Foreign investors led by US fund Ripplewood and Citigroup are poised to wade into Japan's lucrative consumer finance arena with the possible purchase of a 300 billion yen ($2.8 billion) stake in top player Takefuji Corp
It would be the latest high-profile merger and acquisition deal to hit Japan since drug maker Yamanouchi Pharmaceutical Co agreed to buy rival Fujisawa Pharmaceutical Co for some $7.8 billion in February.
Business newspaper Nihon Keizai said on Friday the founding family of scandal-tinged Takefuji was in talks to sell a 33 percent stake in it to five prospective buyers including US buyout fund Ripplewood Holdings and British bank HSBC Holdings Plc
The report fuelled expectations that Takefuji, whose founder Yasuo Takei was arrested in December on phone-tapping charges, would become the latest chapter in a series of shake-ups in Japan's consumer finance sector.
If completed, it would be Japan's biggest ever M&A deal involving a private equity firm, analysts said.
Consumer finance - in which firms lend money with interest as high as 29 percent after borrowing it at rates as low as two percent - is full of profit-making potential, analysts say.
"It's a high profit margin business if properly run and there are great economies of scale," said Simon Chadwick, managing partner of Chikusei Partners, a private equity consultancy.
"For finance services buyers there are good prospects for cross-selling other products. Private equity firms (can) hope to sell to financial buyers after being in control of improving or expanding the business."
Investors, cheered by the possibility of a stake sale, pushed Takefuji shares up nearly four percent to 7,900 yen by Friday's market close. The Nikkei average ended up 0.3 percent.
Credit spreads, a measure of risk, on Takefuji tightened considerably with five-year credit default swaps narrowing to 70 basis points (bps) from around 90 bps last week and spreads on straight bonds narrowed by 30 bps to around 60 bps over libor.
But Takefuji, which has a market value of around 1.1 trillion yen, said in a statement that no formal decision had been made and that it could not comment on any change in ownership. It gave no further details.
New York-based Ripplewood, which said last week it had been eyeing a stake in the consumer finance firm since last autumn, also said a decision had yet to be made.
"Our comment last week still remains intact," said Atsushi Kuse, Ripplewood's spokesman in Japan.
Asked if four foreign buyers including HSBC and Citigroup were considering purchasing a 33 percent stake in Takefuji with Ripplewood, Kuse said: "I have no idea."
Citigroup and HSBC declined to comment.
The deal would value the shares at 6,172 yen apiece - a 22 percent discount to the current market price.
Takefuji's founding family has been under pressure to sell its stake of around 70 percent since former chairman Takei was arrested on suspicion of ordering the tapping of the phone of a reporter who had written articles critical of the firm. The case is still pending.
Under the Money-lending Control Law, if a shareholder who effectively owns over 25 percent of a company is sentenced to prison, the company's lending business licence is revoked.
Takefuji posted a 21 percent slide in group net profit to 74.7 billion yen in the business year that ended on March 31 and forecast tough times ahead due to growing competition.
But the firm has yet to post a loss in its nearly 40-year history.
Several banks have bought into the sector, lured by its robust returns at a time of sluggish growth in bank lending.
The volume of Japanese overall M&A activity is surging, with 593 deals worth $51.84 billion so far in the first half of 2004 compared with 293 deals worth $53.7 billion for the first half of last year, according to data provider Dealogic.
"What's happening now really is we're getting this bank-led realignment of the sector and what's driving that is banks have nowhere else to go," said Barclays Capital analyst Jason Rogers.
Sumitomo Mitsui Financial Group said it would take a stake of up to 20 percent worth some $1.8 billion in Promise Co while Mitsubishi Tokyo Financial Group, Japan's largest bank by market capitalisation, spent $1.3 billion for a 15 percent stake in another lender, Acom Co
UFJ Holdings was talking with such foreign firms as Citigroup and GE Capital on selling its consumer finance unit Aplus Co in a deal reportedly worth some $902 million.
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