Importance of Aderans over-played

Japanese private equity practitioners do not share the view that the recent victory of US activist fund Steel Partners marks a turning point.

In May, US-based hedge fund Steel Partners gained management control of Japanese wig-maker Aderans when eight of its nominees were elected to the company’s board of directors, ousting most of the former management.

The success, which saw the firm simultaneously block local private equity firm Unison Capital’s bid to buy into the company, caused some to paint it as a turning point for private equity in the country.

Two key factors were remarked upon as being significant: firstly, that this was a victory for an activist fund, a notoriously unfavoured type of investor in a country where change in business is often negatively considered and the emphasis is on protecting jobs. Steel Partners holds an approximate 26.7 percent stake in Aderans and is the company’s largest shareholder. The firm invested in the company in 2004 and was an active and vocal critic of the previous management.

The second talking point was that Steel Partners, a foreign firm, beat off an overture from Unison Capital, a local firm, and therefore seen by some – Aderans management in particular – as being the lesser evil. In April, Aderans’ former board had announced its support of Unison Capital’s offer to acquire at least 35.2 percent of the company at ¥1000 per share. This offer was later increased to ¥1200 per share.

However, despite  appearances, private equity practitioners in Japan have been reluctant to view Steel Partners’ success as the milestone many in the media portrayed it as.

For one, the general view was that Unison’s share price offer was too far below Aderans’ book value of ¥1582 per share.

Secondly, there was the fact that Steel Partners wasn’t the only foreign investor in Aderans. US mutual fund firm Dodge & Cox also holds roughly a 9 percent stake in Aderans. “That’s a fair amount of control concentrated in foreign investor hands,” points out James DeGraw, a Tokyo-based managing partner of law firm Ropes & Gray.

Neither was Steel fighting a lone battle: proxy advisory firm Glass, Lewis & Co. also recommended shareholders support the board members proposed by Steel Partners, questioning the former board’s motive behind its agreement with Unison.

In addition, Aderans had been underperforming. The company’s recurring profit in 2009 was approximately ¥2.5 billion, down from ¥4.4 billion in 2008 and ¥8.8 billion in 2007. 

“In a nutshell, this was not a milestone,” said a Japanese GP. “Steel Partners basically made a positive, realistic proposal to change the malfunctioning management team, which was in the interest of the shareholders.”

That’s not to say though that a milestone still cannot be reached. As one Tokyo-based private equity professional said: if the new management manages to turn the company around, it will certainly mark a potential industry turning point.