Japan Inc's US$2 trillion cash fuels overseas purchases

[TOKYO] Japanese companies are on an overseas buying spree.

Canon Inc, Japan Post Holdings Co and Itochu Corp have led US$28 billion of purchases abroad so far this year, the fastest start on record for Japanese acquirers, according to data compiled by Bloomberg going back to at least 2006. They're paying up, too, with takeover premiums that are about double the global average, the data show. The trend is set to continue.

After years of building up cash to a record 233 trillion yen (US$2 trillion) as of the end of September, Japanese companies are looking to convert those stockpiles into future growth by investing overseas where the outlook is brighter.

While the yen's 14 per cent drop against the dollar in the past year has made foreign acquisitions more expensive, economists project the Japanese currency will weaken further amid Prime Minister Shinzo Abe's campaign to fight deflation. That gives companies the incentive to spend now.

Japan Tobacco Inc, Asia's biggest listed cigarette maker, has declared a "year of investments" while machinery maker Mitsubishi Heavy Industries Ltd and brewer Kirin Holdings Co are also considering growth through takeovers abroad.

"Japan Inc's sense of urgency in making acquisitions abroad is strengthening," said Makoto Shiono, managing director of Tokyo-based consultancy Industrial Growth Platform Inc.

"Japan's massive monetary easing slashed the value of cash. So if you have tons of cash, investors will be pressing you to invest in companies to generate cash flow for future growth."

HEFTY PREMIUMS

Companies in Japan have agreed to pay an average 39 per cent premium for overseas takeovers and majority-interest purchases announced since Jan 1, compared with the global average of less than 20 per cent during the period, data compiled by Bloomberg show.

The Japanese purchases valued their targets at a median 23 times earnings before interest, taxes, depreciation and amortization, compared to the global median Ebitda multiple of 9.4.

The takeover activity has been broad in nature, spanning a number of industries. This week alone, Hitachi Ltd. agreed to buy Rome-based Finmeccanica SpA's stake in Ansaldo STS SpA, in a deal valuing the maker of driverless metro trains at 1.93 billion euros (US$2.2 billion).

Japanese chemical producer Asahi Kasei Corp. said it will buy Charlotte, North Carolina-based Polypore International Inc to expand its battery business.

Hitachi fell as much as 3.3 per cent in Tokyo on Wednesday, the first day of trading after the Ansaldo acquisition was announced. The shares were down 0.9 per cent at 820.5 yen as of 1.56pm.

'RADICAL MOVES'

Earlier this month, Japan Post offered A$6.5 billion (US$5.1 billion) for Melbourne-based transport firm Toll Holdings Ltd in the biggest Australian acquisition by a Japanese company.

Canon said Feb 10 it made a 23.6 billion-krona (US$2.8 billion) cash bid for Sweden's Axis Communications AB, expanding into video surveillance as smartphone competition erodes digital camera sales. And in January, the 157-year-old trading house Itochu agreed to the US$5 billion purchase of a stake in China's Citic Ltd.

The combination of large cash hoards, cheap financing and Japan's shrinking and aging population is driving companies to invest overseas, said Shintaro Okuno, a partner at Bain & Co who specialises in mergers.

"They're coming to a point where they have to do these radical moves," Tokyo-based Okuno said. "And also, money here is so cheap."

WILLING LENDERS

Even after weakening to 119 yen against the US dollar from a postwar high of about 75 yen in 2011, Japan's currency may still decline to 128 yen next year, according to the median of estimates compiled by Bloomberg.

Japan's economy is forecast to grow 1 per cent this year, compared with 3.1 per cent for the US and 1.2 per cent for the euro area, data compiled by Bloomberg show.

Overseas purchases are likely to continue, and lenders are willing to finance deals, Japanese Bankers Association Chairman Nobuyuki Hirano said Feb 19. That will help companies like Mitsubishi Heavy Industries, which said last August it's looking for more takeover opportunities as it targets 5 trillion yen in revenue by 2017.

The industrial company was thwarted in a bid for Alstom SA's power business in June, after the French government backed a competing offer from General Electric Co.

SEEKING STOMACHS

Japan Tobacco President Mitsuomi Koizumi said earlier this month that the company will speed up deals relating to other types of tobacco products, such as e-cigarettes. It's also interested in acquisitions in countries where it doesn't have much presence such as Brazil, Singapore and Bangladesh, Koizumi said. The cigarette maker completed 11 acquisitions totaling US$2.1 billion in the past five years.

Kirin, Japan's second-largest brewer by market value, is seeking acquisition opportunities in Southeast Asia and China, President Senji Miyake said Feb. 12.

Its larger rival Asahi Group Holdings Ltd. is also weighing acquisitions in Southeast Asia as the company targets 100 billion yen sales in the region this year, Asahi spokesman Takuo Soga said by phone Feb 20.

"Japanese food and beverage makers need more stomachs abroad," said Tomonobu Tsunoyama, an analyst at Tokai Tokyo Securities Co.

"Asia, Indonesia for example, must be their primary focus because of the region's large and young population and a culture where Japanese brands are welcomed."

Toshiyuki Mitsuzawa, head of cross-border M&A at Frontier Management Inc., expects other Japanese consumer-products companies will join Mizkan Group Corp in making US purchases. Mizkan, a condiment maker founded in 1804, bought the Ragu and Bertolli pasta-sauce business from Unilever NV for US$2.15 billion last year.

"Beverage, food and confectionery makers will perhaps be pouring some of their investment into the US this year," Mr Matsuzawa said by phone on Feb 20. "They are being hit the hardest by the aging and declining population in their home market."

Fast Retailing Co, which runs the Uniqlo clothing chain, may buy one or two brands in Europe, said Mikihiko Yamato, deputy head of research at JI Asia in Tokyo. A representative for Fast Retailing declined to comment.

Such deals could help this year surpass the record US$103.8 billion in annual Japanese outbound deals announced in 2012, led by SoftBank Corp's takeover of Sprint Corp and the purchase of US grains collector Gavilon by trading house Marubeni Corp.

Many Japanese companies have boosted profit in recent years by cutting costs rather than increasing sales, said Bain's Mr Okuno.

"That's not sustainable, so now they're coming to the inflection point where they really have to think about growth," Mr Okuno said. "And they have enormous amounts of cash."

BLOOMBERG