The potential takeover of Japanese conglomerate Toshiba by Bain Capital, valued at over $16bn, could catalyze additional buyout activity in Japan
The potential takeover of Japanese conglomerate Toshiba by Bain Capital, valued at over $16bn, could catalyze additional buyout activity in Japan
Troubled Japanese conglomerate Toshiba is facing a potential takeover by US private equity firm Bain Capital, which could be valued at over $16bn. It won’t be private equity’s first attempt. Toshiba dismissed a bid from CVC and Bain Capital mid last year, which valued the company at more than $20bn, citing a lack of information as a reason.
Opening up to overseas takeovers
For several decades now, Japanese conglomerates have not been forthcoming to foreign private equity takeovers. However, Toshiba has become a possible target for foreign private equity given a spate of accounting and collusion scandals as early as 2015. Toshiba sold a majority stake in Kioxia Holdings Corporation, its memory business, for $2.8bn to avoid getting delisted from the Tokyo Stock Exchange. The sale is currently the largest completed buyout in Japan (Fig. 1).
Since last year, the 140-year-old conglomerate has been trying to restructure to break up into two or three public companies, but activist shareholders have rejected the plans. The business is realizing that a private equity takeover could offer an alternative path to take things private and increase corporate value. It released a statement on April 7 saying that a committee will be set up to ‘identify the privatization offer that is best for [Toshiba’s] diverse stakeholders.’
And while there is no formal offer yet, Toshiba’s largest shareholder Effissimo Capital Management, a Singapore-based fund, has agreed to sell its 10% stake to Bain Capital at the end of April, before a buyout price has even been set. Bain Capital has also proposed to retain the current management team and refrain from divestiture in a bid to win over resistant shareholders.
Bain Capital’s biggest challenge would be to meet the recently tightened regulations surrounding foreign investment in sensitive industries. Since Toshiba has politically sensitive defense, air traffic control, and nuclear power businesses under its umbrella, the government may block the deal. A possible but challenging workaround might be to form a consortium with a local firm to push the deal over the line.
Toshiba could take a leaf out of Hitachi’s book. In recent years, Hitachi has been actively divesting its legacy businesses to unlock shareholder value and overall profitability. Hitachi announced the sale of Hitachi Metals to a consortium led by Bain Capital for $7.5bn last year, and offloaded about half of its stake in Hitachi Construction Machinery to investment fund Japan Industrial Partners and trading house Itochu for $1.6bn in January 2022. Last month, Hitachi announced that will sell its 40% stake in third-party logistics company Hitachi Transport System to US private equity group KKR for $5.2bn. Altogether, Hitachi has sold off more than $18bn worth of businesses in the past five years to focus on its digital core business. Hitachi’s market value has doubled as a result, to $54bn.
Opportunity for private equity
The Toshiba deal may catalyze dealmaking in Japan and help international private equity buyout managers finally gain traction in the market. For now, private equity is regarded as an effective way to improve corporate productivity and facilitate business succession for smaller companies in Japan.
Japanese companies keen to accelerate corporate governance reform will find no lack of corporate buyers, as well. Pharmaceutical conglomerate Takeda could potentially be acquired by large pharmaceutical companies such as Pfizer and GlaxoSmithKline; and multinational conglomerate Sony could possibly divest assets to global tech giants.
Indeed, global private equity firms have set sights on Japan as an attractive location for carve-out deals. Activity has risen since 2019, and dedicated investment teams have quickly expanded. This has driven up the number of private equity deals. In 2021 alone, 184 buyout deals with an aggregate deal value of over $20bn were completed or announced. The total value rose 135% year-on-year and almost doubled 2019’s level (Fig. 2).
While deal-making is nuanced and complex, especially for large public-to-private transactions, the Japanese private equity market is awash with dry powder and no lack of acquisition targets. The Toshiba takeover, if completed, may herald an era of additional expansion for private equity.