Bain consortium to buy Japan's Hitachi Metals for $7.5b
Bain Capital has teamed up with two Japanese PE firms – Japan Industrial Partners (JIP) and Japan Industrial Solutions (JIS) – to carve out Hitachi Metals from its corporate parent for as much as JPY816.8 billion ($7.5 billion).
Should the deal proceed, it would be Japan’s second-largest private equity buyout. The largest was also led by Bain. In 2018, the GP assembled a consortium – largely comprising strategic investors – that acquired the flash memory division of beleaguered conglomerate Toshiba Corporation for JPY2 trillion.
More recently, CVC Capital Partners approached Toshiba itself about privatizing the business at a valuation of $20 billion. CVC has since dialed down its aggression, telling Toshiba that it “would step aside” and await guidance from the company’s board and management as to whether a privatization is desirable. However, several other private equity firms, including Bain, have since been linked to the asset.
Hitachi has agreed to sell its 53.4% stake in Hitachi Metals to the Bain consortium for JPY1,674 per share. The consortium will also make a tender offer to the remaining public shareholders priced at JPY2,181 per share. At least 56.8 million shares out of the 199.3 million not owned by Hitachi must be tendered for the transaction to complete and for Hitachi Metals to be delisted.
The tender offer price represents a 15.2% premium to Hitachi Metals’ April 27 close of JPY1,893. The stock closed at JPY1,895 on January 29.
The carve-out is similar in structure to those of other listed subsidiaries of Japanese corporates by private equity investors. There are two main differences: the size of the premium being paid to the public shareholders over Hitachi, which might be a preemptive effort to deter activist shareholders; and the fact that Hitachi is not reinvesting in the acquisition vehicle.
Hitachi said in a filing that the decision to divest was driven by deterioration in the financial performance of the metals business as demand from industrial customers – chiefly automotive, factory automation, and robotics manufacturers – and the consumer electronics industry weakened.
Revenue came to JPY761.6 billion in the 2020 financial year, down from JPY881.4 billion and JPY1.02 trillion in the two prior years. The company swung from a net profit of JPY31.4 billion in 2018 to a net loss of JPY42.3 billion in 2020.
Recognizing the importance of faster decision-making, new capital for investment, and the introduction of external knowledge in enhancing competitiveness and profitability, Hitachi approached several potential bidders for the subsidiary and launched a process in November 2020.
At the same time, the conglomerate is keen to diversify its business and launched the Lumada innovation program to modernize operations, especially in digital transformation of social infrastructure. Lumada’s key areas of focus are mobility, smart life, industrials, energy, IT, and automotive systems. To this end, Hitachi recently agreed to acquire IT services provider GlobalLogic for $8.5 billion.
The proceeds of the metals division sale will go towards investments in growth opportunities, returning profit to shareholders, and strengthening Hitachi’s financial base.
Private equity investment in Japan came to $13.3 billion in 2020, up from $11.7 billion the previous year. The buyout total rose from $8 billion to $8.4 billion. While activity – in terms of deal volume – is concentrated in the middle market, where succession is a more prevalent theme than carve-outs, the biggest buyouts of 2020 were all carve-outs.
Bain is currently deploying its fourth Asian private equity fund, which closed at $4.65 billion in 2018. Earlier this year, the firm raised JPY110 billion for a debut Japan vehicle mandated to focus on middle-market opportunities.
JIP is a carve-out specialist that upsized its fifth fund to JPY148.5 billion – from JPY67.4 billion in the previous vintage – to target more large-cap buyout opportunities. This is not JIP's first Hitachi carve-out. In 2017, it acquired Hitachi Kokusai Electric alongside KKR for JPY322 billion. KKR took full ownership of the thin film division and 60% of the video and communication division. The remaining 40% was split equally between Hitachi and JIP.
JIS, which was established by Development Bank of Japan, Mizuho Bank, Sumitomo Mitsui Banking Corporation, and MUFG Bank, helps corporates improve their competitiveness. The firm is investing its JPY100 billion second fund.
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