Bloomberg News

Olympus Gains on Report of $1.28 Billion Preferred Stock Sale

December 20, 2011

Dec. 20 (Bloomberg) -- Olympus Corp. snapped a four-day, 33 percent stock slump on reports it may replenish a $1.3 billion hole left in its balance sheet after an accounting fraud by selling shares to a strategic investor.

The Japanese camera maker jumped as much as 16 percent, its maximum daily limit, after the Nikkei newspaper reported the company hired financial advisers for a planned 100 billion yen ($1.28 billion) sale of preferred stock. Investors may include Sony Corp., Fujifilm Holdings Corp., Panasonic Corp., Innovation Network Corp. of Japan and Germany’s Siemens AG, the report said, without citing anyone.

Olympus President Shuichi Takayama last week said he will consider all options to restore capital after slashing net assets 70 percent following revelations that the company had falsified accounts to hide investment losses for more than a decade. Selling preference shares convertible into equity may let the company raise funds at the same time as sidestepping objections from some investors to a sale of common stock.

“Preferred shares are a bit better than common stock for investors as there’s no immediate dilution, even though they may be changed into common equity some day,” said Mitsushige Akino, who oversees about $600 million in Tokyo at Ichiyoshi Investment Management Co. “Also, today’s report reassured investors that Olympus may get support from major Japanese firms and that this may improve its governance.”

The stock reversed an earlier 3.8 percent decline to trade 150 yen, or 16 percent higher, at 1,065 yen as of 1:49 p.m. on the Tokyo Stock Exchange. Olympus was the biggest gainer on Japan’s benchmark Nikkei 225 Stock Average, which rose 0.6 percent. The endoscope maker also had the biggest climb on the MSCI Asia-Pacific Index.

Delisting Threat

The size of the fundraising would be influenced by the Tokyo Stock Exchange’s decision on whether to delist Olympus following the $1.7 billion accounting fraud, the paper said.

Josh Shores, a London-based principal at Southeastern Asset Management Inc., yesterday raised concerns that Takayama would sell new common stock to a strategic partner. That would dilute existing shareholders’ stakes and weaken their ability to force a shake-up of the company’s board at a vote due in March or April, he said.

Tokyo Stock Exchange rules permit companies to issue new stock to a third party with a dilutive effect of as much as 25 percent without seeking shareholder approval.

Creditors led by Sumitomo Mitsui Banking Corp. favor the sale of as much as 25 percent of the Japanese camera maker to a strategic partner, two people with direct knowledge of the matter said. Lenders are also likely to back Olympus management’s plan over any proposal by axed President Michael Woodford to revamp the board, the people said, asking not to be identified because the issue is sensitive.

No Decision

Olympus wasn’t the source of Nikkei report, the company said in a statement to the stock exchange today. Spokesmen at Sony, Fujifilm and Panasonic declined to comment.

“We’re considering a wide range of measures to boost our capital,” Tsuyoshi Kitada, a spokesman for Tokyo-based Olympus, said yesterday. “No decision has been made on whether to form a capital alliance with a partner or not.” Spokesmen for Sumitomo Mitsui couldn’t be reached for comment.

Investors have struggled to exert influence over management in Japan, where stocks on average trade at less than half their value relative to revenue as those in the U.S. and Europe. The companies that make up Japan’s benchmark Nikkei 225 Stock Average trade at an average of 0.6 times revenue, compared with 1.9 times for the Standard & Poor’s 500 Index and 1.7 times for the Stoxx Europe 600 Index, data compiled by Bloomberg show.

‘Severe Blow’

“Olympus should not be sold off on the cheap to anyone,” Shores said in an e-mailed statement yesterday. “If the incumbent board is allowed to sell off the company’s independence cheaply to protect its own interests, it will deal a severe blow to the reputation of Japan’s capital markets.”

Southeastern is Olympus’s biggest foreign shareholder. The Memphis, Tennessee-based fund in 2009 failed in its second attempt to oust the president of Nipponkoa Insurance Co., in which it held a stake of about 18 percent. Brandes Investment Partners LP, Dalton Investments LLC, Steel Partners, and the Children’s Investment Fund Management UK LLP are among overseas investors that have sought a greater say in the management of Japanese companies in which they invested.

Shares Extend Losses

While Olympus’s bank lenders have pledged to stand by the company, a shareholder tie-up may be needed to ensure sufficient capital, the people said. Several companies and private-equity firms have approached banks about the possibility of taking a stake or some other type of capital alliance, the people said.

Fifty-three corporations, including medical equipment maker Terumo Corp., Sharp Corp. and Casio Computer Co., together hold about 13 percent of Olympus, according to data compiled by Bloomberg.

Overseas shareholders have said Olympus’s current management shouldn’t be allowed to play a role in determining a new board.

Takayama last week backed away from the findings of an independent panel on the cover-up, which called for a purge of all executives involved as well as the board that failed to act on warnings from auditors.

Shareholders will vote on new management in March or April, Olympus said last week. Takayama said the replacement of the entire board may not be necessary.

Olympus still faces criminal probes and a review by the Tokyo Stock Exchange that may see it ejected from the bourse.

Katsunori Nagayasu, chairman of the Japanese Bankers Association, said last week lenders will continue to support Olympus and expressed hope it remains listed. Nagayasu is also president of Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded bank and one of Olympus’s main lenders.

--With assistance from Chris Cooper, Takashi Amano, Yuki Yamaguchi and Eijiro Ueno in Tokyo. Editors: Ben Richardson, Frank Longid

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net


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