Deal of the Year and Best M&A Deal
Carlyle and Kyocera's $2 billion acquisition of DDI Pocket from KDDI
Seller's advisor: Goldman Sachs
Acquirer's advisor: JPMorgan, Merrill Lynch
This deal would have been unthinkable even five years ago in Japan. A foreign private equity company using leveraged finance to acquire a fundamentally healthy, but non-core business from a Japanese company. At $2 billion in size it is also one of the most important LBOs in Japanese history.
But what really made this deal so special was that it was rational, created value and met the goals of all the participants.
For KDDI, the divestment provided an opportunity to raise money to invest in its core businesses. At the same time it was able to offload an asset (at a good price) that was taking up management time, yet only contributing around 3% of the company's revenues.
Carlyle, on the other hand, believed DDI Pocket had intrinsic value and just needed additional management time and investment. Thus the new management adopted a strategy of aggressively positioning the company in the corporate data communications market.
Kyocera remains a major vendor to DDI Pocket and used the deal to ensure vertical support for its customers by taking 30% in the new company. Making use of Y174 billion leveraged financing from a syndicate of domestic and international adds to the excellence of the deal, ensuring that if Caryle is right and DDI Pocket can thrive under new owners, then shareholder returns should be spectacular.
This deal lays the blueprint for many, many other potential deals in Japan as investors seek to carve out the hidden gems from the technology conglomerates, creating value and enhancing Japan's position as the leading tech nation in the world.
J-Power's Y375 billion IPO
J-Power's Y375 billion ($3.68 billion) IPO in October 2004 stands out as the first and largest Japanese privatization IPO offered to the global market. It is also the largest Japanese IPO since NTT DoCoMo in 1998.
One of the reasons why the deal is so special is that 100% of the shares were sold at IPO. This means there is no overhang and no residual government ownership, both issues that tend to plague partly privatized companies.
Priced at the top of an indicative range spanning Y2500 to Y2700, the stock has nevertheless performed well since listing, rising to around Y2900 in recent weeks. The quality of the deal can be seen from the fact that $35 billion of demand was generated in a difficult market during September and October.
But more than the transaction itself, the deal successfully starts the process for the privatization and restructuring of the Japanese power sector, which should lead to reduced costs and greater economic development.
Best Secondary Offering
West Japan Railway's Y261 billion Global Follow-on
Nikko Citigroup, UBS
Selling 31.7% of a company through a secondary share sale involves as much work as an IPO. And so it proved for the book runners of West Japan Railway's Y261 billion ($2.57 billion) follow offering.
The deal was the largest secondary offering in Japan since JR East in 2002 and the largest in 2004 until the J-Power IPO came along. After an extensive road show and global marketing campaign, the book closed 6.9 times oversubscribed, with international investors bidding for 18 times the amount they could be allocated.
The deal priced at a 2.14% discount, right at the tight end of the 2%-4% range being offered. Perhaps the best indication of the scale of this deal is that the amount of stock sold was equivalent of 233 days trading.
Best Public Offer Without Listing (POWL)
Ping An Insurance IPO
Daiwa Securities SMBC
POWLs have a tendency to suffer proportionally to a deal's popularity. The more heavily oversubscibed a deal is, the more likely the POWL is to get scaled back. Less popular deals, on the other hand, will often end up being pushed onto Japanese retail investors, who seem to be viewed as little more than an insurance policy by many global investment banks.
Ping An's $1.8 billion IPO in June 2004 saw total demand come in at $11.5 billion. Of this more than $2.4 billion was generated by Japanese demand for the POWL. In the end Japanese investors were allocated $105 million, representing 6% of the total deal.
This was not a particularly sizeable allocation, but it was better than some of the other POWL's completed in 2004 . The most notorious was the ill-fated Link Reit in Hong Kong, where POWL investors were scaled back to just 0.7% of the overall deal, an allocation of only $20 million.
And yet, Japanese investors form a crucial component to many Asian equity offerings, taking over the role once played by US retail investors. They are particularly keen on China and a good momentum builder. This was particularly the case with Ping An, which was viewed as a good company, coming at a difficult time for global markets in June.
Best Equity Linked Deal
Toshiba's Y150 billion Dual Tranche EuroYen Convertible
Nomura, Mizuho Securities
In what has been a tricky year for the Japanese convertible and exchangeable market, Toshiba's Y150 billion ($1.47 billion) dual tranche global CB stands out. In terms of size it was the largest Asian CB of 2004 and roughly the same size as the world's largest for France Telecom.
The leads managed to get the books closed within three hours, with both tranches five times covered. The conversion premium for the five-year tranche was fixed at 30.16%, while the conversion premium for the seven-year tranche was 20.18%.
The deal also contains a contingent conversion feature, which allows the conversion to take place when the closing price of Toshiba stock is 120% above the conversion price for 20 consecutive trading days. This gives Toshiba extra control over the potential dilution arising out of the conversions.
Proceeds are being used to pay down debt and to invest in high growth business lines, thus having a material impact on Toshiba's business performance.
Best International Bond
Mizuho Financial Group's $1.5 billion Perpetual Subordinated Bond
It was a brave decision by Mizuho Financial Group to launch its $1.5 billion perpetual subordinated non-call five bond in January 2004. Two previous and similar deals for Japanese banking groups had not fared too well in 2003.
But Mizuho and its lead managers found demand for $7.5 billion, mainly from Asian-based private banking accounts, an investor base that the world's biggest banking group by assets was keen to tap. The deal was Mizuho Financial Group's first public capital offering and it immediately set a new benchmark as the largest perpetual security issued into the Asian retail market.
With final pricing at 8.375%, well within the guidance of 8.5%, the deal was a hit with investors too. It further set the stage for Mizuho's equally successful $2.4 billion dual currency sub debt deal completed in March.
Best Samurai/Euroyen Bond
JPMorgan's Y25 billion Samurai
JPMorgan broke new ground when it completed the world's first samurai bank capital deal in September. While small in size relative to JPMorgan's capital base, the deal was nevertheless extremely important.
The 10-year, tier two bullet deal was priced at 36bp over yen-libor. This gave JPMorgan a funding cost right in line the spreads on its US dollar denominated tier two paper.
But it also gave investors an opportunity to achieve some yield pick up over less highly rated domestic banks: for less risk they were getting more return. Finally this deal showed the world that the domestic Japanese markets could be used for international funding purposes, which is a boost for the diversity of the global investor base.
Best Uridashi Bond
GECC's A$1billion Uridashi
General Electric Capital Corporation is something of a pioneer in the Japanese bond market and this year has been no exception. In February it launched a A$1 billion ($733 million) three-year inaugural Uridashi bond, aimed at Japanese retail investors.
The bond was the largest ever done by a US corporation in any currency in the Uridashi market. The Uridashi market has been particularly skewed towards currencies such as the Australian dollar and New Zealand dollar this year, which the Japanese have found attractive despite a rising yen.
In total 32,000 retail investors participated in this deal allowing GECC to diversify its investor base and receive the funding it was looking for in volume. Coming as it did in February, the bond set the tone for a strong year in the Uridashi market.
Y404 billion Nippon Shinpan Consumer Credit Securitization
Merrill Lynch, UFJ Tsubasa Securities
The sheer size, scale and scope of this deal make it a stand out for the best securitization of the year. At Y404 billion ($4 billion), the aggregate value of this deal is twice the size of the next largest securitization deal in Japan.
The deal saw Nippon Shinpan shift six different asset classes into a pool from which securitized notes were then issued. The combination of auto loans, shopping credit, credit card cashing receivables, credit card shopping receivables, card loan receivables and loans on deed, was complex enough.
But there was also a time factor, in that Nippon Shinpan had to clean up its balance sheet quickly and repay its own creditors in order to effect its merger into the UFJ Group. Merrill Lynch really stood up to the plate when it bought all the securitization certificates, based on its own work, and then sold the deal in February, a mere four months after winning the mandate.
Most Innovative Deal
There have been many firsts in Japan's capital markets this year: it is always easier to innovate in a rising market than in a dormant one. New techniques have been found in the equity linked and bond markets.
But Shinsei Bank wins the award this year for its Synergy Funding securitization deal. Shinsei has long been at the forefront of developing new securitization techniques in Japan and this year was no different.
Synergy Funding is the first true cash flow of commercial mortgage backed securities that have been repackaged into a CDO by a Japanese bank. The Y35.1 billion ($344 million) deal was also innovative in that it was the first time that mezzanine tranches of Japanese CMBS were brought to the market. This allows investors to sell some of their lower rated assets, raising funds and reducing risks.
The deal will be studied closely by other Japanese institutions that are always on the look out for new funding tools. The deal was successfully received with an oversubscription of two to three times, showing that investors appreciated it as well.