GSCP Hopes To Build On Japan’s Construction –

As Japan’s economy slowly rebuilds, U.S.-based institutions, including private equity firms, are buying up distressed assets at a discount and hoping to earn substantial profits through turnaround plays. Among these firms is GS Capital Partners (GSCP), the private equity arm of Goldman Sachs Group Inc., which, earlier this month, agreed to acquire a control stake in Fujita Corp., a financially struggling construction contractor.

The New York-based buyout shop is the lead investor in a consortium that agreed to acquire 24.44 million common shares of the debt laden company. The deal is valued at 41 billion (approximately $385 million) and will net GSCP and co-investors 55% of the Tokyo-based company. Mori Trust Co., a Japanese real estate developer, is also an investor taking part in the deal. Pending shareholder approval on the sale, payment for the shares is due on Sept. 29.

In years past, Japan-based construction companies purchased real estate by using copious amounts of easily-attainable leverage with the hope of selling the property post-construction and making profit on both the construction contract as well as on the appreciated land value. “After real estate values fell, post bubble, these companies were left with large amounts of debt, relatively low value assets and poor cash flow,” a GSCP spokesperson based in Tokyo told Buyouts. “This led to a downward spiral and the demise of several companies.” Fujita, once a market leader in its trade, was one of the many construction companies that ran aground when the markets became adverse.

But recently, circumstances in Japan’s construction market have been changing. Many companies have stopped purchasing large amounts of real estate and have received support from their banks to clean up their balance sheets. Earlier this month, Fujita announced that 28 creditor financial institutions have agreed to its request to forgive 98.9 billion (approximately $911 million) of lending. And with Japan’s economy improving, construction orders, which typically lag GDP growth, have started to improve, the spokesperson said.

Part of GSCP’s attraction to this particular market is the amount of room that individual companies have to spread their wings. Japan’s construction arena was worth approximately $522 billion in fiscal year 2004. Of that, the spokesperson noted, Fujita has a market share of about 0.6%, while the largest player in the industry can only boast a market share of about two percent.

To implement growth in Fujita, GSCP will lever its corporate relationships and real estate experience to help Fujita win construction contracts; bring in outside talent to strengthen the company where needed, and expand the company’s reach overseas to countries like China and Korea, the spokesman said.

“We believe Fujita has strong technical expertise, solid reputation in the industry and talented people,” the spokesman said. “With a clean balance sheet and the existing franchise and capabilities, we believe the company could grow and regain its leadership position.”

But despite the positive outlook for Fujita, the company’s current president, Keizo Harada, will resign on June 29 to take responsibility for having to ask for further financial assistance from its creditors. He will be replaced by Katsuya Amimoto, Fujita’s COO. Asked if any other management changes could be expected, the spokesperson replied: “We are very supportive of the new president, Mr. Amimoto, and other senior executives, and will work with the company to help make decisions on the management team.”

Equity for this deal will come from GS Capital Partners V LP, which closed earlier this year with a total of $8.5 billion in total capitalization. Currently, there is no plan on the buy-side to lever this transaction with debt, though that may change before the deal is to close, the spokesman said.

GSCP has not been the only party to express an interest in Fujita. The company had originally planned a merger with Sumitomo Mitsui Construction Co., which it backed out of at the end of March, reportedly to be acquired by Lone Star Group Inc. for 41 billion. Though for the same amount, the GSCP-led deal was said to have offered more advantageous conditions for the company than Lone Star’s.


Target: Fujita Corp.

Price: 41B (approx. $385M)

Sponsors: GS Capital Partners, Mori Trust Co.

Financial Advisor: Fujita: Nomura Securities

Legal Counsel: GSCP: Linklaters; Fujita: Mori Hamada Matsumoto

Accountant: GSCP: Ernst & Young