ASIA NEWS: Overshooting the green

Accordia Golf, Japan’s second-largest golf course business, was responsible for hosting 8.2 percent of the 90.78 million rounds of golf played in the county last year. A glance at its annual report, published in June, shows the Tokyo-listed business increased its revenue to ¥87.4 billion (€790 million; $1 billion) in 2010 from about half that when it was taken public almost five years ago.

Despite that, Accordia’s largest shareholder, Goldman Sachs, wants to exit its investment. Indeed, Accordia announced last month that it is planning to hold a secondary offering of Goldman’s 470,587 shares, equal to 44.7 percent of the company.

Accordia was listed via a $1 billion flotation in November 2006. The shares debuted at ¥186,000, slightly down on Goldman’s target but still enough for the firm’s Whitehall Street funds to bank an impressive 52 percent IRR on the 52.9 percent floated. Alas, it will achieve nothing like that for its secondary offering as the shares have since fallen 60 percent, trading at ¥72,500 per share early last month and valuing its stake at about $446 million.

Prologue to the deal

Goldman entered a Japanese golfing world saturated beyond rescue following the excesses of the 1980s. As one former Goldman executive who worked on its early forays recalled: “It was so cheap for us. So many companies had fallen into receivership”. However, for those buyers able to underwrite serious debt loads, significant swathes of Japan’s golfing businesses – and their courses in tow – could be snapped up using little equity.

The return of Japanese consumer spending won’t take forever, but it won’t be in the next 18 to 24 months. If Goldman’s funds wait for two years, they’d have to hope it goes up 40 percent to make their 20 percent IRRs. I don’t think it’s going to do that.

Unamed source

Goldman’s effort was led by executives including Shigeki Kiritani, today its head of merchant banking, and some of the largest names in private equity like Mark McGoldrick, founder of Mount Kellett Capital Management, and Peter Briger, co-chairman of Fortress Investment Group. Unsurprisingly, another private equity veteran, John Grayken at Lone Star Funds, had the same idea, creating Pacific Golf.

PERE’s source said: “Goldman, through Whitehall, already had made some pretty significant investments in US golf courses with Troon Golf. Bringing the Goldman standard to Japan where things were so cheap – needless to say, things worked out okay.”

Before Goldman and Lone Star’s forays, most of Japan’s golf courses were operated as separate entities and were far from efficient enterprises. They sprung up everywhere during the 1980s economic bubble, with memberships at certain clubs selling for more than $1 million. That prompted multiple operators to snap up what land they could to develop more venues. When real estate prices eventually collapsed, many businesses collapsed as the land was typically used to underwrite their operations.

“You eventually had a situation where there were too many golf courses and too few players,” another source said.

Goldman’s first investment in Japanese golf course businesses – the purchase of bankrupt Nitto Kogyo Group, which saw it inherit 30 courses – led to similar such outlays. The courses were combined and ultimately wrapped up under the Accordia brand at IPO. Today, the business has 131 courses and 16 driving ranges countrywide run by more than 6,000 staff.

There was little by way of favourable forecast for Japanese golfing, but where Goldman saw value was in introducing standardised costs and in taking the sport from being a preserve of the rich to a pastime for the everyman. The source said: “The base case assumption was things would get worse before they got better, so it was vital the courses were bought cheaply and there was a business plan to cut costs. By streamlining maintenance, it is surprising how much could be saved.”

Goldman also introduced a ‘regional prices’ programme. Accordia golf rounds today cost ¥8,000 on weekdays and ¥12,000 on weekends – a far cry from the steamy prices charged before its investment. In addition, women were incentivised through further discounts. As a result, Accordia enjoyed a hike in female players from 6 percent of all players in 2006 to 12 percent today.

Precursors to an exit

Still, not everything went as smoothly. Last year, for example, Goldman lost control of the Nanso Country Club outside Tokyo after a court accepted a petition by members to remove its executives, including Kiritani, from the board. “We wouldn’t enjoy our club as we did before if Goldman allowed more visitors to play golf there,” one member explained in rebellion to the bank’s tactics.

Some argued Goldman’s work was done at the IPO, when it handed over the operating reigns of the company to Accordia. That is because, even though its funds had longer to run, its involvement was more passive after the listing. Furthermore, consumer spending in Japan is not forecast for significant improvement – and golf is certainly a consumer expense – prompting some to suggest the bank should have exited long before now.

PERE’s source said: “The return of Japanese consumer spending won’t take forever, but it won’t be in the next 18 to 24 months. If Goldman’s funds wait for two years, they’d have to hope it goes up 40 percent to make their 20 percent IRRs. I don’t think it’s going to do that.” Evidently, neither does Goldman.