Listed subsidiaries get the ax in Japan after investor pressure
Japanese conglomerates are scaling back their hundreds of listed subsidiaries, a structure that critics say is often a poor use of capital and raises potential conflicts of interest.
The trend stems from mounting pressure on companies to cater to shareholders in response to activist campaigns, demands from the stock exchange and even hostile takeovers. Japan has 212 so-called parent-child listings, which is down from 285 in 2020, but still more than the 178 in Europe and 59 in the U.S., according to Jefferies Financial Group.
"Japanese companies are becoming more selective about their assets, looking at whether subsidiaries are helping to increase their shareholder value,' said Chizuru Morishita, a researcher at NLI Research Institute. "Activist investors are becoming more powerful.'
NTT, Japan's largest telecom company and a former state monopoly, said on May 8 it will take its data service unit NTT Data Group private. That followed its acquisition of its mobile service arm, NTT Docomo in 2020. The announcement came a day after another former state-owned firm Japan Tobacco said it would sell Torii Pharmaceutical, in which it has 55% stake, to Shionogi & Co.
The wave has reached the country's biggest company by market capitalization, Toyota Motor. Bloomberg reported in late April that the carmaker's founding family has proposed a buyout of Toyota Industries, one of its many subsidiaries.
The model for many investors is Hitachi, once known as having one of the most sprawling networks of subsidiaries in the country. It slashed them to zero in 2022 as it sharpened its business focus, selling many subsidiaries and buying out a few others deemed critical to its core business. The company's stock price has more than tripled since then.
The pattern has strategists identifying companies which they speculate are likely to shed listed subsidiaries. Common names that appear in their lists include Nippon Steel, Sumitomo Chemical and retailer Aeon. David Mitchinson, a senior portfolio manager at U.K.-based Zennor Asset Management, says about 20% of his trades revolve around bets on the unwinding of subsidiary listings.
"We think the pressure from the exchange and shareholders to resolve that kind of governance challenge is very impactful and very positive for the market,' he said.
The Tokyo Stock Exchange, building on its success pushing low-valued companies to focus on measures to boost their market capitalization in 2023, has also taken aim at the issue, calling on companies to explain the benefits of the structure. In response, executives have opted to use capital more efficiently by focusing on their core strength, rather than investing in other firms. Up until now many companies have resorted to share buybacks, which boost earnings per share by reducing the outstanding shares as a quick fix to improve capital efficiency.
"A few years ago, it was seen as an issue to tackle in the next 10 years, but due to pressure from the Tokyo Stock Exchange, the time-line has shortened, and the perception now is more like a five-year horizon,' said Daisuke Uchiyama, Senior Strategist at Okasan Securities.
But some investors are wary of the rising popularity of bets to benefit from potential unwinding of parent-child listing. Yasuo Sakuma, president of Libra Investments, say there aren't as many opportunities as there seems.
"You could buy companies that could be one day bought by their parent but the thing is, you never know when that will happen,' he said, noting the opportunity cost of holding such positions could be a headache.
Nor is the trend only one way. Some tech companies, such as Softbank Group, Rakuten Group and GMO Internet, are seen as likely to continue to use listings of subsidiaries as a way to raise funds. LY, itself a subsidiary of SoftBank Group-led stock holding company, said just this month it plans to list its digital payment unit PayPay. More fundamentally, some investors say it is too simplistic to think parent-child delisting is always positive for minority shareholders.
"It is not clear either whether taking a listed subsidiary private automatically leads to better governance,' said Richard Kaye, co-head of Japan equity strategy at Comgest Asset Management.
The pressure to simplify corporate structures is likely to increase. Nicholas Smith, a strategist at CLSA, thinks companies may be incentivized to buy out subsidiaries earlier rather than later as the TSE is seeking to tighten its rule on management buyouts to protect minority shareholders from July.
"Even though there are considerable concerns about the likely new rules for MBOs and buy-ins, the rules are likely to tighten,' he said. "A cynic would say that this is already causing a scramble to announce MBOs and buy-ins ahead of implementation of stricter rules.'
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