New era of Japan mega-deals

Bain Capital on Tuesday got the green light from WPP, the world’s largest advertising agency, for its $1.3 billion takeover offer for the company’s stake in Japanese advertising and marketing business Asatsu-DK (ADK).

WPP has agreed to sell its 24.7 percent stake in ADK for ¥3,660 ($32.90; €27.60) per share and indicated it will withdraw its legal action against ADK once the tender offer is completed. WPP applied to launch an arbitration process with the Japan Commercial Arbitration Association in Tokyo and filed a petition in the Tokyo District Court for a preliminary injunction earlier this month over a breach of contract.

The Boston-based firm’s offer for ADK comes a month after it reached a record-breaking $18 billion deal with Toshiba for its microchip unit. Bain led a consortium of investors including Japan’s Hoya Group, Apple, Dell, Kingston, Seagate and SK Hynix to purchase all of the shares of the unit.

Bain is not new to big-ticket transactions in Japan and has a long history of investments in the country including in restaurant chain Skylark ($2.1 billion) in 2011, TV shopping network Jupiter Shop Channel (about $1 billion) in 2012, and call centre operator BellSystem24 (about $1.1 billion) in 2009.

KKR is another private equity firm involved in blockbuster deals in Japan this year, such as its $4.5 billion takeover of Nissan Motor-backed auto parts maker Calsonic Kansei and the $1.3 billion purchase of Hitachi’s power tools unit, which were both completed in March this year.

According to a Bain & Company report, private equity deal volume in Japan reached an all-time high of $23.9 billion from January to September 2017, almost three times the country’s $6 billion to $8 billion historical average. Corporate carve-outs represented a majority of the deals this year.

Jim Verbeeten, head of Bain & Company’s private equity practice in Japan, expects this trend to continue “as key fundamentals, such as improved corporate governance and a sustained focus on return on equity, continue to strengthen, providing sound support for future deals”.

Tsuyoshi Imai, a Tokyo-based partner at Ropes and Gray, also points out that a lot of the private equity firms are bullish on Japan because of the exit activity in the last three to four years, most of which have been good to outstanding in this market. According to the Bain report 2017 is on track to be a strong exit year, with larger exits increasingly going to strategic acquirers.

Although Japan has seen an uptick in large deals (bigger than ¥25 billion) this year, Japan watchers note that deals like these are few and far between due to a variety of challenges.

“Club deals in Japan are still pretty rare,” Imai points out. “Bain led a consortium for the Toshiba transaction in part because of the size of the transaction. As with other markets, trying to come up with $18 billion for one private equity deal is pretty challenging.”

He adds that because of the relative scarcity of Japanese assets sold in an auction, there are generally more bidders compared to other markets, often 10 or more in the first round.

David Gross-Loh, Bain’s co-head of Asia, also characterises Japan as “a hard market”. “It takes years to build teams, relationships, credibility,” Gross-Loh was quoted in a media interview in October.

To snag more deals then, private equity firms need to have a “play to win” mentality in order to qualify and make it through multiple rounds of competitive bidding. According to Bain & Company winning large deals requires private equity firms to “pay up, form alliances earlier, build a credible bid presentation, and lock up expert advisors early on.”

A change in perception of private equity is also driving deal flow. “The big difference that we are seeing now is that there’s more acceptance of private equity compared with a decade ago,” Imai says.

“With Toshiba or the Calsonic auction by Nissan, for example, there wasn’t significant resistance from the sellers about private equity firms participating in the process.”