NEC spurned private equity offers before selling discounted stake in iPhone supplier, sources say

NEC

14/02/2024 06:58

(Adds JAE, NEC share price reactions)
    By Makiko Yamazaki
       TOKYO, Feb 14 (Reuters) - Japan's NEC received multiple
buyout offers from global private equity funds for iPhone
supplier Japan Aviation Electronics Industry  6807.T  before
agreeing to sell back much of its 51% stake to the Japanese
company at a discount, five people said.
    At least three global funds all made offers to both NEC and
its listed subsidiary JAE, indicating they were willing to pay
substantial premiums to buy out the maker of electronics
components, the people said, all of whom declined to be
identified because the talks were private. 
    The existence of those offers, which has not been previously
reported, could open IT services and software firm NEC  6701.T 
and JAE up to criticism they potentially failed to act in the
best interest of shareholders, governance experts said.
    The Tokyo Stock Exchange and regulators are pushing Japan
Inc to improve governance and bolster returns, including by
unwinding both cross-shareholdings in each other and
"parent-child" listings, where companies keep subsidiaries
listed, a practice critics say is unfair to minority
shareholders.
    The regulatory drive has helped power Japanese stocks to
their highest in decades, but governance experts say more needs
to be done.
    "If it's true that there were higher offers, this deal will
make nobody happy except for JAE management," said Kazunori
Suzuki of Waseda Business School.
    While companies tendering their shares aren't required to
disclose whether they discussed alternative offers in cases such
as this, Suzuki said NEC could still face a backlash from
investors, either at the board level or in court.
    JAE makes connectors used in iPhones. It started the year
with a market capitalisation of 290 billion yen ($1.94 billion)
before sliding sharply after news of its discounted tender
offer. 
    NEC and JAE declined to comment.
        Shares of JAE jumped after Reuters reported the buyout
offers, finishing up 14.7% on Wednesday. Shares of NEC closed up
0.6%.
  
              
    TENDER OFFER
    On Jan. 29, the companies said NEC would sell about half of
its stake in JAE back to it via a tender offer.
    The price of 2,605 yen represented a 14% percent discount to
JAE's last close. Such discounts are common when companies
unwind cross-shareholdings, allowing them to tender shares
without having to compete with other sellers.
    The timing of the private equity offers was not entirely
clear. One of the five people said some were made over the last
year or as early as 2022.
    Some of the people, including those with direct knowledge of
the talks, spoke on condition the global funds would not be
identified.
    The highest offer reached around 4,000 yen per share, three
of the people said. That would value JAE at around 369.2 billion
yen ($2.5 billion) and represent a 54% premium to the buyback
tender offer price.
    At least one of the private equity proposals came in a
written form with specifics such as price and detailed
post-buyout strategies, two of the sources said, meaning it
likely met the standard of a "bona fide offer" under new
corporate takeover guidelines introduced by the government in
August.
    The guidelines say such offers should be given sincere
consideration by boards.
    It's not clear whether the boards of NEC and JAE discussed
the proposals.
    
    FIDUCIARY DUTY
    It would be unusual if a private equity firm's approach
would not be considered a "bona fide offer," said Travis Lundy
of Quiddity Advisors, who posts on independent investment
research platform Smartkarma.
    "But the new takeover guidelines are just that -
guidelines," he said. "Other countries have laws about and
penalties against weak execution of fiduciary duty, especially
as regards a bona fide offer."
    JAE shares have fallen almost 20% since the Jan. 29 tender
offer announcement, losing nearly $350 million in market value,
as the decision dashed hopes for a buyout of the company.
    "There was widespread speculation that NEC would eventually
sell JAE to unwind the parent-child dual listing structure,"
said an executive at a private equity firm who said it was not
one of the bidders.
    Hitachi  6501.T  and other electronics conglomerates have
been duly selling off their listed subsidiaries, sometimes to
private equity firms.
    Waseda's Suzuki said cases involving the change of corporate
control may need additional disclosure rules.
    "NEC shareholders missed a chance to obtain profits that
could have been generated through a higher bid," said Suzuki.
"While JAE shareholders saw their shares plunge." 

($1 = 150.5000 yen)

 (Reporting by Makiko Yamazaki; Editing by David Dolan and Kim
Coghill)
 ((Makiko.Yamazaki@thomsonreuters.com; +81-3-4563-2805;))