Japan’s interest in foreign assets may dwindle

Japanese trade buyers have been targeting acquisitions in foreign markets such as Southeast Asia. However, a depreciating currency could make offshore acquisitions less attractive.

The depreciating Japanese currency could curtail the number of Japanese corporates seeking opportunities abroad, according to Tsuyoshi Imai, a partner at Ropes & Gray in Japan. 

“There was a significant increase in [Japanese] outbound M&A activity during 2012. I think a lot of it was driven by the strength of the yen, which made overseas assets cheaper, and there was an overall sentiment that really the domestic market wasn't expanding. So they either had to go abroad or wither, wait and die.”

Japan's new prime minister, Shinzo Abe, announced a new economic stimulus in January, but the currency has continued to depreciate. Imai continued, “The yen has depreciated significantly even since November last year, so I think there has been some reduction in that type of outbound acquisition.”

Japan's total outbound M&A in 2012 rose to $$84.6 billion, a 22 percent increase from the $69.6 billion during 2011, according to Thomson Reuters data. Private equity-backed M&A, on the other hand, decreased to $476 million, an 82 percent decrease from the $3.26 billion the previous year.

Cashed-up Japanese strategics have been targeting foreign businesses, especially in Southeast Asia. For example, Japanese retail conglomerate Aeon is in talks to acquire CVC Asia Pacific’s 80 percent stake in Indonesia-based department store chain Mata Hari in a deal that could be worth up to $3.5 billion, according to media reports. CVC acquired the business in April 2010 for $790 million. 

“Clearly [Japanese corporates] are players in the billion dollar deal space,” added Brahmal Vasudevan, founder of South Asia-focused Creador. “I don¹t see them much as competition but perhaps [as an] exit route for a lot of the larger private equity firms.”

Despite the depreciation of the yen, global firms such as Bain Capital and Kohlberg Kravis Roberts are bullish on the Japanese economy and are eyeing partnership with Japanese businesses that aim to acquire foreign assets. Sources say private equity is well-placed to tie-up with these Japanese companies as they often lack operational capabilities and the expertise to expand abroad. 

Joseph Bae, managing director at KKR, said at the January HKVCA forum in Hong Kong that KKR has recently made two strategic partnerships with Japanese corporations. He said the firm hopes these will ultimately create investment opportunities for Kohlberg Kravis Roberts Asia Fund II, which is believed to be near final close on $6 billion.