As the second largest economy in the world, Japan would not be considered an emerging market in most circles, but its private equity scene is a different story. Buyout pros have long found the country a difficult place to organize deals due to its risk-averse culture, but last year’s $2.2 billion acquisition of Japan Telecom Holdings’ fixed-line operations by Ripplewood Holdings points to the fact that all that is changing.
The deal, which took more than a year to complete and involved 11 debt providers, is one of the largest leveraged buyouts in Japanese history. The purchase price is an estimated 3X the value of the unit’s EBITDA. Out of the total 262 billion yen paid for the subsidiary, 209 billion yen was debt and the rest was equity split between Ripplewood and Britain’s Vodafone Group, the owner of Japan Telecom.
“This deal breaks new ground in financing a large buyout here in Japan,” says Jeff Hendren, a managing director with Ripplewood. “Everyone in the banking community should be proud.”
Citibank and J.P. Morgan Securities Asia led the debt-financing, along with the three largest banks in Japan: Mizuho Corporate Bank, the Bank of Tokyo Mitsubishi and the Sumitomo Mitsui Banking Corp. Ripplewood has some credibility with the Japanese banking community, having become the first foreign investor to acquire a Japanese bank when it bought the failed Long-Term Credit Bank of Japan-now known as Shinsei Bank-in June 2000. Shinsei is going public this month, completing a successful turnaround for the firm.
That deal made Ripplewood a pioneer in Japan, a market that Hendren refers to as a “target-rich environment.” Since then, other western firms have joined the fray, but he says there are too many opportunities there now for much head-on competition. Ripplewood has also acquired a resort operator in southwestern Japan, a Japanese record company and a Japanese auto parts maker.
Ever since Vodafone bought a controlling stake in Japan Telecom in 2001, Ripplewood has had its eye on its fixed-line business. Vodafone, now the largest mobile carrier in the world, needs capital to expand its mobile business in Japan, where a unit of Nippon Telegraph & Telephone, NTT DoCoMo, controls 60% of the market. The fixed-line business was a non-core asset for the company.
“If you look at Vodafone, the company is exiting the fixed-line market around the world in order to focus on mobile,” says Hendren. “We saw an enormous opportunity in the fixed-line, broadband market [in Japan]. We wanted to participate in that, and help it grow.”
Originally, Vodafone approached strategic buyers about the subsidiary, notably Japan’s largest power-utility company called Tokyo Electric Power Co. (TEPCO). TEPCO underbid the assets in the midst of a scandal concerning the safety of its nuclear reactors. Vodafone, irritated by the bid, rejected its offer and opened talks with Ripplewood.
“We could negotiate effectively because of all the knowledge we had about the Japanese markets,” said Hendren. “We were on it early and pushed hard on it early, and kept pushing until they opened the door to us.”
Unlike most of its previous purchases, Ripplewood is buying a profitable business in a decent position to compete with NTT and the KDDI Corp., Japan Telecom’s two larger rivals. The relatively low-price tag on the deal will allow the firm to invest more in growing the business, and the mobile phone subsidiary retained by Vodafone, J-Phone, will remain a client. The two units may cross-market products wherever synergies exist.
“The fixed-line people at the company appreciate that they’re no longer the step-child of the organization,” says Hendren. “They’re the focus of our attention. Employee satisfaction surveys are showing us that we’re on the right track.”
The firm is reviewing more acquisition targets in Japan’s telecommunications sector and beyond as Ripplewood remains active in looking for opportunities there. He thinks the most likely exit for the investment will be an IPO in three to five years.
“We’d like to get the company back public again, but there’s no rush.”