Brightrust Buyout Monthly For July-Sept 2012

The July-September issue covers;

• Unison's $1 billion Sushiro exit,  foreign funds sweep large deals 
• Unison invests in Korean battery company
• Polaris invests in a unique housing company
• Fortress acquires a troubled debt-collection company and its parent consumer finance company 
• JIS invests $190 million in a semiconductor fabrication maker under reconstruction
• ACA and Sompo Japan invest in an elderly care home operator
• JIP buys a mobile phone seller from Olympus Corporation for $680 million 
• Permira buys Japan's top-selling belt-conveyer Sushi restaurant from Unison
• Next buys a 40-year-old cooking school operator for turnaround
• Jupiter Shop Channel, 50% owned by Bain, expands into Thailand
• Aozora managed to push back Gov't takeover deadline, but Cerberus will sell its 50 % stake
• Carlyle postponed the listing of Tsubaki Nakashima
• INCJ invests in a high-tech battery JV with 3 Japanese companies
• iSigma sells a fruit juice maker to a strategic buyer
• Advantage will hand over its restaurant chain investment to a strategic buyer
• J-Star sells a silver-focused mail order company at a high multiple
• Nippon Mirai divests a restaurant information service provider
• DRC exits from its 5.5 year old PIPE deal 
• State-backed ETIC makes $4 billion profit from Japan Airlines turnaround
• KKR may lose $1.3 billion chip maker deal to a Japan consortium led by INCJ
• Tokyo Metropolitan Government appoints 2 infrastructure managers
• Japan's largest public pension will study implementation schemes for its PE investments,  etc.

If you are interested, please send email to monthly@brightrust.jp with your name and contact details.

Cerberus To Sell Its 50% Stake In Aozora Bank

Aozora Bank has told media that its majority shareholder Cerberus Capital Management LP will sell some of its holdings in the bank in the planned buyback that was announced by Aozora a month ago and it may also begin selling the remainder in 2012 through the capital market or off-exchange direct transactions.

On August 27, Aozora Bank agreed with the Japanese government to repay public funds in installments over the next decade to push back the mandatory conversion of the preferred shares owned by the Government until 2022. When the government injected public funds into the bank in 1999 and 2000, the state received convertible preferred shares worth JPY 320 billion (USD 4.1 billion), of which JPY 180 billion worth remain outstanding. Aozora announced that it would reduce its capital base from JPY 420 billion (USD 5.4 billion) to JPY 100 billion, buy back about 20% of shares issued and boost its dividend payout from 30% to 40% of earnings.

KKR May Lose Renesas to a Japan Consortium Led by INCJ

Major Japanese manufacturers have teamed up with a government-backed Innovation Network Corporation of Japan (INCJ) to put together a rescue package for Renesas Electronics Corp. (6723). According to The Nikkei, the consortium led by INCJ will include Toyota, Nissan, Honda, Panasonic, Cannon, Fanuc, Denso, Keihin and possibly Bosch. It plans to invest more than JPY 100 billion (USD 1.28 billion) to acquire a majority stake in Renesas by the end of the year.

Renesas is one of the world's top producers of microcontrollers used in automobiles, consumer electronics and  industrial machinery. Some of its cutting-edge custom-made products are hard to replace with those from other manufacturers. The concern over ensuring the supply of these microchips apparently alerted the manufactures and INCJ and prompt them to submit a rescue proposal.

In late August, KKR proposed investing about JPY 100 billion in Renesas. Major lenders and major shareholders - NEC, Hitachi and Mitsubishi Electric - were ready to accept at one point. But the manufactures were wary that microcontroller supplies could be disrupted as they learned that KKR is likely to direct Renesas to focus on mass-production of generic chips. As conditions for its investment, the U.S. firm is said to have sought the removal of Renesas' entire board as well as additional loans from the lenders and three shareholders, who have already provided JPY 100 billion to Renesas to enable large-scale restructuring, entailing roughly 5,500 job cuts as well as the sale and closure of 19 domestic plants.

(Pls also see our post on August 29th.)

iSigma's Sale of Gold-Pak to Air Water To be Completed This Month

iSigma Capital's sale of its 100% stake in Gold-Pak, a fruit juice maker, to Air Water Inc. will be completed at the end of this month. The news was released in mid-August. Air Water is an industrial gas production company with USD 2 billion market cap. However, 2/3 of Air Waters sales are from non-Gas business. iSigma acquired a 92.6% stake of Gold-Pak through a tender offer in January 2011. The fund spent JPY 4.5 billion (USD 57million), of which JPY 1.5 billion was borrowed from Aozora Bank. We estimate the entry EBITDA multiple was around 3.5x (after paying a 56% premium).
Little financials are available regarding the exit of this time. According to Air Water's press release, Gold-Pak's sales, which had been falling in the preceding years, were stable at around USD 500 million in 2011 and 2012. Today Air water shares are trading at PER 10. As the entry price was low, even a sale at PER 7 (a random assumption) would have brought 1.5-2.0 x return to the iSigma fund.

The Enterprise Turnaround Initiative Corp of Japan Pocketed USD 3.8 Billion Profit From Japan Aiirlines' Re-Listing

Further to our post on August 3rd, Japan Airlines Co. is now re-listed at Tokyo Stock Exchange. This morning the carrier's market capitalization reached JPY 690 billion (USD 8.8 billion) making it the second largest IPO in this year only after Facebook. The Enterprise Turnaround Initiative Corp. of Japan supplied a total of JPY 350 billion (USD 4.5 billion) in support of the collapsed airline in 2009.  Today ETIC is cashing in JPY300 billion (USD 3.8 billion) profit for the benefit of tax payers.  There are some big deals in Japan. 

DRC Exits From Yumeshin Holdings At 1.5x

DRC Capital has sold its investment in Yumeshin Holdings, a staffing company specializing in construction workers. DRC invested JPY 920 million (USD 12 million) to acquire a 7.6% stake in the company in February 2007. Since the minority acquisition, DRC guided the company to focus on the core competence and helped restructure the swollen balance sheet. The GP believes the operational improvements have helped Yumeshin shares to out-perform peers and general equity market. This 5.5 year PIPE investment achieved 1.5x ROI with a gross IRR of 8.3% p.a..  During the corresponding period,  Nikkei Index fell by 49% (-11.3% p.a.) due to the Lehman Crisis and 3.11 Tohoku earthquake.

J-Star Exits From Elderly-focused Mail Order Business At A High ROI

On September 7th, J-Star announced that it has transferred all of the shares of Iki Iki K.K., a mail order business focusing on growing elderly population in Japan,  to NK Relations Co., Ltd., a wholly-owned subsidiary of Noritsu Koki Co., Ltd. Noritsu Koki has its origin as a manufacturer of film processing machines, but has been expanding business lines to include medical care, food and environments.

J-Star fund and its co-investors acquired Iki Iki in 2009 for about USD 13 million. As this was a turnaround investment under the Civili Rehabilitation Act, the entry multiple was extremely low and no leverage was used. According to a source quoted by PEI Asia, the sale price to Noritsu was approx. USD 100 million. J-Star CEO was quoted as saying "(During the holding period) EBITDA grew from $5.8 million to $12.5 million and net cash increased more than seven times to $18.3 million".

This is another example where operational improvement brought a significant ROI. "Silver Business" is the way to go.

Sushiro Will Bring $700 MM Profit To Unison II Fund

As is reported by several industry media, Unison Capital has announced that it will sell its entire stake (81%) in Sushiro, the top-selling revolving sushi restaurant chain in Japan, to an Irish investment company backed by Permira. Permira revealed that it was "valuing Sushiro at an enterprise value of approximately USD 1 billion".

Sushiro deal should be a home-run for Unison's second fund, which raised JPY 75 billion (USD 960 million) in 2004.

Unison acquired a 20% stake in the Sushi restaurant operator in 2007, increased its holdings to 90% by TOB in 2008 and took the company private in 2009. Unison paid approximately USD 285 million to acquire a 100% stake in Sushiro, of which US 170 million was financed by bank loans. After allocating 19% to the founder, we believe Unison spent approx. USD 100 million to finance the 81% stake (and associated cost). With USD 1 billion EV and no net outstanding debt, the deal will score approx. 8x ROI bringing USD 700 million profit to Unison II fund. Unison purchased Sushiro at 4x EBITDA, grew its EBITDA by as much as 3 times, and sold it at a very modest multiple.

This transaction shows foreign funds are increasing its presence in Japan. Large local funds, such as Unison, Advantage and Nomura Principal, used to own a lion's share in the large cap buyouts in Japan, but this in no longer the case. Bain, Carlyle and Permira have substantially benefited from the vacuum created in Japan's large cap space. Recent large transactions done by their Japan teams are secondaries bought from Japanese GPs without an exception.

Nippon Mirai Sold Gourmet PIA to Jorudan Co.

Nippon Mirai Capital announced that the mid-sized buyout firm has sold its holdings of Gourmet PIA Network Co., a restaurant-related information provider, to Jorudan Co., Ltd., a transportation-related information provider. Jourdan paid JPY 330 million (USD 4.2 million) to acquire a 100% stake in Gourmet PIA, which had a revenue of approx. USD 6 million with very small pre-tax losses in the past 3 years.  Nippon Mirai invested in Gourmet PIA in June 2005.

NEXT Capital Bought A Cooking School Operator For Turnaround

PE Asia reported that Next Capital Partners has acquired Tokyo-based cooking school operator Sunrich for JPY 500 million (USD 6.3 million).  Sunrich and its subsidiary Homemade Association run 114 cooking schools plus 150 franchise schools in Japan. The acquisition is a distressed investment and makes the first investment from the firm’s second fund. A second investment is expected in September, a NEXT spokeswoman  said.

Advantage Partner's Portfolio Company Rex To Be Taken By Colowide Via DES

Rex Holding Co, the holding company of several restaurant chains and a portfolio company of Advantage Partners, will become majority-owned by Colowide Co. (7616), the parent firm of several chains of Japanese-style pubs. Currently Rex is 32% owned by its founder and at least 55% owned by the funds advised by Advantage Partners.

Last Friday, Colowide announced that it will acquire a 66.6% stake of Rex through a debt-equity swap. Colowide has agreed to purchase outstanding bank loans from the lenders for JPY 13.7 billion (USD 175 million). While the total notional of the loans purchased was not disclosed, it should occupy a substantial part of Rex's USD 800 million liability (as of Dec 2012).

Aggressive business expansion in early-mid 2000s has caused Rex to suffer from heavy interest payments. Since Advantage funds acquired approx. 90% of the company in December 2006, Rex has been restructuring its business by selling convenience store chain operator am/pm in 2009, Red Robster in 2012 and super market chain Seijo Ishii in 2012. While the liability on its B/S was reduced by approx. USD 640 million between 2011 and 2012,  apparently it was not enough for the company to turn around. The sale of Seijo brought USD 215 million profit to Rex turning its pre-tax profit into black in 2012 , while the sale of am/pm in 2009 caused USD 95 million loss, according to Colowide's press release.

Advantage paid approx. JPY 7 billion to delist Rex from Tokyo stock exchange in December 2006. This deal will certainly pull down the performance of Advantage III fund eating up a portion of the large profit realized by the sale of Pokka Corp. last year.

Japan' s Largest Pension Fund to Study Alternative Investment Scheme

Last week, Government Pension Investment Fund, the largest public pension fund in Japan with USD 1.37 trillion AUM, collected proposals from the companies interested in conducting a research on the subject of "a possible alternative investment scheme at GPIF".  GPIF had announced a public tender a month ago and the tender winner is expected to complete the work by February next year.  In 2011, GPIF gave a research mandate on private equity to Towers Watson and another on infrastructure to Mercer through the same tender process.

Aozora Bank, Majority-Owned By Cerberus, Pushes Back Government's Preferred Shares Conversion Deadline By 10 Years

On Monday 27th, Aozora Bank Ltd., the successor institution to failed Nippon Credit Bank majority-owned by Cerberus Capital Management LP, said it has agreed with the Japanese government to repay public funds in installments over the next decade. It will make an initial upfront payment to the government of JPY 22.7 billion (USD 288 million) and then pay it JPY 20.49 billion annually until 2022.　

When the government injected public funds into the bank in 1999 and 2000, the state received convertible preferred shares worth JPY 320 billion (USD 4.1 billion), of which JPY 180 billion worth remain outstanding.

This deal pushes back the mandatory conversion of the government's preferred shares until 2022. One tranche of the preferred shares was due for conversion in October.

To generate funds for the repayment, Aozora plans to reduce its capital base from JPY 420 billion (USD 5.4 billion) to JPY 100 billion. Aozora will also buy back 330 million shares, or about a fifth of shares issued, and boost its dividend payout from 30% to 40% of earnings, one of the highest ratios among Japanese banks.

The plan is subject to the approval of shareholders at an extraordinary meeting on Sept. 27.

Aozora Bank shares jumped 20% at the news as the retail investors welcomed the proposal for share buybacks and dividend payout ratio increase.

Daikin To Buy Goodman From Hellman & Friedman for USD 3.8 Billion

Daikin Industries Ltd. (6367) will acquire Goodman Global Inc., the leading manufacturer of home air conditioners in the U.S., for roughly JPY 296 billion (USD 3.8 billion) from Hellman & Friedman LLC. The acquisition would be one of the largest yet this year by a Japanese manufacturer.

Daikin's air conditioning segment rang up sales of JPY 1.04 trillion (USD 13.2 billion) in fiscal 2011, making the firm No. 1 in the global market. With Goodman's sales, the sales will increase to JPY 1.2 trillion (USD 15.2 billion). 

Back in the spring of 2010, Daikin launched talks to acquire the U.S. firm in a deal that could have cost as much as JPY 350 billion. The negotiation was halted after the March 2011 earthquake. Daikin apparently restarted the talks aided by a strong JPY currency and urged by increased competition from Chinese manufacturers.

Currently Daikin shares are trading at 5.5 % below the yesterday's closing price.

KKR To Invest USD 1.27 Billion To Take Over Renesas Electronics

The Nikkei reported this morning that Kohlberg Kravis Roberts & Co. has decided to take over management of Renesas Electronics Corp. (6723) by spending JPY 100 billion (USD 1.27 billion) to acquire new shares from the struggling chipmaker.

KKR has presented its proposal to Renesas' three major shareholders, NEC Corp. (6701), Hitachi Ltd. (6501) and Mitsubishi Electric Corp. (6503), as well as the chipmaker's main banks. It hopes to reach a formal agreement as early as next month and to own a majority stake of the company by December.

Renesas has a market capitalization of about JPY 95 billion (USD 1.21 billion) . By seeking more than 5,000 voluntary early retirements and closing down some facilities, it expects to report an extraordinary loss of 150 billion yen for the current fiscal year. Renesas also plans to eliminate up to 14,000 jobs (roughly 30% of its workforce) and shut or sell nine domestic plants within three years.

NEC, Hitachi and Mitsubishi Electric have already agreed to provide a total of JY 50 billion (USD 630 million) through loans and other measures and 4 major banks are prepared to lend up to JPY 50 billion (USD 630 million) in total.

According to the Nikkei report, Renesas had requested that KKR spend JPY 50 billion (USD 630 million) on a private placement of new shares. But KKR apparently determined that it needs to take management control for a quicker restructuring and KKR may replace Renesas' management if the US fund becomes unsatisfied with the restructuring progress.

The news sent Renesas shares more than 30% higher this morning.

Sharp Divestments Will Provide Opportunities For PE Funds

Sharp Corp. (6753) reportedly plans to sell its information equipment business (copiers etc., JPY 277.5 billion / USD 3.5 billion in sales), electronic devices business (LED lighting etc., JPY181.2 billion / USD 2.3 billion in sales) and air conditioning equipment business (JPY 53.5 billion /USD 0.7 billion in sales).

Sharp may also invited a JV partner to operate its main plant in Kameyama, which makes LCD panels for Apple. It may also have other firms operate its TV assembly plant in Mexico and solar cell production facilities. It will sell its 0.6% stake in Olympus (7733) and possibly its 9.8% interest in lithium ion battery joint venture Eliiy Power Co.

Kyocera (6971), Daiwa House (1925) and Daikin Industries (6367) are among the firms to have reportedly expressed interest in buying them. According to our source, a few private equity firms have been in contact with Sharp.

Bracing for a huge net loss this fiscal year, Sharp seeks to get back on its feet by focusing on such fields as LCDs, mobile phones and white goods. With about JPY 200 billion (USD 2.5 billion)  in convertible bonds set to mature in autumn of next year, Sharp is in need of cash.

Japan Airlines to Be Re-listed, Bringing a Profit to ETIC

Japan Airlines Co. will be re-listed on the Tokyo Stock Exchange on 19 September 2012.

JAL filed for a bankruptcy on 19 January 2010 and received capital injection of JPY 350 billion (USD 4.5 billion) from the state-backed Enterprise Turnaround Initiative Corp. of Japan (ETIC). Having wiped out all of the shareholder equity 2.5 years ago, JAL has engaged in substantial corporate restructuring - reducing its flight routes and employees by 40% and cutting pension obligations and the number of subsidiaries by a half. It reported JPY 200 billion (USD 2.5 billion) operating profit in FY 2012.

ETIC, which owns approx. 96% of the carrier, will be selling its entire holdings at the listing. While the actual offering price will be set on 10 September, EITC would nearly double its investments if the price is set at JPY 3790, as reported by a media.

Banks to Be Allowed to Hold More Than 5% of Non-Financial Companies

The Financial Services Agency plans to relax the rule limiting bank stakes in non-financial companies to 5%, The Nikkei reported. By lifting the cap on ownership to 10-20%, the FSA hopes to nudge banks, particularly regional financial institutions, into helping struggling companies get back on their feet. If regional banks become able to provide more capital in addition to loans, it would stabilize smaller businesses' cash flows and could spark fresh capital investment. There have been calls within the ruling Democratic Party of Japan to relax the rule to encourage the growth of local economies.

INCJ to Invest JPY 10 Billion in Lithium Ion Battery JV

The Innovation Network Corp. of Japan will invest JPY 10 billion (USD 125 million) in a joint venture with Kureha Corp. (4023), Kuraray Co. (3405) and Itochu Corp. (8001) to mass-produce a cutting-edge lithium ion battery material at home and abroad. The 3 strategic partners will jointly contribute JPY 10 billion to the JV. Kureha and Kuraray have established processes to produce plant-derived material to be used in battery electrodes that can halve the time required to charge electric and plug-in hybrid vehicles, as well as improve battery durability by as much as 30%.

Polaris III First Close with JPY 20 Billion

Polaris Capital Group has announced that its 3rd fund had the first closing on July 11th with approximately JPY 20 billion (USD 250 million) commitments from investors. Polaris III aims to raise between JPY 30 to 40 billion. According to the press release, Polaris I has realized almost two-thirds of investments and expects to achieve full exits in a couple of months. Polaris II is now fully invested.

http://www.polaris-cg.com/topics/20120730-E.pdf