Ripplewood's $2.3bn buyout of Japan Telecom was the largest of a number of recently announced private equity transactions in Japan, giving the strongest indication yet that the country could become a significant market for both local and overseas investors. Ricky Morton reports.
Often cited as a somewhat inhospitable environment for private equity investors, Japan suddenly flashed brightly on the private equity map in September when it was confirmed that a consortium of investors led by Ripplewood Holding, the US-based LBO house, would acquire Japan Telecom's fixed line business from Vodafone for more than $2bn.
In addition to being the country's largest private equity-backed transaction to date, the deal had symbolic significance for the country's private equity operators. “It was nice to see a large deal like that taking place,” says Tatsuo Kawasaki, a director at Unison Capital Partners. “There are so few precedents for a deal like this.”
To put the transaction into context, the Japanese private equity market accounted for $2.4bn of the country's total M&A activity last year, putting it in second place in Asia in terms of overall private equity volume, behind South Korea ($3.5bn), according to data from the Asia Venture Capital Journal. At $2.32bn, the Ripplewood-led investment almost single-handedly matched last year's total market activity in Japan.
“Japan has the most potential as a major buyout market [in the Far East],” believes Ken Albolote, a vice president at the Japanese operations of global private equity firm The Carlyle Group in Tokyo. “So many more deals should be on the cards looking forward. We are very confident about the prospects.”
Carlyle's enthusiasm for the Japanese market was recently boosted by its acquisition of Colin Corporation, a medical device manufacturer based in Komaki. The investment was made from the firm's dedicated Japanese buyout fund, which is expected to hold a final close later this year. Carlyle is targeting $400m for the fund and will make equity investments of between $20m and $80m per transaction. “We are one of the few overseas firms to have raised a dedicated Japan-focused fund,” says Albolote. “We think the mid-market will provide us with significant opportunities.”
The bulk of Japanese private equity activity is expected to be the result of corporate divestment programmes. “Many large corporations need to be leaner,” says Hideo Aomatsu, a co-founder of mid-market buyout house Activ Investment, based in Tokyo. Part of what is fueling the need for leanness is companies struggling to service their debt. “Companies have come under pressure from their lending banks who themselves are under pressure to reduce their exposure to non-performing loans,” says Aomatsu.
But this does not mean that every private equity professional in Japan is focused on turnaround situations. “There are a lot of good opportunities for implementing restructuring strategies at Japanese businesses,” says Aomatsu, “but we are not shying away from typical LBO situations either.”
New players welcome
Despite the presence of foreign houses of Carlyle, the Japanese mid-market is dominated by local players. “In [the large-cap] category, you have firms like Ripplewood that tend to play a big game in the high profile projects,” says Aomatsu. “Then there are the domestic, independent funds which have raised between $100m and $300m and focus on middle market businesses.
In most cases, it is the mid-market that will benefit from most intensive restructuring.”
Unison Capital has enjoyed a pick-up in activity in 2003, completing three deals in the first nine months of the year. “Deal size has also increased,” notes Kawasaki. According to Aomatsu however, one of the key issues facing the Japanese buyout market is an absence of new players to further the progress. “Some have tried to set up but we have not seen any new entrants recently. Given the size of Japan's GDP, buyout activity is still small. In order to increase this we will need to see more players in the market.”
The emergence of new fund managers may hinge on a change in perception of the Japanese market in terms of whether it can provide financial investors with enough liquidity. “Some pension funds in the past have not been satisfied with the current progress being made by private equity firms,” says one GP. “This is understandable to a degree because of the difficulty in achieving exits.” However, according to Kawasaki, the situation may be improving. “Every time we try to buy, there seems to be some non-fund competition. This is a positive sign.” The hope must be that trade buyers remain interested in these businesses a few years down the line when private equity firms are looking to offload their investments. “Private equity is definitely viable in Japan,” says Kawasaki. “Even as the market stands, there is plenty to keep us busy.” ?
Longreach sets $500m target for Asia fund
Longreach Group, a new private equity firm set up by the former head of UBS Warburg Japan, Mark Chiba, is planning to raise at least $500m to invest in the Asia-Pacific region, according to press reports.
Chiba joins in the venture with Yasuyuki Miyoshi, a former managing director at Merrill Lynch Japan, and Masamichi Yoshizawa, former managing director at Morgan Stanley Japan.
Chiba departed UBS at the end of July after the company announced his resignation in May. While at UBS, he served as the president and CEO of its investment banking division.
The firm is starting with offices in Tokyo and Hong Kong. Investment targets include divisions of Japanese technology conglomerates that could be spun off and possibly merged with companies from South Korea and China, as well as regional deals in food beverages and retailing, according to reports.
Carlyle backs Kito buyout
US private equity giant The Carlyle Group has acquired a 91 per cent stake in publicly traded Japanese crane and hoist manufacturer Kito Corp in a transaction valued at $111.8m.
Kito Corp, founded in 1932, manufactures hoists and crane products used in industrial settings. The company had revenues of $173m last year. Carlyle and Kito management will provide equity for the transaction with a debt package coming from Japanese banks led by Sumitomo Mitsui Banking Corp.
“Kito has a bright future and we are pleased to be a part of it,” said Tamotsu Adachi, managing director of The Carlyle Group's Tokyo office. “Kito's leadership position in the global hoist market and its strong cash flow are quite impressive in this difficult market.”
AC Capital to buy Foodx Globe
Japanese investment company AC Capital has agreed to privatise Foodx Globe, the operator of coffee chain Tully's Japan, in a deal valued at $103m.
The purchase price is at a premium of 45.16 per cent based on Foodx's average closing price between June 2 and August 29 on Osaka's Hercules market. AC Capital said Foodx CEO Kota Matsuda, who owns 25.5 per cent of Foodx, and other major shareholders including Unicafe Inc, a producer of roasted coffee, and Fujimak Corp had agreed to the deal.
Lone Star agrees KEB deal
The South Korean government has approved the sale of a controlling 51 per cent stake in Korea Exchange Bank to US investment fund Lone Star in a deal valued at around $1.2bn.
Lone Star, which has said that it plans to make South Korea the hub of its Asian operations, will acquire a 51 per cent equity interest in cash through the subscription of new primary shares from KEB and the purchase of existing shares from its leading shareholders, according to Reuters. Under the contract, KEB will issue 268.8m new shares to Lone Star for approximately $3.48 per unit, a 20 per cent discount to its par value.
KEB, South Korea's sixth-largest commercial bank, said the injection of fresh capital would help it reduce bad loans to ailing firms and household borrowers. The deal is part of the government's efforts to recoup state money injected into the restructuring of troubled lenders during the 1997-1998 Asian financial crisis.
Carlyle signs MoU for Colin
Carlyle Group has signed a memorandum of understanding to acquire Colin Corporation, a medical device manufacturer based in Komaki, Japan.
Carlyle was selected as equity sponsor of the acquisition after an auction process was conducted following Colin's recent filing of Civil Rehabilitation Law, Minji Saisei Hou or Chapter 11 equivalent in Japan. Financial details of the transaction have not been disclosed.
Colin was established in 1975 as a blood pressure monitor manufacturer and has since broadened its product line into two primary areas of business. Colin's Moneo business is a leader in the non-invasive blood pressure and patient monitor market.
“This is a unique opportunity to purchase an attractive, stable business with leading market share,” said Tamotsu Adachi, a managing director at Carlyle. “Carlyle's global healthcare platform and financial resources will enable us to establish an early foothold in Japan's promising healthcare buyout sector.”
Ripplewood syndicates Japan Telecom equity
Ripplewood has reached agreement with four international private equity firms to provide additional financing to back the buyout of Japan Telecom, which was announced in August.
Ripplewood, which agreed a price of $2.3bn with vendor Vodafone, said that Goldman Sachs, Newbridge Capital, PPM Ventures, the private equity arm of Prudential, and Telecom Venture, a Hong Kong investment group, would be co-investors in JT's fixed-line business.
Financial arrangements for the co-investment agreements have yet to be arranged, although further investors are expected to back the transaction. Ripplewood has signed up eleven financial institutions to provide debt for the buyout, according to the Financial Times.
Australia set for private equity boost
The private equity market in Australia is set to bounce back in 2003 and 2004 after two years of declining activity, according to a report published by KPMG's Private Equity Group.
The head of the KPMG Private Equity Group, Ian Knight, said a number of factors should lift future activity and put private equity back on the map for investors after two lackluster years. “The greatest boost in the next 12 months will come from stand-out investment performances. A number of the private equity managers hold positions in exceptional companies. These are likely to be converted into large realised profits over the next 12 months and will re-ignite interest in the private equity market.”
According to data published by KPMG, funds raised in 2002-2003 are expected to fall below the A$810m (US$547m) raised in 2001-2002 and the A$1.1bn (US$740m) raised in 2000-2001. KPMG estimates that Australian private equity fund managers still have about A$2.5bn of capital available to invest, adding that the surplus of private equity funds available for investment was diminishing quickly.
“Private equity fund managers indicate that opportunities to raise capital remain restricted for two reasons,” Knight said. “First, supply is limited because of the reduced appetite of investors for private equity after poor returns in recent years. And secondly, raising capital is a complex and lengthy task, even for proven private equity fund managers, because of the gatekeeper process required by institutional investors.”
China's SMIC raises $360m
Shanghai government-backed Semiconductor Manufacturing International Corporation (SMIC), China's largest semiconductor manufacturer which was set up in 2000, has raised $360m in a private placement from a group of venture capital investors. The move comes ahead of plans to launch a $750m IPO in New York and Hong Kong next year.
Shanghai Industrial Holdings Limited, H&Q Asia Pacific Limited, and Walden International were among the existing backers of the business in the latest financing round. New investors included New Enterprise Associates, Oak Investment Partners, and Beida Microelectronics Investment and Israel's Vertex Venture Fund.
JAFCO to back Autron Corp
JAFCO Asia Technology Fund, the venture capital fund of Japanese-based investor JAFCO Asia, has invested just under $5m in IC Equipment, the manufacturing unit of Autron Corporation.
Under the agreement, JATF will inject approximately $8m into IC Equipment equating to around 26.67 per cent of the company's total enlarged share capital. “About $2m of the net proceeds will be used for the expansion of the manufacturing and engineering facilities in Singapore and Shanghai in China, while up to $1m will be used to repay certain loans with the rest of the proceeds to remain as working capital for IC Equipment,” said TY Lim, managing director of IC Equipment.
Private equity firms prepare Australian music IPO
Australian home entertainment and music retailer JB Hi-Fi is planning to raise up to A$134m (US$90m) via an initial public offering on the Australian Stock Exchange in late October managed by Goldman Sachs, JBWere and Macquarie Bank.
The proceeds of the IPO will be returned to Macquarie Direct Investment, Australian
Ventures, and BancBoston Investments, as they complete an exit from the business they acquired in 2000. Management, directors and previous owners of the company will retain their current 15 per cent interest.
JB Hi-Fi said it plans to issue 86.6m shares, or about 85 per cent of the company, in an offer priced at between A$1.35 and A$1.55 a share. The final price will be set after an auction to institutions.
Australian buyout fund closes on A$115m
Advent Management Group, the Australian private equity firm, has held a final close of its fourth fund, Advent IV Private Equity Fund, on A$115m (US$78m). The new fund has already participated in several investments, and has committed 16 per cent of the fund's capital to date.
Advent, which bought itself out of Advent International in 1997, secured the majority of its commitments from local pension funds. The fund was launched in 2002.
Advent IV will make equity investments of between A$2m to A$17m equity per company. The firm, headed by Rupert Harrington, Brian Ball and Daryl Reilly, invests in information technology & communications, medical and health care services, industrial and commercial services, tourism, leisure and hospitality. The firm also aims to participate in larger buyout syndicates.