Land of rising deal flow

Japan has seen only muted new deal activity so far in 2005, but the foundations are being laid for a strong finish to the season.

There is no shortage of private equity firepower targeting the Japanese market at the current time. With foreign investors like The Carlyle Group, Permira and Ripplewood Holdings lining up alongside domestic outfits such as Advantage Partners and Unison Capital, it is estimated that as much as $50 billion (€43 billion) is currently looking for a home.

The problem so far this year appears to have been lack of deal flow. According to the latest figures from the Asian Venture Capital Journal (AVCJ), Japan saw transactions totalling just $3.2 billion in the first nine months of 2005, around $2 billion less than the total recorded in China. On the face of it, there seems to be a mismatch of supply and demand.          

Thankfully for those non-domestic firms that have committed resources to the country, it is a situation that shouldn’t pertain for long. Satoshi Kitahama heads up the Royal Bank of Scotland’s Leveraged Finance Tokyo office, which opened in August. Kitahama said a strong recovery is just around the corner. “Hostile takeovers have started to pick up and mega-deals generally are beginning to make their way through the system,” he insisted.

Recent developments in the television industry provide a prime example of how a new generation of Japanese businesses are beginning to shake up the status quo – and trailing M&A activity in their wake. Earlier this year, fast- growing Internet services group Livedoor acquired a 35 percent stake in Nippon Broadcasting Systems, a radio group whose primary attraction for Livedoor was its Fuji TV subsidiary. Meanwhile, web-based shopping mall Rakuten has made an audacious (and apparently unwelcome) bid for TBS, Japan’s third-largest TV group.

Meanwhile, the ongoing saga at property group Seibu Rail highlights the potential for succession issues at private companies to slew off large deals. Cerberus Capital and Nikko Principal Investments earlier this month agreed to invest around $1.4 billion in Seibu, a business whose fate has been in the balance since Yoshiaki Tsutsumi, its founder and largest shareholder, stepped down in April 2004. The two private equity firms are facing a rival bid, however, from Yuji and Seiji Tsutsumi – the founder’s brothers.

Another potential source of large deals is the Industrial Revitalisation Corporation of Japan (IRCJ), the state-owned body established to provide assistance to ailing companies. Currently coming through the IRCJ pipeline is Kanebo, a cosmetics firm that is currently the subject of final-round bids from four consortia (including at least seven private equity firms). All four bids have reportedly been priced in excess of $3.5 billion.

It may not yet show up in the statistics, but private equity professionals in Japan are braced for a busy start to 2006.