Daiwa Sec To Launch a Tender Offer For Daiwa SMBC Capital

Daiwa Securities Group has announced that it will launch a tender offer for Daiwa SMBC Capital (formally NIF SMBC Ventures). The offering price is 563 yen per share, which is 30% higher than the average closing prices from the previous one month period. Daiwa SMBC Capital, a venture capital and buyout investment firm said in a separate announcement that it has agreed to the tender offer.Daiwa Securities Group currently holds a 46.2% stake in Daiwa SMBC Capital. The second major shareholder, Sumitomo Mitsui Banking Corporation, holds a 40% stake in the company. If the transaction is successful, Daiwa SMBC Capital will be delisted from the Tokyo Stock Exchange.

Shinsei and Aozora in Merger Talks

Shinsei Bank, the nation's 7th largest bank and Aozora bank, the 8th largest bank have entered into negotiations to integrate their operations in the summer of 2010, according to Nikkei.

The two banks are owned mainly by US hedge funds J.C. Flowers & Co., which has a stake of about 33% in Shinsei, and Cerberus Group which has an interest of around 45% in Aozora.

We expect more consolidation in the Japanese financial industry.

SMFG Wins Nikko Cordial Deal

Sumitomo Mitsui Financial Group (SMFG) has been granted preferential negotiating rights for Citigroup Inc's Japanese retail brokerage operations, prevailing over its two rival Japanese banks.

Citigroup and SMFG will negotiate the terms of the deal, with hopes of closing within the next few weeks.

Now the market is focusing on how SMFG will handle Daiwa Securities Group, which jointly operates wholesale brokerage house Daiwa Securities SMBC.

Japanese Mega Banks Deeply in the Red for 2008

According to the financial daily Nikkei, Mizuho Financial Group Inc. announced that it expects to post a 580 billion yen net loss due to mounting credit costs as well as investment losses in Merril Lynch & Co.

Sumitomo Mitsui Financial Group also announced a projected net loss of 390 billion yen, blaming rising credit costs and investment losses from Barclays PLC's.

These companies are dragging down investments in foreign financial institutions.

CLSA to Launch $500mn Japan Fund

CLSA Capital Partners is gearing up to raise its second Japan-focused buyout fund with a $500 million target. Its first Japan focused fund was closed in 2006 with capital commitments totaling $350 million. The fund has made investments in 5 Japanese companies. The private equity investment arm of CLSA focuses on mid cap companies which rely on domestic demand.
CLSA Capital Partners stands tall, while a few other foreign buyout firms are closing their Japan branched.

Honda Seen Beating Outlook On Weak Yen, China Sales

The Nikkei reported that Honda Motor Co.'s group operating profit for the year ended March 31 is likely to come in about 10 billion higher than the company previously forcast thanks to a weaker yen and better-than-expected sales in China in the 1Q of 09.

Japan astounded the world with the news that Japan recorded a -14.9% GDP (annualized rate) in 4Q of 08. Since Japanese banks had not invested much in subprime-issued papers, people thought that the Japanese economy would fare better than other developed countries. In fact, Japan fared worse. But on the bright side, since Japanese companies responded the worldwide crisis first they should be the first to take off when the world economy comes back.

Matsushima Industry To Launch A Tender Offer For Shinagawa Tatemono

Shinagawa Soko Tatemono, a real estate and warehousing company, announced that it will accept a tender offer from Matsushima Industry, a Miyagi-based stone material company. The tender offer price is 185 yen which is 10% higher than the average closing price of the previous month.

Shinagawa Soko Tatemono has been looking for a partner as well as a sponsor due to multiple concerns - including aging management, necessity for renewals of leasing buildings, and the increasing cost of staying on the stock exchange.

The company will be de-listed from the JASDAQ upon completion of the deal.

Renown Announces Resignation of All 5 Directors

Renown Inc, one of Japan's major apparel makers, has announced that all of its 5 board members will resign and the company will appoint a 47-year old planning department manager as its new president under a new restructuring plan.

The decision is aimed at ducking a proposal from Neoline Capital Co., the firm's biggest shareholder, to send three executives to the apparel maker's board to maintain initaitive in rebuilding its ailing operation. Neoline Capital, a consumer finance company and an investment fund operator, holds a leading stake of roughly 25% in the apparel maker.

Renown will seek to have the plan endorsed during its May 28 general shareholders meeting.

Time for the Semiconductor Industry to Reorganize

Japanese semiconductor makers Renesas Technology Corp. and NEC Electronics Corp. are in talks for a merger, according to the Nikkei.

Renesas Technology Corp, the second-largest Japanese semiconductor maker, is a 55%-45% joint venture between Hitachi and Mitsubishi Electronics. NEC Electronics, the third-largest, is 65% owned by NEC Corp. Both companies have been struggling due to weak demand and have been looking at ways to save costs. The combination of those 2 companies will create the Japan's largest semiconductor maker, surpassing Toshiba, and will rank third in the world after Intel and Samsung Electronics.

The move may trigger further industry consolidation involving other chip makers like Toshiba and Fujitsu.

Unison to Tender Offer for Aderans shares

Unison, one of the leading Japanese private equity firms, will make a tender offer for at least 33.4% of Aderans Holding Co. according to the Nikkei newspaper. The tender offer premium is expected to be around 30% over the average of share prices for the last 3 months.

Currently, the largest shareholder of the troubled wigmaker is Steel Partners, a US activist fund, with a 27% stake. Steel Partner is requesting a replacement of all current board members. By playing a role of white knight, Unison aims to rebuild the company's operation with its turnaround expertise. A fierce proxy fight could occur between the two funds unless a previous understanding had already been reached.

BlackRock To Raise USD 1 Bn From Japan For PPIF

Nikkei newspaper reported that BlackRock plans to raise 1 billion dollars from Japanese investors as part of the seed money for a U.S. government-led program to buy toxic assets. In an interview with Nikkei, BlackRock Chairman Laurence Fink said that BlackRock has started soliciting customers around the world to invest in the PPIF program. It intends to raise 5-7 billion dollars worldwide, including around 1 billion dollars from Japanese institutional investors. The CEO added that BlackRock plans to set up a retail fund in the U.S. to allow individual investors to participate in the PPIF program.

Economists Estimate 2009 Q1 GDP at -12.8%, Expect Positive Growth in Q4

According to a survey compiled by the Economic Planning Association, a Cabinet Office-affiliated think tank, 37 economists at private research institutions estimate the growth rate of real GDP in 2009 Q1 will be -12.76%. The respondents believe the economy will continue to shrink in Q2 and Q3 at the rate of -1.46% and -0.35% respectively, while they expect a positive 1.72% growth in Q4. FY 2008 GDP is estimated at -2.99%, FY 2009 GDP is forecasted at -4.53%.

Japan's Record JPY 56 trillion (USD 560 billion) Stimulus Package

Last week the government unveiled its plan to submit a supplementary fiscal 2009 budget proposal to the Diet on April 27. It includes a 15.4 trillion yen stimulus package and carries a total value of 56.8 trillion yen. This is the largest government stimulus package in Japanese history. The measures include assistance to the unemployed, subsidies in the purchase of green electronics, low emission cars and solar power generators, government guarantees to bank loans to small-mid corporations, and tax reforms to reduce gift taxes from parents to children to promote housing construction. Other measures focus on education, elderly care, recycling, and R&D.

According to press reports, "The value of the entire package is about 3% of Japan's gross domestic product -- the U.S. called for fiscal spending equal to 2% of GDP at the recent Group of 20 summit meeting. The latest stimulus package is expected to lift Japan's real economic growth rate for fiscal 2009 by 2 percentage points and lead to the creation of 400,000 to 500,000 jobs."

On the other hand, more than 10 trillion yen in Japanese government bonds are to be newly issued to finance the stimulus measures. The total amount of JGBs issued in fiscal 2009 is expected to surpass 43 trillion yen, an all-time high.

The package was by and large welcomed by the equity market.

BOJ Mulls Increasing Capital

According to a press report, the Bank of Japan is considering boosting its capital against losses from its purchase of commercial paper and corporate bonds. BOJ's consideration of purchasing risky assets from financial institutions is one of the government's emergency measures to stem financial turmoil. Details of plan are yet to be finalized and will be submitted to the finance minister for approval early next month.

Sumitomo Mitsui Financial Group Reports 390 Billion Yen Loss

Sumitomo Mitsui Financial Group (SMFG) announced last week that it has an estimated 390 billion yen net loss and it plans to issue up to 800 billion yen in common shares.

With less value in equity holdings on its balance sheet compared to its 2 rival financial groups, SMFG was thought to have weathered this dislocation market fairly well - but that was not the case .

The majority of the loss comes from the decreased valuation of its stockholdings, notably Barclays Plc and increased reserves for non-performing loans.

Details on The New Tax Bill

Further to our previous reports, here are some more details on the bill to provide tax exemptions to foreign investors who hold stakes in Japanese domestic investment limited partnerships. The bill passed the Diet late last month.

Investors (limited partners, “LP”) of a domestic investment limited partnership are seen as being engaged in "joint-business activities” with Japanese general partners and therefore deemed to have a permanent establishment (“PE”) within Japan, which in turn, leads to tax obligations.

The latest tax bill provides exemptions to certain foreign investors and non-resident investors from assuming PE status in Japan, even though they have directly invested in domestic limited partnerships as the LP.

To be eligible for the exemption, however, foreign/non-resident investors need to satisfy all of the following conditions (such qualified investors are called “Qualified Foreign Limited Partners”).

1) The investor must be a LP in the limited partnership.
2) The investor is not involved in the execution of the business of the limited partnership.
3) The investor should own less then 25% of the asset held by the limited partnership.
4) The investor is not affiliated with the general partner.
5) The investor does not have other PE except for the one for the investment limited partnership (to which this bill provides exemption).

It should be noted that a foreign investor without PE in Japan has NOT been subject to capital gain tax - while the investor could still be subject to the Quasi-Business Transfer Tax.

The bill also provides for changes in the application of Quasi-Business Transfer Tax. Under the Quasi-Business Transfer Tax (often called as 25%/5% rule or “Shinsei Tax”), if a non-resident investor acquires 25% or more of a Japanese company and the investor sells 5% or more of the company during any of the following three years, the realized gain will become subject to Japanese corporate tax rate of 30%. The rationale for this rule is that if an investor acquires more then 25% of a company, the investor should be regarded as being engaged in business activity rather than investment activity.

The latest bill will change the application of the 25% test from the current “per collective investment vehicle” basis to the “per each LP in the fund” basis. This change will reduce the chance of the Quasi-Business Transfer Tax being applied, as it is less likely that a LP owns more the 25% of a co-mingled fund.

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Fast Retailing Revenue and Income Soar in 1H '09

Fast Retailing, the operator of Uniqlo casual wear stores, reported that it achieved a significant increase in both revenue and income in the six months from September 2008 through Feburary 2009, with consolidated net sales totaling 354 billion yen (up 13% yoy), operating income totaling 69.8 billion yen (up 39%), and net income totaling 36 billion yen (up 24%).

Uniqlo's existing store revenue in Japan rose an impressive 12.9%, generating a large increase in operating income. Its international division produced a higher than anticipated operating income for the first half of the year as business continued to grow favorably in the Asian region including China, HK and South Korea. The Uniqlo operation in the UK also managed to reduce its operating losses.

Although many of Japan's retailers are suffering as consumers cut back on spending, Uniqlo has built a solid brand image and enjoyed being the only winner amidst a host of sinking ships.

Interview with the CEO.

Mitsubishi Heavy Industries Bought Belgium Power Maintenance Company

Mitsubishi Heavy Industries, Ltd.(MHI) reached an agreement to acquire 100% of Maintenance Partners NV (MP) of Belgium.

According to Mr. Tsuchiyama, Deputy General Manager of Power Systems Business Strategy & Planning Department, "With MP, we are now able to offer our customers in the EMENA area a total package that goes beyond the mere supply of top of the range machines, [and] offer them certainty about the entire life cycle. This investment will dramatically enhance its ongoing power generation service[s] and component repair operations".

This is a relatively rare example of a Japanese company purchasing a foreign company to gain market share in EMENA.

Unitas and Merrill Private Equity Closes Tokyo Offices

It was reported that Merrill Lynch Global Private Equity has closed its Tokyo Office "mainly due to lack of deal flow in Japan’s private equity markets." Prior to this, Unitas Capital (ex-CCCP) also closed its Tokyo office, giving more priority to other Asian offices.

Japan has been a difficult market for many foreign funds. Restricted by their fund size, the foreign funds in Japan typically chased large deals. Despite the precedence of the Shinsei Bank deal, large deals are few and far between in Japan.

Foreign funds account for only 15% of approximately 500 buyout deals to date in Japan (as well as 15% of approximately 200 exits). The 500 deals are typically small in size. Four out of every five deals have less than a USD 100 million transaction value and Japanese funds have historically dominated the deal flow.

Lone Star To Buy Failed Japanese REIT

Nikkei newspaper reported today that Lone Star will be purchasing the failed REIT, New City Residence Investment Corp. for around 120 billion yen, of which 112.3 billion yen is for the assumption of the REIT's existing liabilities.

New City Residence filed for bankruptcy protection in October last year, the first of a series of REIT failures to follow in the next 6 months. At the time of the filing, it was reported that New City Residential had around 200 billion yen in assets under management (105 apartment buildings and other properties, mostly in the Tokyo area) with 112.3 billion yen in liabilities.

There were about 10 candidates for the rehabilitation sponsorship and Lone Star won the mandate, while Oak Tree supposedly came in second.

Asahi Breweries Gulps Down Australian Beverage Maker

Asahi Breweries, Ltd. the second largest Japanese Brewer announced that it has successfully acquired all otustanding shares of Schweppes Holding Pty Ltd., the direct parent company of Schweppers Australia.

The acquisition of Schweppes Australia will strengthen Asahi's international soft drinks business, create a new platform for growth in Oceania and enable the capture of synergies across the Group.

With the yen's appreciation, cash-rich Japanese drink makers are penetrating Asian markets through M&As.

Nikko Asset on Citi's Selling List

It was reported that Citigroup has started the divestment process of Nikko Asset Management, soliciting interest from major Japanese banks, insurance companies, and investment funds.

Nikko Asset is one of the largest asset managers in Japan with 9.1 trillion yen AUM and 561 employees, including 64 fund managers and 41 economists/analysts.

In February this year, Citigroup started the auction process for Nikko Cordial Securities and all 3 major banking groups in Japan - Mitsubishi UFJ, Mizuho and Sumitomo Mitsui - submitted bids. It is now considered likely that Citi will seek to sell Nikko Cordial and Nikko Asset as one package. The winner of the package will immediately gain substantial advantage in their respective fields, while the losers will have to face much tougher competition.

Nikko Principal Investments is also a shareholder of Nikko Asset Management.

2010 Graduate Hiring Plan

Financial institutions and manufacturering companies are seriously affected by the current economic turmoil and they are reducing FY 2010 graduate recruitment drastically.

Mizuho Financial Group plans to reduce its recruitment of new graduates for FY 2010 to 1370, which is 380 less than their earlier plan. Nomura Securities plans to hire about 500, down 23% from FY 2009. Daiwa Securities will hire 400, down 52%. Sony will hire 280 graduates next year, cutting about half from this year. Sanyo Electric Co. is hiring 50 engineers only. NEC will hire 100 graduates, down 90%. Toshiba will slash their recruitment by 40% to only 1500 hires. Panasonic, hiring 500, is one of the few exceptions in hiring the same number as last year.

Valiant Partners: Anzen Group Starts New Services

Anzen Group, a Tokyo-based taxi operator and a portfolio company of Valiant Partners, introduces new services to its transportation business.

It launches " Support Taxi", where the driver provides concierge-type services to his/her taxi clients. Examples are: booking doctor appointments, picking up medicine, escorting children to and from school, shopping and other emergency assistance.

Anzen Group is no exception in suffering from weakening sales under the current economic slowdown. The company tries to differentiate itself from competitors by introducing the new services for approximately 15% of its taxi fleet.

DBJ To Expand Emergency Lending Program to 10 Trillion Yen

The government and ruling parties are planning to boost the Development Bank of Japan's emergency lending program from its current 1 trillion yen to 10 trillion yen (approx. 100 billion US dollars).

The financing needs of Japanese companies are so strong that the emergency lending program has already depleted its 1 trillion yen budget after only 4 months since the inception of the program. Nissan Motor Co. and Mitsubishi Motor Co. are among major borrowers.

Restricted by their capital, commercial banks remain reluctant to meet the borrowing demands of those Japanese companies. It was reported that DBJ, on its way to privatization but still 100% Government-owned, initially resisted the government's plan as it will substantially inflate DBJ's balance sheet. The government is to inject 3 trillion yen of new capital to maintain DBJ's financial strength.

The government, the Bank of Japan, and ruling parties are employing all policy measures in order to bolster the struggling economy.

Japan Tankan Confidence Survey Fell to Record Low

The Bank of Japan announced that Tankan, the economic survey of enterprises that indexes sentiment among large manufactures, went down to minus 58 in March from minus 24 in December. This is the lowest since the survey started in 1974. The market expectation for Tankan was minus 55. A negative number means pessimists outnumber optimists.

While the real economy may contract further and the situation is even more serious among smaller corporations, there are signs that may suggest certain improvements. The auto and other industries have aggressively reduced inventories since the end of last year. The March Tankan survey indicated that business confidence was projected to improve for the next quarter.

The Nikkei 225 Index hit a recent low on March 10 at just above 7000 and moved up to 8843 on March 27.

Capital Gain Tax Scrap Bill for Foreign Investors Have Passed

As we reported last December and as was reported in the Nikkei newspaper in January, the bill to scrap capital gains taxes for foreign investors who hold stakes in Japanese companies through Japanese domestic limited partnership was submitted to the Diet. According to a reliable source, the bill was passed, although detailed operating procedures are yet to be finalized.

While there are several conditions for the capital gain tax exemptions, this change will generally allow foreign investors (who do not have business/offices in Japan) to directly invest in Japanese domestic private equity funds without assuming permanent establishment status.

We will keep you posted as we learn more details about this change.
For questions on this matter or on any other matters relating to Japan private equity, please send emails to mail@brightrust.jp. We will do our best to answer your questions.