Japanese private-equity groups Japan Industrial Partners and Japan Industrial Solutions alongside Bain.
Hitachi has made a string of moves to streamline its holdings, one of the most-active Japanese companies in addressing its sprawling operations. It had already last year bought up its own subsidiary Hitachi High-Tech, and sold off its Hitachi Capital subsidiary to Mitsubishi UFJ (MUFG) for US$2.8 billion. Both subsidiaries were listed separately. Likewise, in late 2019 it sold off its Hitachi Chemicals listed subsidiary to Japanese rival Showa Denko (SHWDF) , a deal that also attracted interest from Bain and Carlyle.
Hitachi has historically specialized in hardware. It clearly would like to recast itself in the services century, and just announced at the end of March that it would buy the software engineering group GlobalLogic for US$9.6 billion, its largest-ever acquisition.
Hitachi Construction Machinery (HTCMY), another listed subsidiary, falls into the "old-industry" camp and would be the next logical candidate for offloading.
Other Western private-equity investors such as Apollo Global Management (APO) , Blackstone (BX) , Carlyle Group (CG) and KKR (KKR) have all established Japanese operations. All are sniffing around the divestitures that Japan Inc. is looking to make.
The CVC bid for Toshiba, which is contingent on CVC raising co-investment from partners, could be the largest leveraged buyout in Japanese history if it comes to fruition. It would also require extensive government clearance. That's not only on antitrust and foreign investment grounds but also because Toshiba builds nuclear reactors and makes sensitive parts such as lithium-ion batteries for Japanese defense force submarines.
Chief Cabinet Secretary Katsunobu Kato, the No. 2 official in government, noted that the CVC deal would require sensitive government assessment to ensure it does not disrupt Toshiba's infrastructure work. That includes the decommissioning of the Fukushima Daiichi nuclear power plant that melted down and exploded in 2011.
However, the friendly ties between CVC and Toshiba could offer a welcome ownership embrace at a time Toshiba has been pressured by hedge-fund shareholders such as Singapore-based Effissimo Capital and San Francisco-based hedge fund Farallon Capital Management.
The Japanese corporate world, particularly Big Business, is generally tight-knit and closed off to outsiders. Many corporate and real estate deals are shopped in private circles, with deals done before anyone outside the Japan Inc. circle knew an asset was on the market.
To have public discussions emerging with Western investors is a sea change. Japan Inc. has long been dominated by conglomerates with vast reach across business sectors. But improvements in corporate governance have been a key tenet of the "Third Arrow" of structural reform in Abenomics, the program of change initiated by former Prime Minister Shinzo Abe. His successor and second-in-command, Yoshihide Suga, has vowed to continue.
Streamlining the complex network of subsidiaries and cross-holdings among large Japanese companies is key among those corporate reforms. There were 259 listed subsidiaries of other Tokyo-listed companies as of the end of 2019, according to figures from the Ministry of Economy, Trade and Industry, or 7% of the total market. Only 0.5% of the companies listed in the United States are subsidiaries of another listed company.