Global investors in bidding war for obscure Japan stock

[TOKYO] Four months ago, few people had even heard of Unizo Holdings Co, an obscure Japanese developer whose shares had slumped for three straight years.

Now, the Tokyo-based property firm is caught in a bidding war between global investing behemoths that could have big ramifications for Japan's more than US$6 trillion stock market.

The unlikely drama pits Blackstone Group against Fortress Investment Group and features a cameo role for billionaire Paul Singer's Elliott Management Corp. The activist hedge fund, Unizo's largest shareholder, has been piling into the stock in anticipation of a buyout.

It's a rare hostile takeover battle that's turning into a litmus test for Japan Inc. Such acquisitions have hardly ever been attempted in the country because shareholders traditionally support incumbent management. But firms like Blackstone, Fortress and Elliott are betting that change is finally afoot. Unizo's board, which has called on acquirers to meet a stringent list of demands, has until Wednesday to respond to Blackstone's offer.

If a deal goes through, other "boards will sit up and pay attention now, and can't be lazy with their balance sheets," said Jin Rui Oh, a Singapore-based director at United First Partners, an investment and advisory group that specializes in special situations. That's especially true for "companies with a wide register that lacks an individual shareholder holding a chunky stake," he said.

The Unizo saga all started, oddly enough, when a travel-agency operator launched a surprise tender offer for part of Unizo in July, at a 56 per cent premium to the company's share price. Unizo's board decided not to support HIS Co's bid, and sought out competing offers.

"When HIS came in, and Unizo rejected it, it put the company into play," said Travis Lundy, a special-situations analyst who publishes on Smartkarma. "It made it possible for people who hadn't thought about taking it over to think about taking it over."

There have been many twists since HIS launched its tender offer. First, Elliott smelled an opportunity and started buying shares. It's now the largest stock owner with a 13 per cent stake.

BIDDING WAR

Then the bidding war began. In August, SoftBank Group unit Fortress came in with a rival tender offer for 4,000 yen (S$49.80) a share, significantly higher than the 3,100 yen offered by HIS. It wanted to buy the entire company, it said.

Days later, another fund appeared on the shareholder register. Ichigo Asset Management, the investment firm run by Scott Callon, disclosed a stake of more than 5 per cent. It's since increased that to 9.3 per cent, making it the second-largest holder, according to data compiled by Bloomberg.

Unizo initially treated Fortress as a white knight, saying it supported its bid. And HIS, which failed to attract enough interest in its tender offer, decided to pull out.

But in late September, Unizo rescinded its approval of Fortress's offer and called on the firm to raise its bid to 5,000 yen a share. The Japanese company said it got another offer for that amount from "one of the biggest investment funds in the world," which it didn't identify. As well as withdrawing its support for the Fortress bid, Unizo rejected the new offer.

It was clear that Unizo's management was getting cold feet about an outright sale. The company published a new policy for handling takeover offers, which had some strong conditions.

UNIZO CONDITIONS

Unizo would only accept offers that "ensured employment for workers," it said. But most controversially, it wanted what it called the Unizo Employee Stock Ownership Company to be part of any deal. This entity should have the right to approve director appointments and block restructuring plans including the sale of assets, Unizo said in a proposal for a new agreement with Fortress. Unizo's management, it said, should still decide how to run the company even after a takeover.

"The board and management seem to be entrenching themselves," Lundy said.

With a market value of about 171 billion yen, Unizo gets most of its income from renting offices in Tokyo. Behind the battle is the likelihood that Unizo could be worth much more. Accounting for a valuation gain of 220 billion yen suggested by management, Unizo's per-share value could reach 7,857 yen, according to Bloomberg Opinion's Shuli Ren.

Unizo's management has displayed a stubborn streak before. Originally an affiliate of Mizuho Financial Group, the property firm has sought to dilute its shareholders and aggressively issued new shares to distance itself from the megabank.

United First Partners' Oh has a negative view on the buyout negotiations. "The entire process has been rather distasteful," he said.

Elliott was also dissatisfied, and decided to turn activist. In an open letter to the company's board in October, it questioned management's flip-flops in handling the takeover bids and indicated suspicions about the intentions of the employee stock ownership company.

'HIGHLY CONCERNED'

"We are highly concerned about the lack of disclosure and the risk of conflicts of interest that have appeared in Unizo's handling to date of the tender offer bids," the activist investor said in the letter.

On Oct 10, Unizo confirmed the 5,000 yen a share offer came from Blackstone. Blackstone then joined Elliott, which supports Blackstone's bid, in going public about the situation. On Oct 23, Blackstone extended its deadline for Unizo to agree with its proposal, saying that all options, including a hostile tender offer, remained on the table if it didn't. It has since extended the deadline again to Wednesday. Fortress, meanwhile, has extended its tender offer deadline to Nov 11 without raising its offer price.

With Unizo sticking to its guns and Elliott and Blackstone continuing to apply pressure, it's unclear how the situation will end. But stock investors, at least, are betting the company will be sold. Unizo shares closed on Tuesday at 5,000 yen, Blackstone's proposed price. The stock, which traded below book value for more than two years before this all started, has risen more than 150 per cent since HIS first made its bid on July 10.

Unizo and Fortress declined to comment. Blackstone and Elliott said they didn't have additional comments beyond what they said in past statements.

If the deal does go through, it may also be a wake-up call for management at the hundreds of other Japanese public companies that trade below book value. More than 960 of the 2,148 stocks in the benchmark Topix index trade below the value of their net assets, according to data compiled by Bloomberg.

Smartkarma's Lundy said he's watching the reaction to the Unizo situation within Japan. One positive, he said, is there has been "zero public support for Unizo's very, very unusual defense." But on the flip side, he said, there also hasn't been vocal criticism.