Time to Bet on Japan's Restructuring?


By Brian Bremner Japan as the next big, can't-miss restructuring play? In Tokyo, folks have been hearing that claim from the big foreign-investment banks since the late 1990s. The spin back then was that, right about now, Japan would be in full-blown restructuring mode. Foreign direct investment would flow into the archipelago, as cheap corporate assets were picked up, revamped, and put to more productive use.

Oh yeah, and one more thing: A lot of foreign investment bankers and traders were going to get filthy rich by getting in early and betting big on Japan's economic revitalization.

Yet here it is in early 2003, and expat dealmakers are heading back to New York or off to mainland China, if they're lucky enough to have a job at all. Traders and research analysts have been hightailing out of Tokyo, too.

GLOBAL TREND. Small wonder: The number of Japanese merger-and-acquisition (M&A) deals announced in 2002 added up to $48 billion or so, a decrease of about 28% from 2001 levels and the lowest since 1998, according to data compiled by Thomson Financial. Some money was probably made short-selling Japanese bank shares. But trading volumes at the Tokyo Stock Exchange had all the oomph of a small-town Saturday-night poker game.

Paradoxically, though, I have a sense that 2003 is going to surprise a lot of the observers who are ready to stick a fork into Japan. For one thing, the downturn in mergers pretty much mirrored the rest of the industrialized world. Overall, global dealmaking fell by about the same magnitude -- about 28%, to $1.23 trillion.

For the global economy, the conditions were awful. Economic weakness and uncertainty were the norm in the U.S. and Europe. Japan staggered along, too. China boomed, but most of the investment pouring in there is for new production sites and capital spending, rather than M&A.

PATIENCE MAY PAY. This year, the global economy remains sluggish but should improve slightly. The U.S. is still suffering a post-bubble malaise but is forecast to grow a respectable 3% or so, as long as the country doesn't have some sort of spectacular terrorist attack or prolonged war in Iraq. Japan is going to have a tough year too, and it will be lucky to escape recession. But at least it looks like a policy framework is in place to work out the pile of nonperforming loans hanging over the banking system.

Tougher government audits on the banks will be starting later in February. Banks will be forced to crack down on overextended borrowers, either cutting them off or forcing them to restructure. With that level of seriousness, Japanese CEOs will get a lot more focused about spinning off money-losing opportunities and doing mergers.

A lot of companies, though not all, will be desperate for foreign capital -- and that means there some low-hanging fruit will be awaiting Western investors, albeit patient ones, who think Japan's outlook will brighten considerably in 2004 and 2005. Nobody, of course, does such deals for charity, so any cash infusion will come with more potential than profit attached.

INTERESTING DEALS. Still, a lot of viable corporate assets will likely be coming up for sale, and at prices and valuations that may not be around in two or three years, as Japan starts to recover. This isn't a game for those with a weak stomach, but some interesting deals are in the works in 2003 that could end up nicely for investors willing to take a fair amount of risk.

Consider some recent headlines:

Goldman Sachs has agreed to buy $1.2 billion worth of preferred shares being offered by a capital-starved Sumitomo Mitsui Financial Group (SSUMF). Those shares will carry a fat 4.5% dividend yield, absolutely unheard of in Japan. The money-center bank will also provide up to $2.1 billion to back loans extended by Goldman to its blue-chip European and Western investment-bank clients. One other thing: Goldman is buying four hotels from the ailing retail giant Daiei (DAIEY) for $378 million.

Tim Collins, the New York dealmaker who runs Ripplewood Holdings, and his backers, such as GE Capital, are probably going to make a nice return on their collective $1.2 billion investment in Shinsei Bank, the one-time bankruptcy formerly known as Long Term Credit Bank of Japan (LTCB). Shinsei may well go public in late 2003 or 2004. Now, the Nihon Keizai newspaper is reporting that British cell-phone giant Vodafone (VOD), which controls Japan Telecom, may sell Japan's third-largest fixed-line operator to Ripplewood. The deal could be worth $2.5 billion and would be one of the biggest foreign-led buyouts in Japan.

A bidding war is now under way to buy a 49% stake in a big money-center bank called Aozora. Like the old LTCB, it was nationalized and sold off to a group led by Softbank (SFTBF), the former Internet investment holding company that's trying to raise cash to focus on broadband. In the running are GE Capital and investment fund Cerberus Group. A domestic player, Sumitomo Mitsui Financial Group, is also in the game.

Who knows? Maybe some of these deals will end in tears for the acquirers. Maybe this is just an early blip and the rest of the year will have all the drama of a croquet match. I don't think so. With so many Japanese companies in need of cash and with so many distressed assets up for sale, I have a hunch lots of dealmaking synapses are finally firing around Tokyo these days. Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online


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