Japan's management buy-out market set to bloom

TOKYO, Jan 24: Management buy-outs (MBOs), hitherto a rarity in Japan, are set to take a much higher profile this year as firms move to slim down and focus on their core businesses, MBO experts say, reports Reuters.

The change is being accelerated by the entry of foreign venture funds, who see a chance to profit in Japan's relatively underdeveloped MBO market, they said.

"Many changes in the business environment have helped to boost the MBO market here in the past year," said Junri Oda, managing director of 3i-Kogin Buyouts Ltd, a fund formed last year by UK-based venture capital firm 3i Group Plc and Japan's Industrial Bank of Japan Ltd (IBJ).

"Japan's traditional 'keiretsu' business groupings are breaking up as cross share-holdings are unwound. Also changes in Japanese commercial law and accounting rules have made it easier for companies to spin off and sell their businesses," he added.

Under a management buy-out, company managers, usually with help from outside investors, buy their business from the parent company or owner in order to gain full control.

Such activity has been rare in corporate Japan's hierarchical culture, where firms tend to keep a tight grip on their subsidiaries and attach a great deal of stigma to selling off operations. Legal obstacles also discourage MBOs.

But a long recession and a recent wave of restructuring are forcing managers to change their way of thinking.

Last Friday brought the announcement of Japan's largest MBO deal yet, when Recruit Building Management Inc (RBM) said it is being sold for five billion yen through a MBO plan funded by Schroder Ventures, a unit of Britain's Schroder group, and a subsidiary of Tokio Marine & Fire Insurance Co.

RBM is the building management unit of magazine publisher Recruit Co Schroder and Tokio Marine will own a combined 70 per cent stake, with the management and employees of RBM holding a 14 to 15 per cent stake. The remaining shares will be owned by a number of other companies with business ties to RBM.

Under the deal, the current management team will remain in place and aim to make an initial public offering some time in the future.

"This case is considered one of the largest and first real Western-style MBO deals, in the sense that the whole business group is spinning off from a bit, well-known company," said Kiyoshi Hirasawa, a managing partner in MBO fund operators ACTIV Investment Partners Ltd.

More deals seen

Oda of 3i-Kogin expects his venture, which is 60 per cent owned by 3i and 40 per cent by IBJ, to wrap up its first Japanese MBO deal by the spring.

On top of an initial investment of 10 billion yen by 3i Group and IBJ, 3i-Kogin now is raising a further 10 billion yen from institutional investors anxious for access to the fledgling Japanese MBO market.

"We are getting a positive reaction from investors. As for actual deals, there are a few on the final negotiating table," Oda said.

Another Britain-based firm, NM Rothschild Group, joined major Japanese trade house Mitsui & Co Ltd to form and MBO fund last year.

ACTIV Investment Partners Ltd, which manages the fund, plans to raise 20 billion yen from investors and to close at least one or two deals by the end of this year.

The flurry of activity is in sharp contrast to previous years.

Last year saw only 12 MBO deals announced, five of which were completed, according to research firm Thomson Financial Securities Data.

Most of the companies targeted for MBOs in Japan have been small, family-owned businesses, market specialists say.

Oda expects Japanese MBO activity to start taking off this year and to reach 200 to 300 deals a year within the next five years, narrowing the gap with Europe's average of 600 deals a year.