Longreach completes precision drilling carve-out from Hitachi

The size of the transaction was not disclosed. Longreach typically invests $50 million to $250 million and AVCJ understands the Hitachi deal is of meaningful size within this range.

HVM is a leading manufacturer of spindle and laser micro-drilling machines for printed circuit boards widely used in consumer electronics devices. It claims to be one of few global players with the ultrafine and high-precision drilling technology required for the latest smart phones and other mobile devices.

Noting that the industry has become increasingly competitive due to changing demand patterns since the global financial crisis and the rise of manufacturers in emerging nations, Hitachi said it considered various options to improve HVM's earnings, before settling on Longreach.

"The Longreach Group will reinforce HVM's financial and business foundation and management resources as well as provide global business strategy know-how and other benefits," Hitachi said in a statement. This will include faster expansion in emerging markets, particularly Asia.

According to sources familiar with the situation, the Japanese company deliberately ran a very discreet process, approaching a small group of strategic and private equity investors with which it felt comfortable.

HVM employs more than 700 people and had JPY2.9 billion ($29.5 million) in capital as of June 2013. It was one of five major subsidiaries in Hitachi's electronic systems and equipment division. The division had revenues of JPY1.01 trillion for the year ended March 2013 - 10% of the group's total revenues - and operating income of JPY29.4 billion. More than half of the division's revenue comes from overseas.

The divestment of HVM - a non-core asset - is part of a wider restructuring at Hitachi, which earlier this year announced plans to overhaul operations in a bid to boost profitability. The company sold its hard drive business to Western Digital last year.

Hitachi is not the only Japanese corporate considering divestments - Panasonic, for example, has been in the process of shedding around JPY110 billion in assets for the past year in an attempt to boost cash flow - and private equity firms are looking for carve-out opportunities, if not full buyouts of distressed technology giants.

While KKR's $1.3 billion bid for ailing chipmaker Renesas was trumped by a bailout led by government-backed Innovation Network Corporation of Japan (INCJ), late last year Advantage Partners succeeded in buying a digital camera unit from Sanyo Electric, a subsidiary of Panasonic.

Panasonic's healthcare business - which manufactures products such as hearing aids and blood sugar level sensors - is also on the block, with KKR, Bain Capital and a partnership between Toshiba and The Carlyle Group said to be tracking the $1 billion-plus deal.

Longreach can also claim a sweet spot for corporate carve-outs. In 2010, the GP acquired Sanyo Electric Logistics from Sanyo for about $200 million in a leveraged buyout, after two years of informal negotiations. After expanding the business in Asia - new clients included Chinese appliance maker Haier - Longreach sold it to Mitsui-Soko in 2013 for $300 million, generating a 2.3x return.

The Hitachi investment was made through Longreach Capital Partners 2, which reached a final close of $400 million last September. Although the vehicle is smaller than its predecessor - which raised $1 billion before the global financial crisis - there is a strong appetite for co-investment among some of the LPs.

"We realistically have around $700 million in capital to deploy in total, with LPs co-investing on top of the fund size," Mark Chiba, the firm's chairman and partner, told AVCJ last year.

Hitachi Chemical, another subsidiary of the Japanese group, sold housing equipment manufacturer Hitachi Housetec to New Horizon Capital in 2007 for JPY15.1 billion. It exited the business to consumer electronics retailer Yamada Denki last year.

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• Topics
• Buyouts
• North Asia
• Industrials
• buyout
• The Longreach Group Limited
• manufacturing
• Japan