Best M&A deal
Daikin Industries’ US$3.7 billion acquisition of Goodman Global from Hellman & Friedman
Advisers to Daikin: Bank of America-Merrill Lynch, Daiwa, GCA Savvian Advisors, Mitsubishi UFJ Morgan Stanley, Mizuho, Nomura, SMBC Nikko
Advisers to Hellman & Friedman: Barclays, J.P. Morgan
A combination of the strong yen, healthy balance sheets and an abundance of domestic liquidity have allowed increasing numbers of Japanese companies to escape the growth confines of an ageing population and mature economy in their home market.
Last year’s biggest manufacturing transaction in Japan, Daikin Industries’ US$3.7 acquisition of Goodman Global was a typical move for Japanese companies that have found themselves able to realise key strategic objectives through overseas acquisitions.
The US is the world’s biggest market for heating, ventilation and air-conditioning equipment (HVAC), and dominated by systems that use air ducts to heat and ventilate homes.
Daikin is the world’s largest maker of air conditioners, ideal for Japan’s hot and humid summers, but it has lacked the duct technology needed to crack the American market.
In 2006, Daikin paid MYR7.61 billion (US$2.47 billion) to acquire O.Y.L. Industries, a Malaysian HVAC company that was strong in other sticky Asian climes and also owned McQuay International, an HVAC supplier headquartered in Minneapolis. That gave Daikin a foot through the door.
Osaka-based Daikin was advised at the time by Morgan Stanley, but the entire team of bankers responsible that worked with Daikin later defected to join Merrill Lynch in Tokyo. This infusion of talent helped ensure that Bank of America-Merrill Lynch gained a lead mandate to advise Daikin on the Goodman deal.
Buying Houston-based Goodman from private equity form Hellman & Friedman has compelling synergies for Daikin. Goodman boasts a 25% market share of North American residential air conditioning market, and it uses duct systems.
In addition to acquiring Goodman’s North American distribution, Daikin can also learn from the company’s leaner sales and management structure. Many listed Japanese companies are burdened by high sales, general and administrative expenses, which damage their cost competitiveness.
The deal was good for Goodman too, offering it access to Daikin’s global sales network of dealers in 90 countries, as well as the Japanese company’s more efficient technologies for saving energy.
Best IPO
Japan Airlines ¥663.3 billion (US$7.5 billion) IPO
Global coordinator: Daiwa
Bookrunners: Daiwa, Merrill Lynch, Mitsubishi UFJ Morgan Stanley, Mizuho, Morgan Stanley, SMBC Nikko
The initial public offering (IPO) of Japan Airlines (JAL) boasted a streamlined corporate fuselage, improved financial engines and a new crew.
It was also the largest airline equity offering and the biggest transportation IPO on record, a milestone both for Japan and the global transport industry. International institutions flocked to a listing second in size last year only to Facebook’s US$16 billion IPO in May.
The IPO followed a remarkable corporate turnaround. Under the stern stewardship of Kazuo Inamori, founder of Kyocera and KDDI and a trained Buddhist priest, JAL had downsized its business by 60% by shedding unprofitable routes, axing 40% of the workforce, cutting the average wage by 20%, reducing its pension obligations by 53% and halving the number of group companies.
After three years of punishment the airline emerged from bankruptcy protection as one of the world’s most profitable carriers and a commercial ethos that Shuntaro Nagashima, head of European equity capital markets (ECM) at Daiwa, says appealed to investors.
"Where the new JAL is proving itself quite different from the old JAL is its focus on profit, not top-line revenue. When the Senkaku islands dispute blew up with China, JAL moved earlier than many competitors. JAL's response was, 'Okay, we are not going to damage profit by flying empty jets.' Their handling of this crisis was a very good sign of how much JAL's top management has changed."
The other reason for the IPO success was its competitive pricing. JAL’s shares were sold at 5.3 times estimated earnings for the 2012 fiscal year, compared to an estimated price to earnings ratio of 15.4 times for All Nippon Airlines (ANA), JAL’s main competitor which sold ¥184 billion of shares in a global follow-on in July.
Despite this the Japanese government made money from the IPO. The Enterprise Turnaround Initiative Corp. of Japan held 96.5% of JAL’s shares after injecting ¥350 billion into the bankrupt company. It sold all these shares in the IPO and made a ¥300 billion profit that it returned to the national treasury.
JAL’s rehabilitation is not without detractors. Shinichiro Ito, the chief executive of ANA, claims the airline enjoys unfair tax advantages that let it offset past losses against corporate taxes until 2021. This flatters its profits, which far outshine ANA’s. He adds that JAL should not get any of the 25 new landing slots to be added to Haneda, the airport nearest to central Tokyo.
Worryingly for JAL, the Liberal Democratic Party (LDP) appears sympathetic to such criticisms.
“With the LDP now back in power people believe ANA will be treated better, and JAL will continue to face difficulty in obtaining slots at Haneda. The other concern is that some LDP lawmakers object to JAL’s lenient tax treatment,” a bookrunner tells Asiamoney.
This political angst explains why JAL’s share price did not share in the Tokyo market rally since the LDP’s resounding election victory in December.
Best equity offering
H2O Retailing’s ¥11.77 billion (US$131 million) global follow on offering
Bookrunners: Mizuho, UBS
Japan’s market regulators finally acted upon a deluge of complaints from foreign institutional investors about insider trading in share offerings during 2012.
Nomura was sanctioned for leaking confidential information about share sales in 2010 by oil explorer Inpex, Mizuho Financial Group, and Tokyo Electric Power (Tepco). The scandal cost the chief executive and chief operating officer of Nomura their jobs, and the bank lost key mandates for the sale of government-held shares and bonds. Daiwa and J.P. Morgan were also reported to have tipped off investors about an equity offering in 2010 by Nippon Sheet Glass.
Japan’s two largest follow-on offerings of 2012 – All Nippon Airways ¥184 billion global offering in July and Mazda Motor’s ¥151.2 billion issue in March – were also blighted by pre-announcement leaks.
ANA’s share sale was reported on midday Japanese television on July 3 by public broadcaster NHK, causing its share price to plunge by 18.6% before the announcement was made after the market closed. A Reuters report in advance of Mazda’s regulatory filing led the car company’s shares to swoon 23% from launch to pricing.
Asiamoney has spurned both deals, instead giving the Best Equity Offering award to a share issue by H20 Retailing, a company few people have heard of (its name is a play on the initial letter of two Japanese department stores, Hankyu and Hanshin, and of Osaka, where both are based).
H2o’s ¥11.77 billion share offering ranked just 16th in Japanese deal size last year, but its shares fell just 0.5% from the launch on February 10 to pricing on February 21. The stock has since risen in price by 26%.
The success of the offering boils down to a tempting equity story and careful structuring.
“Before the offering, nobody had paid much attention to the H2O name. Many didn't even know it was a department store company. But then people realised that Hankyu headquarters in Osaka’s Umeda, under construction for several years, would be completed in November and start contributing to profits. Investors suddenly noticed this was an undervalued, untouched stock with big potential,” said Yoshihiro Warita, head of Japan equity capital markets (ECM) at joint bookrunner UBS.
Unusually for a Japanese retailer, H2O allocated 75% of the deal to international investors and just 7.5% to domestic retail, as part of a deliberate strategy to reward small shareholders.
“Japanese brokers are often deemed as selling to a broad retail base of small shareholders, but in practice...they place a large amount with individual investors who have large assets,” says Warita. “[H2O] deliberately restricted the retail allocation to a tiny number of shares per person. What they want are stable retail shareholders, in line with their customer base.”
Best equity-linked offering
Sony Corp.’s ¥153.75 billion (US$1.94 billion) convertible bonds due 2017
Bookrunners: Goldman Sachs, J.P. Morgan, Nomura, SMBC Nikko
For most of 2012 Sony Corp. seemed to embody Japan’s economic woes.
While profits soared at Samsung Electronics and Apple, Sony recorded its fourth straight annual loss, ¥456.7 billion for 2011-2012 fiscal year ending March 31. New CEO Kazuo Hirai promised to cut 10,000 jobs, or 6% of Sony’s workforce, slash costs and sell off assets. It was not enough.
On October 31, Panasonic sent shock waves through the electronic sector by warning of a ¥765 billion loss for the 2012-2013 financial year. Its stock plunged to its lowest in over three decades, dragging down the whole electronics sector. Then Sony announced a seventh consecutive quarterly loss, raising its total first half loss to ¥40.1 billion. On November 9, Moody’s cut Sony’s long-term debt rating from ‘Baa2’ to ‘Baa3’, one notch above junk.
That led frightened investors to push Sony’s five-year credit default swaps up to a vertiginous 450 basis points (bp). It hardly looked a propitious time to launch a new issue.
“This deal was certainly no walk in the park,” one of the bookrunners said of Sony’s ¥153.75 billion convertible bond. “Everywhere there was a major headwind.”
A convertible was Sony’s only fundraising option, courtesy of its dismal share price and the pressure that any straight bond issue would have had on its credit rating. But its joint bookrunners had a few good cards to play.
“One big plus point was the view on credit. The CDS market was dislocated and investors mis-priced and misunderstood Sony’s credit. They were looking at a spread of 450bp. Because of the credit swap available, the CB was priced at 190bp so the gap of 260bp presented a major arbitrage opportunity. Moreover, in general there was a lack of new paper in the CB market, so as with any fresh issuance, it attracted notice from a lot of investors.”
The equity story on the warrant side was one of resurrection under new CEO Hirai. “Sony’s restructuring has been quite drastic and fast-paced,” says Makoto Ito, head of ECM and co-head of financing at Goldman Sachs Japan.
“Sony has been announcing a lot of new strategic moves since Hirai-san came into office in April, such as the alliance with Olympus,” says another banker. “There are now high hopes and expectations of a turnaround.”
It’s already proving a promising investment. Sony’s shares touched a 52-week low of ¥772 on November 15, one day the convertible was launched and priced, but they have risen ever since to close at ¥1,407 on January 28.
This is partly thanks to Japan’s new monetary policy of lowering the yen’s value, making exporters like Sony more competitive.
Best international bond
NTT’s US$750 million 1.4% five-year bonds due 2017
Bookrunners: Bank of America-Merrill Lynch, Barclays, Morgan Stanley
Takeda Pharmaceutical’s US$3 billion dual-tranche bonds
Bookrunners: Bank of America-Merrill Lynch, Citi, J.P. Morgan, Morgan Stanley, Nomura
Asiamoney found two US dollar-denominated issues to be so impressive that it has taken the unprecedented step of awarding both.
NTT’s US$750 million bond issue in July was the first global US dollar offering by a Japanese corporate to be registered with the U.S. Securities and Exchange Commission since the telecom company’s last US dollar deal in 1998.
Almost 7.5 times oversubscribed, with 70% going to the US, it achieved the lowest five-year coupon from a non-US borrower on record in the global US dollar market.
“NTT is the world’s only ‘AA’-rated telecom company, so US investors felt they had to buy NTT, otherwise they would have missed an opportunity to buy a very rare bond. NTT’s ‘Aa2’/’AA’ rating is even one notch above Japan’s sovereign credit rating, which is ‘Aa3’/AA-’,” says Takemi Ando, head of global finance and risk solutions at Barclays Japan.
Takeda Pharmaceutical’s US$3 billion transaction made during the same week in July was the largest ever from a Japanese corporate in the international capital markets, yet despite being a debut dollar deal it was eagerly snapped up by foreign investors.
Total orders across both three- and five-year tranches reached almost US$7 billion.
“It demonstrates the strong confidence of international investors in Japanese credit," says Reiko Hayashi, Japan debt capital markets (DCM) head at Bank of America-Merrill Lynch. "The fact that even a debut Japanese issuer can raise such a large amount at such a competitive funding cost bodes well for the future. It's a very encouraging transaction, not just for Takeda but for all Japanese corporates."
The major difference between the two deals was that NTT’s was SEC-registered, making its bonds eligible for the US aggregate bond index. US investors prefer bonds with this eligibility, and this explains why 70% of demand came from the US.
With US$5.6 billion worth of orders, NTT priced the deal 80bp over US Treasuries, equivalent to 18bp below Japanese government debt after swapping it back to yen.
“The transaction was cheaper for them than issuing in yen,” says Ando. “NTT have significant US dollar cash flow from their international operations, which they can apply to coupon payment and redemption. So they could either keep the US dollar liability as it is or swap the proceeds back into yen.”
The peculiar dynamics of the yen-dollar swap market are tempting many Japanese corporates like NTT to issue in dollars.
The Takeda issue will refinance bridge loans of between ¥600 billion and ¥700 billion that were taken out to help pay for its €9.6 billion (US$13 billion) takeover of Nycomed in 2011. One of the bookrunners says the deal would become a “paradigm” for funding Japanese M&A through the international capital market.
Takeda’s bookrunners declined to say whether the company swapped the bond proceeds back into yen.
Best local currency bond
Rabobank’s ¥161.8 billion (US$2.01 billion) five-tranche Samurai bond issue
Bookrunners: Daiwa, J.P. Morgan, Mizuho, Nomura
Shifts in the yen-US dollar swap rate made it punitively expensive for US dollar-based borrowers to issue Samurai bonds.
But it gave euro-based Rabobank of the Netherlands the perfect opportunity to sell its biggest-ever yen bond in October, a ¥161.8 billion five-tranche issue that was the largest Samurai bond issue of 2012.
“The basis swap plays a pivotal role in deciding whether I can issue or not. The past couple of years have been okay for us. It has allowed European issuers to come to the market, whereas American dollar-based issuers have been shut out,” Kazuhide Tanaka, Rabobank’s Japan head of long-term funding, tells Asiamoney.
Local investors were undeterred by a 27bp tightening of Rabobank’s benchmark spread for the core five-year tranche since its previous five-year offering in May. Instead they were attracted by relative yield and a scarcity of issuance by favoured international credits.
“We do issue significantly wider than any Japanese curves. Japanese credits are incredibly tight, and I don't think that is going to change in the near term either,” Tanaka said. “The Japanese are hungry for bonds, and there is a lack of product beyond JGBs [Japanese government bonds].”
He adds that transparency in pricing has helped to win over both dealers and investors.
“I say to dealers here, ‘Here is the euro benchmark curve. You guys work backwards from that and derive coupon and spreads that you think work, and then you can discuss it with your potential investors.’ It helps to maintain our credibility and integrity with Japanese institutional investors who examine these things with a very fine-toothed comb.”
Investment in Japanese-language publicity also helped to nurture a loyal investor base in Japan.
“We translate our entire annual report and investor presentations into Japanese, and for all of last year, we also had a Japanese-language video introducing Rabobank,” Tanaka explains. “Plus over the past few years we have held investor roadshows twice a year to keep our name in front of Japanese institutional investors.”
Rabobank’s loss of its cherished ‘AAA’ credit rating from Standard & Poor’s in 2011 has failed to dent Japanese investor appetite for its bonds. “Since we lost the triple-’A’ we have done probably the two biggest deals in the market,” Tanaka says.
Best securitisation
Driver Japan One ¥18.9 billion (US$245.87 million) 0.73% asset-backed securities bonds due 2020
Bookrunners: Mitsubishi UFJ Morgan Stanley, RBS
This was Volkswagen’s first issuance of asset-backed securities (ABS) outside of its European home territory, where the world’s third-biggest automaker has become a mainstay of the securitisation market.
Around 17,000 Japanese auto loans worth ¥18.9 billion were securitised into a note priced at 31bp above Japanese mid swaps, yielding a coupon of 0.73%.
The January 2012 issuance was bought by 18 Japanese banks and insurers and was 3.5 times oversubscribed.
“The fact that the deal was well oversubscribed indicates that we did a good job in structuring,” says Sarah Hofman, Asia Pacific head of securitisation at RBS.
Japanese investors were also attracted by the ‘AAA’ rating for the deal and “the high quality of VW as an issuer,” she added.
The mandate from Volkswagen Financial Services was to replicate in Japan what it has already achieved in Germany, the UK and Spain with its ‘Driver’ automobile loan securitisations.
While this sounds simple enough, it presented bookrunners RBS and Mitsubishi UFJ Morgan Stanley with some challenges.
“Japanese investors had not seen this sort of thing before, so it took a lot of education,” Hofman says.
Securitisation of balloon payments and a dual-tranche structure, with half in loan format to appeal to a wider group of investors, were both novelties, as was its pass-through rather than controlled amortisation.
The ABS was also the first by a foreign issuer to be marketed on a semi-public basis in Japan. Other foreign automakers such as BMW had previously sold loan-backed securitisations in Japan but these were all private placements.
Volkswagen could easily have increased the size of its inaugural Japanese ABS but chose instead not to tap the extra demand.
“Volkswagen in Japan is not as big as our company in Germany, and for that reason we would rather come as a frequent issuer 12 months later, rather than doing one deal and taking a break for two to three years,” explains Stefan Rolf, head of ABS structuring at Volkswagen Financial Services.
Volkswagen is now conducting a ¥25 billion ‘Driver’ ABS now being marketed in Japan and due to be priced mid-February. It plans to price debut ABS issues backed by Australian and French auto loans in the second half of this year.
Asiamoney did not choose any best loan awards this year due to a lack of deal submissions.