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Osaka Exchange Holder Jupiter Asset Says Tokyo Bid Price Too Low

July 26, 2012

Jupiter Asset Management Ltd., the London-based fund company that owns 1.2 percent of Osaka Securities Exchange Co., won’t go along with its takeover unless Tokyo Stock Exchange Group Inc. raises the price.

Shareholders deserve more than 480,000 yen a share because Osaka, which dominates Japan’s growing futures market, is more profitable than Tokyo, where volume in equities and public offerings are falling, according to Simon Somerville, manager of Jupiter’s Japan Income Fund. Osaka shares gained 4.9 percent to 462,000 yen since the merger was announced nine months ago.

“We’re certainly not going to support the deal in its current form,” Somerville said in a phone interview. Jupiter has owned shares in the Osaka exchange since 2009. “The price isn’t right. TSE is being valued 50 to 60 percent higher than OSE in the terms of this deal. The problem at the moment is that the value’s all in Osaka, not in Tokyo.”

Foreign investors who own 75 percent of Osaka Securities Exchange Co. may be able to extract more money to complete a merger that’s part of government plans for reviving Japan’s securities industry. They have leverage because the TSE can’t easily walk away from the deal, first announced in November, according to Somerville, Deutsche Bank AG and Religare Capital Markets Ltd.

Kazuhiko Yoshimatsu, head of corporate strategy at the Tokyo Stock Exchange and Masahiro Yada, a spokesman for Osaka Securities, declined to comment on the progress of the bid.

Comprehensive Exchange

Japan’s government said in 2010 it wants to create a “comprehensive” exchange that combines the country’s nine bourses into a single entity handling stocks, commodities and other securities. The country’s Financial Services Agency was involved in discussions between TSE and Osaka before the deal was announced, two people with direct knowledge of the talks said in March.

The transaction has two steps, with TSE first bidding for between 50 percent and 67 percent of Osaka in a tender offer scheduled to end Aug. 22. If that’s successful, owners will then vote to complete the merger via a share swap that values TSE at 1.7 times Osaka.

Osaka Securities is forecasting net income of 6.2 billion yen in the year to March 31, a 13.4 percent increase from the previous 12 months. The smaller venue’s target is 100 million yen less than last year’s annual profit at the TSE, where net income fell 29 percent.

Osaka had 1.33 billion yen net income in the three months through June 30, it said this week. Tokyo is scheduled to post earnings today.

Clearing Threshold

“If Tokyo barely clears the 50 percent threshold, then there’s some risk that the merger won’t be approved at the extraordinary shareholder meeting,” said Deutsche Bank analyst Hiroshi Torii. “Given this is part of the national agenda, raising the offer price would probably satisfy investors who don’t like the merger ratio.”

Market value of companies traded on the Tokyo bourse, which handles about 96 percent of share trading in Japan, is the third-highest of any venue in the world, the World Federation of Exchanges said this month.

Investors outside Japan owned 75 percent of Osaka’s shares as of yesterday, according to data compiled by Bloomberg. That’s less than the 80 percent they held on Nov. 21, the day before the merger was announced, the data show. Fidelity Investments is the largest holder.

Political Imperative

While regulators elsewhere in the world have scuttled more than $30 billion in exchange mergers since 2010, Japan’s Fair Trade Commission approved the deal July 5. The companies project the deal will close in January.

Government backing binds the companies more than usual, said Jonathan Foster, Singapore-based director of Global Special Situations at Religare Capital Markets Ltd., who advises some of Osaka’s shareholders.

“There’s a lot of pressure to get this done,” Foster said in a phone interview. “It’s not going to be easy to turn around and explain that the deal isn’t going to work because you couldn’t come to terms on price.”

JO Hambro Capital Management Ltd., the OSE’s third-largest shareholder, won’t tender its 5.1 percent stake because it wants to own a piece of the exchange formed out of the planned merger, Nudgem Richyal, a Singapore-based portfolio manager at JO Hambro, said on July 10. The bourses should make sure disagreement over price doesn’t derail the bid, he said.

‘Tough Decisions’

“The TSE is going to be forced to make some tough decisions to get this deal through,” said Gaku Ishiwata an attorney at Mori Hamada & Matsumoto, rated Japanese Deal Firm of the Year by Asian Legal Business magazine. “Foreign investors are interested in profit and are different than domestic investors who have business dealings with the merger companies. Hedge funds may well approach TSE and ask for more in exchange for their support.”

If Tokyo was simply offering 480,000 yen a share for Osaka, the deal would fail, said Jupiter’s Somerville. The two-stage process and a lack of transparency about the progress of the tender offer makes it difficult for shareholders to decide whether to sell or hold out for more and risk ending up with shares of a merged company dominated by TSE.

“TSE has been very clever with the way they’ve done this,” Somerville said. “If you don’t tender and it goes through, you’re going to look pretty stupid. So it’s a game of poker going on.”

To contact the reporters on this story: Jason Clenfield in Tokyo at; Toshiro Hasegawa in Tokyo at

To contact the editor responsible for this story: Nick Gentle at

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