Japan Achievement Awards: Why they won, part 2

We explain the rationale for this year's Japan Achievement Awards winners, concluding with the winners of our Deal Awards.

Last month, we named the winners of our annual Japan Achievement Awards. Today, we continue setting out in detail why the winners caught our eye. We started yesterday with the House Awards, and explain our reasoning for the Deal Awards. The awards will be presented at a reception in early July.

Deal of the Year & Best M&A Deal
Softbank’s acquisition of ARM Holdings

It has been a busy year for Softbank founder Masayoshi Son. Between a high-profile meeting with US President Donald Trump, the launch of a new $100 billion Saudi-backed investment fund and the promise to create 50,000 American jobs, he stopped to pick up the crown jewel of the listed British technology sector, ARM Holdings, in a £24.3 billion ($31.8 billion) deal that is the clear winner for Deal of the Year.

“Mr Son is a person who doesn’t miss any opportunity. He is very quick in decision-making,” said one banker involved in the deal, in what seems to be something of an understatement.

The deal, the biggest-ever Japanese acquisition in Europe, was also a welcome boost to a Brexiting UK since it showed faith in the future of the British economy. Son said the sharp drop in the value of the pound after the Brexit vote last June, which undoubtedly made the ARM acquisition cheaper to fund, had not been a factor in the decision to proceed.

The deal was classic Son in a number of respects. In addition to the speed of the deal (the decision to go ahead was said to have been made in just two weeks), Softbank didn’t scrimp on the price, offering a fairly hefty 43% premium to the pre-announcement level. That, it was said, was designed to ward off any other potential suitors and to reassure ARM staff that they were appreciated. It also took Son into the higher-value end of telecommunications. ARM’s technology is already in 95% of mobile phones and the opportunities are even greater in the much-vaunted “internet of things”.

The deal also showed the value of friendships. Heading the financial advisers for Softbank was boutique firm Raine Group. The firm’s co-founder Jeff Sine has a long-standing relationship with Son and the firm has been actively involved with many of Softbank’s biggest ventures, including Yahoo Japan and the takeover of Sprint.

ARM opted for stalwart Goldman Sachs as lead adviser with Lazard and UBS also on board.

Best IPO

Whoever thought a dual listing would be this much work? For the coordinators on the $1.3 billion NYSE and TSE launch of online platform Line, there were a myriad of rules that required negotiation with regulators and the two exchanges. Issues included the timing of roadshows, pre-market soundings, required float percentages, and the timeframe from pricing to listing. Further complicating matters were Korean regulations that covered Line’s parent Naver.

So no wonder it was the first-ever dual launch on the two exchanges and our winner for Best IPO.

“It’s not for everyone,” said one banker who had to wade through all the issues. “It’s like starting from the beginning.”

Roadshows spanned out from Tokyo to Hong Kong, London, Boston, New York, Chicago, and San Francisco to tell the Line story of fast growth in the online messaging sector. Line boasts users in 230 countries, mainly in Asia. They top more than 200 million, which is a lot of stickers. The IPO results suggest all the trouble was worth it: the international tranche was covered more than 25 times, while the domestic one was 13 times covered in the case of institutional buyers and 18 times for the retail segment. 

The aftermarket has been bumpy. Since the launch July listing, Line’s share price has risen sharply then retreated. However investors are still well up on the IPO price of ¥3,300. The stock was trading at ¥3,960 at press time, a rise of 20% that was nearly double the Nikkei rise in that period.

Best Secondary Share Sale
Recruit Holdings

For foreign investors, corporate crossholdings in the stock market have long been a concern and have become a target since the introduction of new Japanese corporate governance standards in recent years. Recruit Holdings, the staffing, media, and technology group, sought to break away from big corporate business partners as owners and move to a broader share base.

Through a ¥230 billion follow-on offering, the company was able to buy back approximately ¥30 billion in shares held by big institutions including SMFG, MUFG, Mizuho, Dentsu, and Mitsui. The sale was the largest Japanese equity add-on offering since 2009.

The pricing, a 3% discount to the market, was tricky since the shares were on their way up, hitting a 52-week high during the marketing period.

Marketing was also a key issue since the goal was to attract foreign and retail investors. In the end, both buyers and sellers appeared happy. The business partner institutions were able to reduce their own crossholding issues and the company was able to cut the big shareholders’ stake to 33% from 44% before the transaction.

Best Private Equity Deal
Longreach acquisition of Wendy’s Japan/Wendy’s purchase of First Kitchen

Japanese fast food businesses have been an area of focus for the private equity industry, with Longreach the latest to enter the fray with a two-part deal to take over the Japan operations of Wendy’s. Longreach purchased the franchise operation in June as part of a two-step deal that then saw Wendy’s use the funding to buy up the 136-outlet First Kitchen line of restaurants from Suntory Holdings. It was the first time Suntory had sold any of its operations to a private equity-controlled group, reflecting the somewhat-sceptical pervading view of private equity in Japan.

The company is rebranding the First Kitchen outlets, which sell pasta and salads beyond the main hamburger line of Wendy’s, to become Wendy’s First Kitchen.

The concept has already had a test run after the two chains linked up in 2015 in a cooperation deal that helped Wendy’s penetrate the Japanese market more quickly. The company had pulled out in 2009, only to re-emerge in 2011 under the leadership of Ernest Higa, who previously built up the successful Domino’s Pizza franchise and sold that off to another private equity group, Bain Capital. But growth for the new Wendy’s was slower than expected, given the time required to scout and secure good locations. 

Prior to the Longreach purchase, Higa owned 51% of Wendy’s Japan. He still retains a minority holding.

Japan has not proven to be hamburger heaven for the industry’s biggest names. McDonald’s has gone through a number of setbacks over the years, shuttering some stores after it over-expanded and more recently when sales were hit by a China-linked food safety scandal. Rival Burger King pulled out in 2001 and came back in 2007.

Best DCM Deal
Japan Tobacco’s dual-tranche Reg S bond offering

Long after the deals are done, there is the job of getting beyond the bridge financing to raise long-term funding. In the case of Japan Tobacco, there was a need to refinance loans that it took out for the $5 billion purchase of the non-American business of the Natural American Spirit line of cigarettes. The deal with Reynolds American was announced in September 2015. At the same time, the firm wanted to diversify its financing and debt currency weighting. The solution was a $1.25 billion, two-tranche bond in the international market. The five-year and 10-year notes were listed on the Luxembourg Stock Exchange’s Euro MTF Market in a Reg S format. Strong demand was not assured. Aside from tobacco-related issues, the firm had not tapped the dollar market since 2013 and the Natural American Spirit acquisition had raised questions about valuation, with one analyst at the time saying sales would have to rise five-fold within five years to justify the price.

To help counter any such worries, the company got in front of more than 50 investors with roadshow meetings in Hong Kong, Singapore, London, and Geneva, in addition to Tokyo. The result was an oversubscribed order book worth $9 billion for the Aa3/AA- rated senior notes.

Best FIG Deal
Sompo Holdings’ acquisition of Endurance Specialty Holdings

Cash-rich Japanese insurers showed no let-up in their overseas expansion this past year with the $6.3 billion purchase by Sompo Holdings, Japan’s largest property/casualty group, of Bermuda-based Endurance Holdings.

The purchase was not cheap at 43% over the pre-announcement closing price, but it gives the Japanese firm a solid presence in the US market. Endurance has a portfolio ranging from standard property/casualty insurance to specialty lines and a large presence in crop insurance. It is also active in reinsurance with a growing UK platform. 

Given Endurance’s strong profit level, the purchase also pushes up Sompo’s international business to 27% of total earnings from 12% previously.  

In a nod to leaving good things alone, Endurance will continue to operate under its own name with the current Endurance management team signing on for a lengthy five-year stretch.

Underscoring the deep pockets of corporate Japan (or, if you ask the Bank of Japan, how money is sitting idle), Sompo is financing the deal through excess cash on hand.  

Best Project Financing Deal
Yamal’s $20 billion LNG project

Japan is the world’s biggest importer of liquefied natural gas. In addition, the Japanese government is keen to step up its economic cooperation with Moscow in order to improve relations and help resolve a 70-plus-years territorial dispute over an island chain north of Hokkaido. Bringing together these two elements was the giant Yamal LNG project led by Russian natural gas producer Novatek. 

Total borrowing of around $20 billion forms the core financing for the $27 billion project. With the bulk of the financing secured from the Export-Import Bank of China, China Development Bank, and Russian banks Gazprombank and Sberbank plus Russia’s National Welfare Fund, there was an opportunity for Japan to get a seat at the table via a €200 million ($209 million) loan in December 2016 from the Japan Bank for International Cooperation (our Best Issuer for the year).

Also providing funding was Italy’s Intesa Sanpaolo bank with an Italian export agency-insured €750 million ($792 million) in December.

The Yamal LNG operation targets annual production of 16.5 million tonnes of LNG starting from late 2017. Shareholders in the Yamal project are Novatek with a 50.1% stake, China National Petroleum Corp. and French group Total with 20% each, and China’s Silk Road Fund with 9.9%.

But there is potentially more to it than just the Yamal project, with JBIC also considering involvement in the follow-on project, Arctic LNG 2, which is expected to start production in 2022. 

JBIC hasn’t yet announced that it will participate, although Novatek said in December that it had signed up three of Japan’s big trading firms, Mitsui, Mitsubishi, and Marubeni, to potentially provide some of the complex infrastructure required to super chill the gas to make it liquid, then store and transport the highly volatile cargoes. That involvement could pave the way for fresh financing from JBIC in a politically important area for Japanese Prime Minister Shinzo Abe as he seeks closer ties with Japan’s northern neighbour.

The loan is also the latest in a long run of Japanese investment in Russia’s oil sector, with Japanese funding for both the Sakhalin I and Sakhalin II LNG projects in Russia’s Far East.

Most Innovative Deal
Suzuki Motors’s dual-tranche ¥200 billion convertible bond

With an ambitious five-year plan in place, automaker and motorcycle group Suzuki wanted to raise capital but without undue dilutionary pressures on its share price, which was under the watchful eye of activist hedge fund manager Daniel Loeb.

For Nomura, the answer was a landmark dual-tranche ¥200 billion ($1.8 billion) “dilution-minimising” convertible bond with two types of share settlement. The structure gave the company the chance to limit the dilution to one-half of the level typically seen in convertible bonds.

The capital raising was linked to the company’s plan to cancel 70 million shares of Treasury stock that it acquired from Volkswagen in 2015 as a part of the unwinding of their relationship. That represented around 12% of the total.

Complicating the picture was the presence of Loeb, whose hedge fund, Third Point, bought a stake in the carmaker in August 2015 and had been pushing for the cancellation of the shares in order to boost shareholder value. 

For bondholders, conversion could take place through a conversion notice in which they would receive cash up to the principal amount, with the remainder paid in shares, subject to an overall cap.

At the same time, Suzuki could give notice to bondholders from one year to within three months of maturity.

In both cases, the five-year and seven-year bonds would be subject to a contingent conversion clause of 130%. 

For Suzuki, the bonds helped to fund a $2.8 billion factory in India’s Gujarat state, helping the automaker to increase its already-strong presence in one of the fastest-growing markets globally.

¬ Haymarket Media Limited. All rights reserved.
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