Just two months into 2023 and it is already clear that private equity and shareholder activists are set for another banner year in Japan.
Year-to-date, 10 Japan-listed companies have announced either a buyout by their parent or a take-private. Financial sponsors or shareholder activists have been backers or catalysts for half of these deals.
This level of listco buyout activity marks a run rate in line with the approximate 50 buyouts seen in each of the past two record-setting years. In each year since 2018 take privates and parent subsidiary buyouts have together accounted for just 1% to 2% of the total number of Japanese M&A transactions but between 5.2% and 48.4% by value.
Source: Dealogic, Dealreporter
Land of the Rising Premium
Subsidiary buyout activity has historically fluctuated in both number and value. Last year saw a significant tail off in subsidiary buyouts in terms of value but in 2020 the USD 40.4bn deal for NTT Docomo by its parent NTT Corp accounted for 40.4% of Japan’s total M&A value.
Financial sponsor-led take-private activity, meanwhile, has broadly been increasing on both counts. Last year saw a record high 36 take-privates worth a combined USD 20.1bn.
Shareholder activism often precedes both types of buyout deal. Kanematsu Corporation’s [TYO:8020] buyouts of 57.84%-owned Kanematsu Electronics [TYO:8096] and 52.86%-owned Kanematsu Sustech, both announced in January, and last month’s chairman-led management buyout of Ihara Science [TYO:5999] came after shareholder activists had pushed the companies to take action to create shareholder value.
Even though buyout premiums have been rising in recent years, deal multiples have remained steady. This suggests activists are being rewarded with significant investment upside, but private equity firms and parent companies are not being forced to overpay. It also supports the longstanding view that many Japanese companies trade at significant discounts to fair value.
Source: Dealogic, Dealreporter
*Public take privates involving change of control deals where acquiror owns less than 50% pre-announcement
#Subsidiary buyouts are defined by controlling parent owning more than 50% pre-announcement
** Excluded an outlier on the Ihara Science MBO where EV/EBITDA is 4.93x
The increased willingness of Japanese listcos to engage in buyouts follows years of Japanese corporate governance reforms designed to encourage conglomerates, many of which trade below book value, and company founders to pursue MBOs and other corporate actions to improve shareholder value.
Such reforms include the introduction of the Japanese Stewardship Code in 2014 and the Corporate Governance Code in 2015 that were central to the “third arrow” of the Abe administration’s economic revival program. These reforms have continued most notably with last year’s overhaul of Tokyo Stock Exchange.
Source: Dealreporter, ActivistMonitor, Dealogic
*activists with official declaration of intention to agitate
Names to watch
UK-based Asset Value Investors last November called for the parent company of Shin-Etsu Polymer [TYO:7970] to buy out minority investors “at a large premium”. Shin-Etsu Chemical [TYO:4063] owns 52.03% of the semiconductor casings company, which has a JPY 114bn (USD 834m) market cap.
Another name to watch is Sanken Electric [TYO:6707], which has long been on activists’ radars due to the USD 2.6bn disparity between the Japanese power chip maker’s JPY 2.4trn (USD 1.8bn) market value and that of its 51.5% stake in Allegro Microsystems [NASDAQ:ALGM], which has a USD 8.7bn market cap.
After Sumitomo Pharma [TYO:4506] agreed last October to buy out the 48% it did not already own in Myovant Science [NYSE:MYOV], this news service questioned whether the move could herald a wider group restructuring by parent Sumitomo Chemical [TYO:4005] to reduce the number of listed subsidiaries under its umbrella.
Finally, Hibiki Path Advisors last November urged three major used condominium resellers– Star Mica Holdings [TYO:2975], E’Grand [TYO:3294] and Intellex [TYO:8940] – to improve corporate value and consider a single or joint management buyout.