Private equity opportunities in Japan for investors
Private equity is eyeing up the country and moving in to break apart giants. That will be great for investors, says Matthew Lynn.
The deal may still fall apart at the last minute. The government may step in to block it. Shareholders may get cold feet. But the takeover of the Japanese conglomerate Toshiba by the buyout giant Bain Capital looks close to completion.
If it happens, it will be among the largest buyouts of a listed company ever staged. It could also pave the way for a series of buyouts of Japan’s ageing, uncompetitive conglomerates, opening up a huge range of opportunities for their global competitors and for investors as well. Toshiba has a long and distinguished history stretching back to the 1870s, but it has been in trouble for years.
It has been beset by a series of accounting scandals, management upheavals and troubled takeovers, while competition in many of its main markets has been getting fiercer, which forced it to slim down and retrench. If you wanted to write a textbook on ineptly managed conglomerates, you couldn’t ask for a more perfect case study. Bain’s offer will probably come as a relief to shareholders and indeed to management, even in Japan, where takeovers, and foreign ones especially, have always been disapproved of.
The first of a wave of deals
In itself it will be a huge deal. When, and if, a final price is agreed, Toshiba is likely to cost Bain at least $20bn, putting it in the top 20 buy-out deals of all time. So long as it has a free hand, Bain should be able to make plenty of money on that investment. Toshiba, like many Japanese companies, has a sprawling range of units, ranging from air conditioners to consumer electronics to medical equipment, office systems, and IT management. There are probably dozens of little businesses within it that just need capitalising, some fresh ideas, a burst of energy, and can suddenly be brought back to health and sold off at a big profit.
It will certainly be a lot easier to make money from Toshiba than from a business such as Morrisons, sold to private equity for a fat price last year, which is already very efficiently run and operating in a very competitive market.
The deal may well open the door to a wave of private-equity deals in Japan. If so, that will be a unique opportunity and one of the most compelling of the 2020s. Japan has lots of great businesses that are ripe for a shake-up. Sony would be a very tempting target for one of the tech giants. Toyota is one of the best carmakers in the world and its two domestic rivals, Mazda and Honda, have fantastic niches and strong reputations. Takeda has formidable drugs research ,distribution, and manufacturing in its domestic market, and would surely be a tempting acquisition for Pfizer, GlaxoSmithKline and AstraZeneca, especially if it was broken up into separate units.
Japan also has lots of vast, sprawling conglomerates of the sort that were all broken up in the US and UK 30 years ago. There are companies we have hardly heard of, such as Itochu, with a value of more than $50bn, which has six divisions from food to textiles, all of which could be knocked briskly into far better shape and then listed as separate companies, or sold off to their global rivals.
Rich pickings for investors
There are three broader opportunities that the Toshiba deal can unlock. For the giant buyout firms, Japan could open up a whole new wave of potential targets, and at precisely the time when traditional hunting grounds such as the UK and US were starting to look difficult. It will take a lot of capital – not many Japanese conglomerates will cost less than the $20bn Toshiba is likely to command – but the returns will be handsome. Second, there will be opportunities for some of the world’s biggest companies to pick up choice businesses in food, consumer goods, engineering and electronics as units get spun out of the conglomerates that controlled them. This could boost earnings and market share. And finally, there will be plenty for shareholders. If the private-equity firms rip through Japan, the market will finally start to deliver after three decades of dismal returns, and the buyout funds will be a pretty good bet as well.