Why much is at stake with Blackstone’s offer for Unizo

The outcome of Blackstone Group’s bid for listed Japanese hotel operator Unizo Holdings has larger implications for foreign hostile takeovers in Japan. It could signal that Japan is finally changing its attitude toward public deals by international funds or that the country remains resistant to foreign ownership of its listed companies.

Last week, the US private equity giant – originally invited as one of the 16 white knights to save the real estate company from a hostile bid by Japan’s leading travel agency HIS – said it “remains prepared to engage in further discussion” until November 18 to enable Unizo to respond to its ¥5,000 ($45.94; €41.31) per share offer.

Blackstone’s offer price represents a 151 percent premium to Unizo’s closing share price of ¥1,990 on July 9. Prior to that, Unizo revoked support for Softbank-backed Fortress Group’s ¥4,000 per share offer and turned down another offer from a “locally renowned” fund. Unizo’s share price closed at ¥5,030 last Friday, up by more than 154 percent since July.

Timeline

July 11 HIS launches a tender offer at ¥3,100 per share

Aug 16 Fortress proposes a tender offer at ¥4,000 per share and is approved by Unizo

Aug 24 HIS withdraws its bid

Sept 17 Blackstone makes binding proposals to Unizo

Sept 25 Blackstone proposes a tender offer of ¥5,000 per share to Unizo

Sept 27 Unizo withdraws support for Fortress and rejects Blackstone’s proposal

Oct 7 Fortress extends the deadline of the offer to Oct 17; Blackstone makes a new proposal to Unizo

Oct 9 Elliott Management, Unizo’s biggest shareholder, sends an open letter to the company

Oct 10 Unizo reveals to the public that the ¥5,000 offer was from Blackstone and rejects Blackstone’s second proposal

Oct 15 Blackstone makes its third proposal to Unizo with a deadline of Oct 23

Oct 23 Blackstone extends the deadline to Oct 28

Oct 17 Fortress extends the offer to Nov 1

Oct 28 Blackstone extends the deadline to Nov 6

Nov 1 Fortress extends the offer to Nov 11

Nov 6 Unizo has not responded to Blackstone

Nov 7 Blackstone says it will continue to engage in discussions with Unizo

So far, Blackstone has shown a willingness to compromise instead of pushing through the deal aggressively. This was the third time the firm had extended its offer – which was originally set to expire on October 23 – after having two previous offers rejected by Unizo.

Rather than the offer price, the point of contention between the two parties has been a ‘mechanism’ to protect the employees’ benefits upon the acquisition. Blackstone pointed out that the demand from Unizo was “unprecedented” as it would involve giving all the employees a veto on every major decision of the company. However, the firm agreed to provide protection and benefits for Unizo employees “above and beyond what they currently enjoy.”

High hurdles for foreign acquisitions

Historically, there has not been any successful foreign hostile takeover of a listed real estate company in Japan. The last notable hostile bid for a local real estate company by a private equity real estate firm was in 2007, when Tokyo-based real estate fund manager KK DaVinci Advisors attempted to acquire commercial property developer TOC. The deal collapsed after shareholders rejected the ¥103.3 billion offer.

“Everybody got a lesson from the DaVinci and TOC deal,” a Tokyo-based researcher at a real estate services firm told PERE. “Nobody has tried since 2007. We have had 12 years without any activities until this Unizo situation. That tells you how high the hurdles were for foreign investors to take over a listed real estate corporation.” In the attempted hostile takeover of TOC, DaVinci only received 35 percent investor support, short of the 45 percent required.

The researcher explained that unsolicited bids like the one for TOC are rare in Japan as firms often have a web of cross-shareholding loyalties with domestic peers that, together, could block any takeover attempts. For example, TOC’s chairman pressured investors to decline the offer from DaVinci and refused to give the bidder a list of shareholders, which complicated the process.

Joel Rothstein, shareholder and chair at international law firm Greenberg Traurig’s Asia real estate practice, pointed out that the lack of publicly available information in a hostile takeover was another issue for any acquirer, which will be unable to fully understand the risk embedded in the target company.

“In the context of a closely held real estate company, financing documents for specific real estate projects or joint venture contracts with strategic partners may have ‘change of control’ covenants or restrictions,” said Rothstein. “These provisions restrict or prohibit changes in the ultimate ownership and control of the real estate company without the consent of the lender or joint venture partner. Breaches of these covenants could be triggered in a hostile takeover, leading to defaults under loans or breaches of joint venture arrangements.”

Another challenge is the short-term hold period for opportunistic buyers. “Many foreign private equity players often lack the liquidity to hold the assets for a long time,” added the researcher. “In this case, except for Blackstone, which has huge pools of core and opportunistic capital, both Fortress and Elliott Management are opportunistic players and they can’t afford to hold the assets on their balance sheet for too long. The risks associated with a quick exit can sometimes be challenging for them.”

An international real estate manager who was approached by Unizo to be a white knight told PERE that their firm would never do a hostile takeover in Japan because hostile action has been viewed extremely negatively in the country.

“More so in Japan than in any other countries, most of the relationships are based on trust, and a hostile takeover just fundamentally goes against this concept,” said the manager. “You have to take a long-term view and say, ‘if we launch this hostile tender offer, we may get this deal done but then what will our next deal in Japan look like?’”

Time for a wake-up call  

Jeff Acton, managing director and co-head of the Tokyo office at M&A advisory firm BDA Partners, pointed out that Blackstone’s proposal is the most attractive in terms of both the valuation and terms. He said it was clear that the firm was making an effort to respect the board and to provide employees with an opportunity to share in the upside of the company in order to have its proposal accepted.

“If Unizo ends up rejecting Blackstone’s proposal, it will show the market that management objectives continue to take precedence over general shareholders’ interests, despite recent efforts to improve corporate governance in Japan,” said Acton. Since 2013, Japanese prime minister Shinzo Abe has been encouraging Japanese corporations to improve shareholder returns.

If the two parties fail to reach an agreement, Unizo would be likely to have difficulty finding another white knight, according to the researcher. Given that the reported fair market price is ¥5,300 against Blackstone’s offer price of ¥5,000, the source said this would leave very little room for upside.

“If Unizo does not have the financial capacity to survive on its own either, then it will potentially pull the share price down to the pre-takeover bid price of ¥2,000,” said the researcher. Elliott, Unizo’s biggest shareholder, purchased ¥16 billion of the company’s stock at ¥3,654 per share. It will potentially face a loss if the Blackstone deal fails.

“At the end of the day, the management board of any listed company should make themselves aware that they are hired to do their job on behalf of the shareholders,” said a second international fund manager who was invited by Unizo to be a white knight. “They need to listen and to consider every offer very sincerely.”