Goldman consortium to buy remaining 60% of USJ

A Goldman-led group launches a $1.7 billion tender offer for the Japanese theme park operator.

Goldman Sachs and co-investors MBK Partners and Owl Creek Investments announced yesterday evening that they are launching a tender offer for the remaining 60% of USJ following a previous ¥20 billion ($204 million) investment by Goldman in 2005. USJ manages the Universal Studios theme park in Osaka, but is not owned by Universal Studios in the US.

The investor group is offering ¥50,000 per share for the outstanding shares, or 22.9% more than the ¥40,700 where they closed on Wednesday (there was no trading on Thursday.) The tender offer starts on March 23.

Including debt, the total consideration on a fully diluted basis comes to ¥165 billion ($1.7 billion). For equity alone, the amount comes to ¥111.2 billion. In other words, the group is paying ¥111.2 billion for 60% of the group compared to ¥20 billion for 40% four years ago.

The company listed in November 2007. The share price hit ¥82,520 in 2008, before slumping to ¥30,000 last December.

According to Dealogic, the deal is the largest buyout in Japan in the past 12 months, surpassing Carlyle Group's $1.1 billion purchase of a 71.5% stake in NH Techno Glass in May last year. The deal pushes sponsor volume in Japan to $1.9 billion from 14 deals so far this year, down 41% from the same time last year.

If the deal goes through, Goldman will own 60%, Owl Creek will reportedly own 15%, MBK Partners will own 20%, and Glenn Gumpel, current president and CEO of USJ, will own just under 1% of the company. However, this is an estimate only and may not correspond to final voting rights, a source notes.

The board will consist of seven people, of whom two will be full-time (including Gumpel). The rest will be outside directors.

In a statement, a Goldman spokesperson said that the investment would help the company management aim for the next level. It was also a sign of Goldman's long-term commitment and confidence in Japan.

One Tokyo-based banker not involved in the deal admitted that it "is a great time to be doing deals, given how low prices are, but it's not clear we have reached an economic bottom".

Existing investors in USJ may not be thrilled by the premium, given the 43% drop in the company's share price in the past 12 months. However, the banker says they may "tender their shares, on the basis that it's better than nothing".

According to one source, the 41% stake held by the existing Goldman Sachs investment vehicle Crane Holdings will be folded into the new investment vehicle, SG Investments, which will own 100% of USJ. The other investors will also hold USJ via SG Investments.

Observers have been scratching their heads over how the consortium will finance the deal, given how tight liquidity is.

At a press conference held in Osaka on Thursday, Ankur Sahu, the head of principal investments at Goldman, said that the investors would borrow up to ¥75 billion from Mizuho Financial Group and Sumitomo Mitsui Financial Group. If that ¥75 billion is only for the acquisition (and not working capital), it will cover more than two-thirds of the purchase price, which is similar to the high levels of leverage of the past few years (often 30% equity and 70% debt).

In relation to USJ's Ebitda for the 12 months to March 2008, the ¥75 billion results in a ratio of 3.5 times, which is low compared to the past few years. USJ had debt to total assets of 45% in the year to March 2008 (in other words, before the deal) and total debt to common equity of 121%.

Some analysts warn that the attitude of one shareholder, the city of Osaka, which holds 9.23%, will be crucial in determining the success of the deal. Another key investor is the Development Bank of Japan, which holds 10.26%.

The banker not involved in the deals believes that if Osaka city likes the deal, it could use its influence to arrange financing, as could the Development Bank of Japan.

The basic driver behind the deal does not appear to be to achieve a major turnaround. USJ, created in 2001, is not as popular as other theme parks in Japan, but it has improved over the past few years -- at least until the current downturn. According to the company's website, sales came to ¥53.6 billion in the April 1 to December 31, 2008 period, compared to just under ¥58 billion in the same period in 2007. The downwardly revised forecast for the fiscal year ending March 2009 estimates sales of ¥68 billion, compared to ¥73.158 billion for the year ending in March 2008.

"The company is pretty healthy, it's now more of a matter of bringing the company to the next step," says another source.

That step will likely be an initial public offering or a trade sale when the economy recovers, and might just bring a fat profit for the consortium. No doubt the US taxpayer, who has provided Goldman with $22 billion in direct and indirect funding since the beginning of the crisis, will be watching the deal with interest.  

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