Breakingviews - NTT generously models Japan's next wave of buyouts

HONG KONG, May 9 (Reuters Breakingviews) - Nippon Telegraph and Telephone (9432.T), opens new tab is doing its state backers a favour. The Japanese telecom company, in which the Ministry of Finance holds a roughly one-third stake, is offering to buy out the 42% it doesn't already own of its subsidiary NTT Data (9613.T), opens new tab for 2.37 trillion yen ($16.4 billion). That's a chunky premium for minority shareholders. But it models a type of dealmaking officials want to see more of in Japan.
The $86 billion acquirer says its cash flow and financing capabilities will help the subsidiary, which was listed in 1995, strengthen its presence in North America and upgrade data centre infrastructure as demand for artificial intelligence increases. Official pressure may also be a factor driving the deal.
The government wants Japan Inc. to use capital more efficiently to ultimately support the economy. Bourse operator Japan Exchange Group has been running a campaign to remove conflicts of interest between parent companies and their subsidiaries' minority shareholders. These messy dual-listing structures are common in Japan; Nippon Telegraph admits, opens new tab the deal to absorb its subsidiary will simplify the relationship.
This type of consolidation will drive the next wave of Japanese buyouts. Of all the large M&A deals currently on the table in the country, Nippon Telegraph's deal is the most likely to succeed. By contrast, a potential $42 billion offer from Toyota Motors Chair Akio Toyoda to buy Toyota Industries (6201.T), opens new tab looks like scrap value.
Nippon Telegraph is offering, at 4,000 yen per share, a price the stock last hit around the dotcom bubble. Getting up there this time involved the subsidiary pushing back against its parent. Filings released, opens new tab on Thursday show the buyer initially proposed to pay 3,200 yen per share last month and increased the amount on four occasions: on Friday morning the target's shares were trading just below the buyout price.
It all means that Nippon Telegraph is paying a huge 67% premium, or $6.6 billion, to when it started negotiating with its target. Covering that might mean finding annual savings of about 140 billion yen, almost $1 billion, or a punchy 15% of NTT Data's operating expenses in the year to the end of March 2025, once taxed – at the 31% rate the company tends to pay – and capitalised.
NTT has a track record of making generous buyout offers, such as when it absorbed NTT Docomo five years ago in a larger deal. However, companies are so undervalued in Japan that high premiums are likely to be a feature of the many more deals to come. It's fitting that a state-backed company is devising a model for how to get deals done.
Japanese telecom provider Nippon Telegraph and Telephone on May 8 announced a tender offer to buy all the shares of NTT Data that it doesn't already own, valuing the information technology services company at 5.6 trillion yen ($38.8 billion).
At 4,000 yen per share, the offer represents a premium of 34% to NTT Data's closing share price on May 7, and of 67% to the closing price on April 7 before the two parties started negotiating a deal. NTT currently owns 57.7% of NTT Data. The tender offer period will run from May 9 to June 19.

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