Glenboden M & A Originations

Sapporo a test case in whether hedge funds can stimulate M&A activity

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Origination Status statement of intent to acquire 66,6% shareholding, Feb. 2007;
Asset Sapporo Holdings (Japan), no. 3 domestic beer producer;
Buyer Steel Partners Japan Strategic Fund LP (USA), hedge fund;
Seller shareholders of Sapporo;
Buyer Rationale to raise value of its 19% shareholding in Sapporo;
Seller Rationale to attract a white knight to make a genuine takeover offer;
NBs Goldman Sachs estimated that the value of Steel’s stake in Sapporo increased by $250 mln, as a result of its actions.
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Stories like this one raise the question of whether hedge funds can stimulate M&A activity by forcing the hand of genuine strategic buyers, and even if they will muscle into private equity territory by actually going through with ‘public to private’ deals. If so, then it will be important to track the companies that have attracted significant share buying by such ‘activist’ funds.

The plot is predictable enough. Steel declared it was considering launching a tender offer for the company, of which it is already the biggest shareholder with a 19% stake; management ponders whether to use the company’s anti-takeover defenses (issuing equity warrants); then rumours emerge of white knight bidders (notably Asahi). Then a long period of stalemate where letters are passed between Steel and Sapporo, meetings held and misunderstandings multiplied.

Sapporo is Japan’s third largest brewer, after Asahi and Kirin. The country’s beer market is in decline, and Sapporo has been struggling in it. In fact its real estate business, benefiting from demand for office space and rising rents amid steady economic growth in Japan, accounts for the majority of Sapporo Holding’s operating profit. So, this story even has a tantalising restructuring angle.

But what are Steel Partners’ true intentions? Invariably, in takeovers of public companies, the aim of the acquirer is to buy all of the share capital, and take the company private or turn it into a subsidiary. There’s no value in keeping the company public and having to deal with minority shareholders.

And yet, in the case of Sapporo, Steel is seeking management’s support to raise its stake to 66,6%, which is to just below the level at which it would be obliged to make a tender offer for all of the shares, i.e. have to try a genuine takeover.

It’s also stated that it doesn’t want to change the management, and hasn’t presented any new strategy for Sapporo. All this is proof that the fund is not serious about going through with a takeover, but just wants to provoke management into restructuring its portfolio or, better still, to attract a ‘white knight’ genuine strategic buyer. Either way, the hedge fund wins in terms of the value of its stake going up.

Apparently, Steel Partners has previously launched three tender offer bids for other Japanese companies – a noodle maker, a woolen fabric dye-finisher and a maker of machinery lubricants.

None of these bids were successful, but Steel Partners benefited each time from the share price gains in its targets. So one could say that in these cases the fund’s intention was to be a catalyst for change, but had to settle for only making a lot of money instead.

A white knight might well appear, and buy Steel Partners’ shares in Sapporo. Asahi has said it’s planning a strategic alliance with Sapporo, although possibly not in brewing. Another Japanese brewer might step in, to consolidate the declining industry further; and/or a real estate company.

Another rumoured option is for an MBO of Sapporo; that might give private equity an opportunity to underline how different it is from the hedge fund world.

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