Breakingviews: Japan’s buyout teams face endurance challenge

Japan has a fondness for endurance game shows, where contestants are forced to brave a variety of tortures to determine a winner. Buyout barons in Tokyo are starting to empathise with the losers. Showa Denko is buying Hitachi’s chemical unit for 964 billion yen ($8.8 billion), ending the year’s biggest private-equity feeding frenzy with a whimper.

Once regarded as “hagetaka”, or vultures, private equity has become a more acceptable option for Japanese conglomerates looking to tidy up their sprawling corporate empires, spurred on by Prime Minister Shinzo Abe’s corporate reforms. Buyout groups dutifully raised funds to take advantage of the coming boom. But, while there have been big deals, such as a Bain Capital-led consortium’s $18 billion acquisition of Toshiba Memory in 2017, they tend to come along infrequently. And worryingly, Japan Inc is increasingly keen to play along. Japanese companies have plenty of advantages: low borrowing costs, and the ability to create synergies.

That was in ample evidence on Wednesday, when chemicals company Showa Denko agreed to buy Hitachi’s adhesives-to-batteries division for more than double its own market value, trumping rival bidders including Bain and Carlyle. The need to guard against the rising threat of Chinese rivals motivated it to pay 13 times the target’s EBITDA, as estimated by Jefferies analysts for the current financial year. Hitachi Chemical’s market capitalisation in March, when news of the sale emerged, was just 413 billion yen.

Showa Denko isn’t an exception. Hitachi Chemical is one of nearly 3,000 Japanese companies worth a combined $115 billion that Japan Inc has snapped up in 2019, making it the most active year for domestic M&A since 2009, as per Dealogic data. Strip out Unizo, the Japanese hotelier that has sparked a similar feeding frenzy but is continually delaying a sale, and just 32 leveraged buyouts worth a combined $4 billion have been done this year. Just one of those, MBK Partners’ acquisition of chocolatier Godiva’s Japanese unit, broke the $1 billion threshold.

Meanwhile, huge sums of capital are being raised on the promise of a deluge of deals. Buyout groups have raised nearly $20 billion for Japan-focused funds since 2017, according to Preqin, the busiest period for fundraising since before the crisis. Record offerings are coming from Carlyle and Polaris. Investors will need plenty of patience.

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