Japan Inc.’s Offshore Gamble
Image Credit: REUTERS/Yuya Shino

Japan Inc.’s Offshore Gamble


The check is literally in the mail for Toll Holdings, after Japan Post agreed to pay A$6.5 billion ($5.02 billion) for the Australian logistics company. But after a wave of billion-dollar overseas investments by Japanese companies, analysts say the move may not be the last as Japan Inc. punts on overseas growth.

On February 18, Toll’s board recommended to shareholders a takeover by the Japanese postal, banking and insurance giant, valuing Toll shares at 49 percent more than the previous day’s market close and setting a new record price for a Japanese takeover of an Australian company.

Stating that its acquisition was key to Japan Post becoming a “leading global logistics player,” Toll chairman Ray Horsburgh said in a statement: “Japan Post is one of the world’s leading postal and logistics companies and Toll is the largest independent logistics group in the Asia Pacific. Together, this will be a very powerful combination and one of the world’s top five logistics companies.”

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Japan Post’s president Toru Takahashi reaffirmed the state-owned company’s new ambitions, saying: “We believe the combination of Japan Post and Toll will be a transformational transaction for both our companies and we are very pleased we have been able to reach agreement. In partnership with Toll we are starting a new chapter of looking outward and becoming a leading global player.”

Despite being leaked to the Australian Financial Review late on February 17, the deal stunned market watchers, being the largest overseas takeover of an Australian company since SABMiller’s $13 billion takeover of brewer Foster’s in 2011.

“No one was expecting a bid and if they were they weren’t expecting that sort of magnitude,” IG’s Chris Weston told Bloomberg. “If you’re a shareholder today, you’re going to be fairly speechless.”

Tokyo-based Japan Post has annual revenue of A$30 billion and nearly 200,000 employees in Japan, dwarfing Toll, which posted revenue of A$8.8 billion in the year to June 2014, with 40,000 staff in more than 50 countries.

Yet Japan Post trails its international competitors, led by Germany’s Deutsche Post with annual revenue of 7.4 trillion yen, and U.S.-based UPS with 6.9 trillion yen, with Toll’s acquisition set to move it from eighth to fifth-largest worldwide.

Founded in 1871, Japan Post is part of a holding company with banking and insurance arms that collectively earns nearly A$163 billion in annual revenue. While its privatization was a goal of former Prime Minister Junichiro Koizumi a decade ago, the group is finally set to go public this fall in an initial public offering likely to raise up to 2 trillion yen, helping to reduce government debt.

Japan Post said the Toll acquisition, expected to be completed by June, formed part of plans to “reinforce its domestic operations while focusing on the fast-expanding Asian market as part of efforts to grow as a comprehensive international logistics company.”

The postal giant has already formed tie-ups with France’s GeoPost and Hong Kong’s Lenton Group, but it noted Toll’s strong presence in the Asia-Pacific region, where it derives about a fifth of its revenue.

More acquisitions are likely for Japan Post, which noted its shrinking domestic postal market amid a declining population and growing reliance on the internet.

“Japan Post would draw on Toll’s extensive M&A [merger and acquisition] expertise and global management acumen to step up M&As throughout Asia, Europe and North America to become a global logistics leader,” it said.

Importantly, the inclusion of Toll would reduce Japan Post’s reliance on postal services, which would shrink from 64 percent to 49 percent of total revenue, while adding new revenue sources in freight forwarding, logistics and express, it said.

While the takeover is subject to shareholder and regulatory approval, Australian Trade Minister Andrew Robb welcomed it as “a major vote of confidence in the future of the Australian economy.”

“This offer represents a massive endorsement of Australian skills, services and expertise and underlines the strategic importance of Toll in the Asia-Pacific, and provides an ideal platform to spearhead Japan Post and Toll’s global ambitions,” Robb said in a statement.

“It is also a vote of confidence in future freight demand, including anticipated growth of trade flows throughout the region, which will be underpinned by our recently concluded landmark free trade agreements with [South] Korea, China and of course Japan,” he added.

Threat To Services?

However, Australia’s state-owned postal service Australia Post fired back, saying it would threaten vital services.

“If these competitors are allowed to cherry-pick the most profitable parts of our business with no obligations to regional or rural Australia, who’s going to take care of regional and rural Australia if Australia Post is not around?” Australia Post chief executive Ahmed Fahour said.

Australia Post recently announced its first annual loss due to a continued slide in letter volumes, with increased retail freight from online shopping unable to cover the difference. Japan Post is also expecting a net loss this fiscal year from its postal unit, with mail deliveries in 2013 down 30 percent on the peak year of 2001.

Japan’s NHK News noted that the organization’s move abroad would expose it to “stiff international competition, and the road will certainly not be smooth…Japan Post is under a legal obligation to provide a universal service to the population of Japan, delivering letters and postcards to every part of the country. If this huge investment was to be lost in future, the domestic service might find itself in difficulties.”

The Nikkei also pointed out that the takeover premium offered by Japan Post was above the 35 percent offered by Japan’s Dai-ichi Life Insurance for U.S. insurer Protective Life, or Suntory’s 25 percent premium for U.S.-based Beam.

“We are buying the time we would have spent for growth,” Japan Post president Taizo Nishimuro explained at a media conference.

Buying Spree

Despite a weakening exchange rate, Japanese companies have recently embarked on a global buying spree, helped by stronger Tokyo stock prices and encouraged by analysts to deploy some of their estimated $2 trillion worth of cash holdings.

Japan Post’s bid for Toll marked the fourth Japanese overseas M&A deal exceeding $1 billion in a month, including Itochu’s $10.4 billion stake in China’s Citic, Canon’s $2.8 billion bid for Sweden’s Axis Communications and the $1.2 billion offered by Kintetsu World Express for Singapore’s Neptune Orient Lines.

In Australia, recruiter Chandler Macleod announced on January 14 that it had agreed to a takeover by Japan’s Recruit Holdings for A$290 million, benefitting from the Japan-Australia Economic Partnership Agreement (JAEPA) that raised the threshold for Foreign Investment Review Board review from A$248 million to more than A$1 billion.

“It’s clearly no surprise that they are pushing ahead with their global expansion plans,” PricewaterhouseCoopers’ Japan head, Jason Hayes told The Australian. “Many Japanese companies have been in a state of suspended animation in terms of coming to grips with globalizing, but now we are seeing many of them starting to move.”

With Japan’s population forecast to fall below 100 million by 2050, the demographic imperative has also forced corporate Japan’s rush abroad.

Fund managers have eyed more potential Japanese takeover targets in Australia, including financial services companies such as AMP and Challenger. As noted by the Australian Financial Review, “Australian diversified financials have been a happy hunting ground for Japanese acquirers in recent years, with Dai-ichi Life picking up Tower Australia and Nikko Asset Management coming for local fund manager Tyndall Investments.”

Japan has A$131 billion invested in Australia, making it Australia’s third-largest source of foreign investment, compared to Australia’s A$50 billion invested in Japan. However, the Japan Post bid could signify a push into new sectors compared to the traditional mainstays of agriculture and resources, according to trade watchers.

“Services is the new growth area, given that it accounts for around two-thirds of both nations’ economies, and we’re already seeing this with the Recruit and Japan Post investments,” said Ko Nagata, managing director of Tokyo-based Global Sky Group, which has investments in Australia, Malaysia, New Zealand and Japan.

“There’s big potential for further growth in Australia-Japan trade, spurred by JAEPA, the Japan tourism boom and overseas drive for growth by Japanese companies,” he added.

Melanie Brock, chair of the Australian and New Zealand Chamber of Commerce in Japan (ANZCCJ), told The Diplomat that the Japan Post-Toll deal was part of a new push by Japanese companies into Asia.

“What’s important in this type of investment is what it says to Australian companies who have developed a footprint in Asia – they can help Japan drive its own development [into the region],” she said.

“A domestic-focused Japanese company like Japan Post can use Toll to anchor some of their activities through the network developed by the Australian company. Companies like Toll represent sectors that Japan might not have been looking at in the past, but Japan and Australia have come together further in Asia than they might have done singularly.”

However, the investment might not be completely one-way, should Prime Minister Shinzo Abe’s move to legalize casinos win Diet approval. According to Brock, representative for Australian casino operator Crown Resorts in Japan, foreign operators could invest as much as A$25 billion into integrated resorts, potentially in Osaka, Yokohama or regional areas, should the legislation pass the Diet.

“Japan is seeking to revitalize regional areas and looking to attract inward foreign direct investment. Where the integrated resort ends up is Japan’s decision, but there are many regional authorities which have volunteered to host an integrated resort, given the hotel, convention and entertainment infrastructure it would create. This would help reinvigorate tourism and create jobs,” she said.

In the meantime though, Japan’s business leaders are clocking up plenty of air miles investigating potential acquisitions. If a state-owned and traditionally conservative institution such as Japan Post can go global, others will surely follow.

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