Tokyo bourse pressed for more disclosure on management buyouts

[TOKYO] The Tokyo Stock Exchange (TSE) remains under pressure to do more to protect minority shareholders during management buyouts (MBOs), just weeks after requiring more disclosures on such deals.

Pacific Industrial, a supplier for Toyota Motor, and car-care products maker Soft99 are among companies that have announced plans to go private in management buyouts, since new rules came into effect on Jul 22.

The bourse requires companies exiting the market through MBOs or acquisitions by controlling shareholders to provide explanations regarding procedures and price fairness, with the intention of protecting investors from losses due to delistings at excessively low prices. Yet some deals are still being viewed as unfair to investors.

The new disclosures alone are not enough to reassure shareholders, said Sho Tsuzuki, an attorney at Atsumi & Sakai in Tokyo who deals with financial regulations. “As long as firms follow specified procedures, they can claim fairness,” he said.

The book value of companies has been one area of focus for investors amid the TSE’s years-long campaign to unlock higher returns to shareholders. The concerns underscore how low valuations are still overhanging the market, even after Japan’s key equity indexes stormed to fresh record highs in August.

The number of MBOs has hit 20 this year as at Aug 25, on pace to exceed the record of 21 reached in the 2011 calendar year, according to M&A data provider Recof Data.

The TSE will follow up after the rule revision and continue to consider necessary measures, an exchange spokesperson said.

“Many investors will not be satisfied with tender offers that value companies below one times book value,” which may indicate a low offer price, said Eiji Yamada, executive principal at business consultancy Japan Research Institute.

The price-book ratio (PBR) has been getting attention amid the recent corporate reforms led by TSE, and now shareholders want firms to realise high valuations in MBOs as well, he said.

The first MBO announced after the rule revision was by Pacific Industrial. The price-book ratio based on the tender price was 0.7, even though the company had set a target PBR of 1.0 in its integrated report, said Satoru Matsuhashi, chief executive officer of Nanahoshi Management. He questioned whether the takeover price, set at a premium of about 40 per cent, was appropriate.

An official in Pacific Industrial’s accounting department said that should the company be liquidated, its book value would be significantly impaired due to factors including factory demolition costs, which makes a PBR of less than one reasonable.

The tender offer for Koatsu Kogyo, which is being held till Sep 18, is also causing a stir. The tender price represents a premium of 11 per cent over the then prevailing market price, with a price-book ratio of around 0.4. The construction company said on Aug 19 that an individual investor had requested an extraordinary shareholders’ meeting to demand a price increase.

The price is appropriate and the business environment will remain challenging, Sei Moriyama, an employee in Koatsu’s administrative department, said.

Soft99 last month also announced an MBO to seek more flexible management. Some investors are concerned because the price is slightly below a price-book ratio of one. Soft99 did not respond to an email with questions, and no one was available to comment when reached by phone.

Generally speaking, it can be difficult to require companies to disclose everything because that may include confidential business information, according to Tetsuya Ishida, an attorney at Ushijima & Partners specialising in corporate governance.

It’s also not realistic to expect all delistings to have a price-book ratio above one, said Nao Makino, a partner at Kaname Capital. As long as companies have looked for potential buyers, “the price ultimately depends on whoever is willing to pay”, he noted.

Still, the rules mean there’s room for companies to do MBOs or other deals that are not fair for general shareholders, and that “could reduce the appeal of Japan’s stock market”, said Koji Nakatsuka, chief investment officer of Japan equity at Allianz Global Investors. BLOOMBERG