Toyota Industries buyout hinges on squeezing minority investors
Widespread criticism of the Toyota group's ¥4.7 trillion ($33 billion) plan to privatize Toyota Industries at a large discount to the company's current share price is fueling doubts over whether the takeover bid can garner enough support to succeed.
The tender offer by the holding company established to privatize Toyota Industries represents an 11.4% discount to Toyota Industries' closing price before the plan was announced.
In order for the buyout to work, the ¥16,300-per-share tender offer will need to attract enough minority shareholders to cross a 42% threshold, excluding shares already held by Toyota Motor and treasury stock. That translates into more than 20% of issued stock in the maker of textile looms, forklifts and car components.
Once the takeover group led by Toyota Motor Chairman Akio Toyoda buys enough shares, and other Toyota companies tender their stakes, they'll have a two-thirds supermajority — enough to initiate a squeeze out of the remaining shareholders.
"It seems like the Toyota Group is effectively telling ordinary shareholders 'this is the fair value, we won't move the price any further',' said Yasuo Sakuma, president of Libra Investments.
Given the government pressure for improved corporate governance and capital efficiency, Japanese companies are increasingly unwinding their parent-subsidiary listings and cross-shareholdings. While the privatization of Toyota Industries is being framed as a step in this direction, executing a takeover at a discount could also be perceived as neglecting minority shareholders.
The holding company for the buyout will be mostly owned by Toyota Fudosan, an unlisted real estate firm that counts Toyoda as chairman. Toyoda will personally invest ¥1 billion as well.
"Given market participants' criticism of the deal, and indignation about the discounted share price offer, it's not out of the question that price will be revisited,' said Julie Boote, an automotive analyst at London-based research firm Pelham Smithers Associates. "Since the deal will only come into effect in December due to clearance requirements and other proceedings, minority shareholders might put forward an official complaint.'
A discounted deal that could potentially give Akio Toyoda greater control over the group may also raise the ire of activist investors.
Toyota Industries was founded by Toyoda's great-grandfather Sakichi, whose son Kiichiro went on to create Toyota Motor. Akio, Kiichiro's grandson, led Toyota as chief executive officer for 14 years until 2023, when he stepped aside to become chairman.
Toyota Industries shares fell as much as 13.2% on Wednesday, the most since August last year.
"Paying a premium is standard practice, but a discount leaves a bitter taste,' Masatoshi Kikuchi, chief equity strategist at Mizuho Securities said, noting that activist investors historically oppose discounted tender offers.
However Kenta Kon, a former Toyota Motor chief financial officer who currently holds key positions at the automaker, its unit and Toyota Fudosan, pushed back on the idea that the privatization was a management buyout led by Toyoda.
"The chairman's involvement isn't about control over the business, it's about his commitment to the deal, to provide support on the ground and for the betterment of Japan,' Kon said during a news conference Tuesday.
The tender offer represents a big premium to the company's shares prior to the news of the buyout becoming public in late April, he said. In early April, Toyota Industries shares were trading around ¥10,765.
Toru Iwai, an analyst at SBI Securities, noted that with Wednesday's decline, Toyota Industries' stock has already fallen to near to the tender price. The shares closed on Wednesday at ¥16,205.
As a result, "the chance of the takeover bid succeeding is increasing,' Iwai said. "Even so, there will probably be significant resistance, particularly from overseas investors. There'll probably be more twists and turns.'
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