Cerberus Capital Management LP is battling Seibu Holdings Inc. shareholders including Yoshiaki Tsutsumi, once the world’s richest man, for seats on the Japanese company’s board. History suggests the investment company, run by Stephen A. Feinberg, will fail.
Seibu President Takashi Goto has said he won’t offer “any concessions” to the New York-based investor even as Prime Minister Shinzo Abe plans to require companies to have at least one outside director. The fight for control at the Tokyo-based train and hotel operator shows the challenge overseas private-equity funds face in Japan, where attempts by foreign investors to gain board representation have mostly been beaten back.
Cerberus, Seibu’s largest investor with a 35.5 percent stake, recommends executives including former U.S. Vice President Dan Quayle and former U.S. Treasury Secretary John Snow to the board ahead of a June 25 shareholder meeting. The investment company, which oversees more than $20 billion, aims to boost Seibu’s profitability before an initial share sale.
“I think Japan is changing but maybe not at the speed some people want,” said Yuuki Sakurai, chief executive officer of Fukoku Capital Management Inc., which manages about $19 billion. “The aim of holding equity in Japan and in the U.S. is probably slightly different. To Japanese, the purpose of a company, whether it’s listed or not, is to provide a service to the community, even if it’s not making a profit.”
Cerberus has spent about 120 billion yen ($1.2 billion) acquiring 35.5 percent of Seibu, which isn’t listed. In comparison, the fund spent $7.4 billion to buy an 80.1 percent stake in Chrysler LLC in 2007.
The push by Cerberus, which raised its stake in Seibu last month, follows failures to gain representation on Japanese company boards by T. Boone Pickens in the 1990s, Christopher Cooper-Hohn’s Children’s Investment Fund Management UK LLP in 2008 and Warren Lichtenstein’s Steel Partners in 2010.
Like those previous investors, Cerberus faces domestic opposition. Tsutsumi, who amassed a $16 billion personal fortune while at the helm of Seibu and was named the world’s richest man by Forbes magazine in 1990, backs the train and hotel company’s management. He holds 36 percent of second-largest shareholder NW Corp.
“It’s going to be difficult for Cerberus to get their candidates elected,” said Kengo Nishiyama, senior strategist at Nomura Holdings Inc.
In addition to Quayle, chairman of Cerberus Global Investments, and Snow, Cerberus has recommended directors including Hirofumi Gomi, a former commissioner of Japan’s Financial Services Agency, Yuji Shirakawa, former chairman of Citigroup Global Markets Japan, and Louis J. Forster, a senior managing director at Cerberus.
Seibu’s candidates for director will be most profitable for the company, said Shuhei Akasaka, a spokesman for the company, the fourth-largest hotel operator in Japan by rooms.
Abe wants to add outside directors to companies to increase independence and aims to double foreign direct investment in Japan to 35 trillion yen by 2020, according to the government’s growth strategy.
“I doubt there are enough qualified people to be outside directors at all listed companies in Japan,” said Sakurai. “I think it’s a gesture. It couldn’t just be anybody; you have to be very qualified to become an outside director, maybe more so than an inside director.”
Cerberus published a list of nine topics last week that it wants to raise at the shareholders meeting, including failures to meet profit targets, lack of comparisons of results with other companies in the industry, and lack of disclosure on its operations in Hawaii.
Seibu lowered earnings forecasts on March 26, five days before the end of the fiscal year, cutting its estimate for operating profit before interest, taxes, depreciation and amortization by 3 billion yen to 78.1 billion yen, from at least 81.3 billion. Two months later, its reported earnings beat that prediction by 2.1 billion yen.
“We want Seibu to be an exemplar of corporate governance,” Forster told reporters in Tokyo this week, citing the change in forecasts as a cause for concern.
Cerberus in 2006 led a bailout of Seibu, the seventh-largest railway operator in the Tokyo area by ticket sales, with Nikko Principal Investments Japan Ltd. Seibu was delisted in 2004 for breaking exchange rules by misstating stakes.
The hedge fund announced a tender offer in March to boost its stake in Seibu to as much as 36.4 percent. Cerberus raised that target a month later to as much as 44.7 percent, as it increased the number of people it was recommending for board seats to eight from three.
The company said it ended up buying 10 million shares, 3.04 percent of the amount outstanding.
About 80 percent of voting rights are typically exercised at annual shareholders meetings of listed companies, Nomura’s Nishiyama said. Cerberus was probably trying to get more than 40 percent of Seibu’s outstanding shares to secure more than half of the usual voting rate, he said.
Billionaire Daniel Loeb is also trying to force change at a Japanese company. He’s pushing Sony Corp. (6758) to spin off part of its entertainment unit so it can focus on its struggling electronics business. Loeb’s Third Point LLC, which owns 6.9 percent of Sony, said in a June 17 letter he was interested in serving on the board.
One example of success was Steel Partners, which won shareholder support to install a new board at Aderans Holdings Co. in 2009, five years after it began investing in the wigmaker.
The New York-based fund wasn’t able to keep that momentum as it lost a shareholder vote to oust directors from Japanese brewer Sapporo Holdings Ltd. (2501) in 2010.
Cerberus has said it is willing to wait as long as three years for an initial public offering of the Japanese rail and hotel operator, while Seibu has said it is already “financially prepared.”
“They probably want an IPO to happen when profit is high enough and the market is high enough to gain a good valuation,” said Nicholas Benes, a representative director of The Board Director Training Institute of Japan, which trains executives in corporate governance. Still, “if trust has broken down, then it’s going to be difficult to recover that.”
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