Some of Japan’s most notable companies are feeling somewhat listless about being listed.
That might be why the US$5 billion ($6.66 billion) privatisation offer for Taisho Pharmaceutical, the largest management buyout in Japanese history, was announced last week. With the founding Uehara family in control of a majority of shares, most expect the proposal to succeed even in the face of grumblings from minority shareholders, ending six decades as a public firm.
Taisho might be the biggest, but is far from alone in choosing this path. Buyouts by management and controlling parties have surged this year in Japan, with the total value now reaching JPY1 trillion ($9.06 billion). Cram-school operator Benesse Holdings and karaoke provider Shidax Corp are among the firms that are choosing to abandon public markets.
Expect this trend to continue: For many businesses, being public is no longer worth the hassle. For decades, a listing in Japan was an easy street. But all that is changing. Now, everywhere management looks, there is a new annoyance. Activist investors are encouraged by recent successes and launching campaigns to bend boards to their will. The Tokyo Stock Exchange is increasingly breathing down executives’ necks, looking to nag them into compliance to boost valuations. Who needs the hassle?
That might sum up the response of Tsuruha Holdings. Despite victory against Oasis Management in the activist investor’s attempt to place directors on its board, the drugstore operator is reported to be talking to private equity firms for a potential US$4 billion deal to take itself off the market (Tsuruha says going private is nothing more than one option to boost shareholder value.)
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The Tokyo Stock Exchange’s pressure campaign to enhance corporate returns and reduce the vast number of firms that trade below book value has been a key catalyst in rallying Japanese stocks to new three-decade highs. A widely publicised revamp of markets last year was dismissed as a cosmetic exercise, but the bourse is now tightening the screws; in 2024, it plans to launch a “name and shame” list of firms that are not meeting its value goals.
Meanwhile, shareholder bases are being diversified with a gradual unwinding of cross-shareholdings. Toyota Motor Corp’s reported sale of a large chunk of its Denso Corp stake is the most high-profile example. Combined with speculation that the Bank of Japan is nearing the end of its seven-year experiment with negative rates, it encourages management to eye the exit.
Including other types of take-private deals, along with M&A and a reduction in “parent-child” listings, where both the parent company and its subsidiary are public, the number of listed companies in Tokyo is set to fall. And that’s a good thing — the country has far too many listed that don’t need to be.
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The Prime segment of the Tokyo Stock Exchange, supposed to highlight the country’s best firms, has 1,655 constituents. That proliferation forces tracker funds to buy and sell highly illiquid stocks. Some two-thirds of the country’s 4,000 or so listed firms have zero analyst coverage — heaven perhaps for value investors, but not for everyone. These little-understood (albeit sometimes greatly undervalued) companies drag down the broader indexes, leaving investors with the impression that Japanese stocks have little upside.
Compounding the problem is that Japanese start-ups still often list too early, forcing them to focus too soon on profitability instead of growth — one reason the country has failed to produce a “decacorn.” And for many firms, there is little advantage to remaining public: Low rates make debt a more attractive option than dilutive share sales, while a once-lacking PE sector has become increasingly sophisticated in the last decade, aiding businesses that need to be broken up and sold off.
When it comes to management buyouts, minority shareholders are frequently upset with the lack of a more transparent sales process — or a bidding war which could drive up valuations. Absent a well-coordinated activist campaign, these holders often have little choice but to accept what they are offered. The 55% premium from Taisho’s founding family might seem generous, but if you were unfortunate enough to build your stake in 2018, you would need another 60% on top of that to break even.
Partly, though, that can be explained by a particularly unique Japanese way of thinking about management’s responsibility to all stakeholders. Boards need to consider workers, suppliers and customers in their deliberations — invested parties would suffer if the firm was wound up and money returned to shareholders, as the business books would advise.
Consider the case of Culture Convenience Club, the operator of Japan’s equivalent of Blockbuster Video. Seeing the writing on the wall for that industry, it went private in 2011 in a JPY69.6 billion deal. It has since flourished as an unlisted firm, successfully pivoting to a line of upscale bookstores as demand for DVDs fell. Blockbuster, of course, went under.
As pressure on boards intensifies, Tokyo is only likely to see more of them pursue this course. Of course, the most-speculated-about of all potential deals is a long-rumoured MBO of SoftBank Group by founder Masayoshi Son, who frequently complains that public markets undervalue his company. If it ever materialised, such a deal would redefine how and where major firms see their future. — Bloomberg Opinion
