We know Japan is coming from a very low base as far as the appetite for leveraged finance goes. But it’s worth noting the completion on Thursday of one of Japan’s biggest LBOs: the Y250bn ($2.4bn) sale of Japan’s Arysta LifeScience, the agrochemicals producer, to Permira and Ireland-based investment company Industry Equity Investments Limited.
Arysta is an interesting – and unusual, in the Japanese context – case of a smooth ride for foreign private equity in Japan. Permira acquired Arysta from the Hong Kong-based buy-out firm Olympus Capital Asia in an auction of 12 bidders last October, in Japan’s biggest LBO deal of the year.
Arysta, created in 2001 through a merger of the agrichemical businesses of Japanese trading firms Tomen and Nichimen, is one of the top 10 players in the $30bn global agrichemical industry with about $1.2bn in anual revenues. Olympus took a minority stake in 2002 , although it gained management control, built up the business, raised its profitability and took 100 per cent control last year.
More significant, the financing of the deal – a mix of senior debt, senior mezzanine and junior mezzanine facilities placed before completion of the deal by JPMorgan, Lehman Brothers, Germany’s HVB Group and Japan’s Aozora Bank – was fully syndicated ahead of the completion, the companies said.
The completion reflects what the companies describe as an “enduring appetite for leverage finance in Japan for the right asset backed by the right sponsor”.
Well, perhaps it was more like a rare display of the financial munchies. However, if buy-out interest picks up as predicted in Japan and deal sizes continue to grow, maybe – just maybe – Japan will shake off its reputation as a relatively barren place for private equity.
As the FT noted last November, a rise in shareholder activism has pushed the management of many Japanese companies to focus more on value, while tougher new accounting rules are also prompting some reflection at Japanese conglomerates about the value of owning so many listed subsidiaries.
Figures, however, show the buy-out scene in Japan has been flat, at best – which is still a lot better than the outlook in some parts of the world. Last year, reports the FT, M&A involving Japan grew just 2.6 per cent to $153bn, although in the first six weeks of this year, it was down 48 per cent at $7.7bn against the same period last year, according to Thomson Financial.
However, many western banks say they are committed to Japan and are expanding operations in areas where they see growth.
Lex meanwhile, gave us more insight into the Japanese-style dyamics of LBO financing, noting last October that debt in Japan has “never been sliced and diced as in other markets”.
Instead, domestic banks mop up senior debt while a handful of foreign and smaller players absorb the junior paper. The covenant-lite contracts that were all the rage in other markets rarely made it to Japan, where payment-in-kind is virtually unknown. Lastly, there were few big deals in the first place.
But even in Japan it is not quite business as normal though. Investment banks hired to run auctions are generally also underwriting financing; in the case of Arysta, the debt amounted to a fairly aggressive eight times ebitda.
Even so, the debt found takers and the deal was closed. Kampai, as they say in Japan.