By David Dolan
TOKYO, March 3 (Reuters) – Toyota’s decision to further sweeten its bid for group company Toyota Industries marks a win for activist fund Elliott Investment Management, which had pushed the automaker for months for a heftier bump up in price.
But the increased offer is hardly a stunning victory for governance. It still does not address what investors had seen as some of the underlying issues – in particular that it was unfair to minority shareholders, even as Chairman Akio Toyoda stands to directly benefit.
The world’s largest automaker raised its offer on Monday for forklift maker Toyota Industries, known as TICO, for a second time, to 20,600 yen ($131) a share, valuing the bid at $30 billion.
That was enough for Paul Singer’s activist fund, which has agreed to tender its stake. In January Elliott rejected a sweetened bid of 18,800 yen a share as too low. The fund had previously said the shares were worth some 26,134 yen apiece.
The buyout is aimed at allowing TICO, a key Toyota supplier, to pivot to advanced mobility technology without the constraints of short-term profit targets.
The Toyota group originally offered 16,300 yen a share in June, sparking outrage from minority shareholders who said the deal was underpriced and lacked transparency. Some overseas investors even complained to the Tokyo Stock Exchange, saying the transaction went against its drive to improve governance, Reuters has reported.
“The fact that the price was revised up twice, with the final offer significantly above the initial one, is clearly a better outcome for minority shareholders,” said Amar Gill, secretary general of the Asian Corporate Governance Association advocacy group.
“Yet various governance concerns remain,” he said, citing the “questionable” treatment of group companies as independent minority shareholders and a lack of transparency over expected synergies.
The association raised concerns about the buyout in an August letter to TICO and Toyota that was signed by some two dozen investors. They cited inadequate financial disclosure and said Toyota group companies should not be classified as minority shareholders, as that lowers the voting threshold Toyota would need to clinch the deal.
TICO subsequently released more financial details. It has also held meetings with investors.
TICO says it took steps to ensure transparency, including consulting outside directors and independent firms, and received three fairness opinions.
Toyota also rejects the notion that the transaction was in any way unfair to shareholders – or that Toyoda stood to benefit unduly.
‘INADEQUATE’ PRICE
The transaction will see Toyoda, the former CEO and the founder’s grandson, invest about $6.5 million to boost his TICO holding to 0.5% from 0.05%, tightening his grip on the supplier.
One London-based investor, who declined to be identified, said the price was “inadequate” given the asset quality, but they, like other minority shareholders, would likely have little option but to tender shares following Elliott’s move.
While the outcome was a “big improvement” in terms of governance in Japan compared to 10 or even five years ago, there were still “many weak points” in the deal that limited the benefit for minority shareholders, the investor said.
For the bid to be successful, 42.01% of shareholders classified as minority owners need to accept the offer. That excludes Toyota Motor’s 24.66% stake. The offer ends on March 16.
One part of the controversy surrounding the deal is that the Toyota group has classified parts makers Denso and Aisin and trading company Toyota Tsusho – which own a combined 12.21% of Toyota Industries – as independent minority shareholders.
Toyota Fudosan, the company leading the buyout, has defended that classification, saying the group companies were independent, listed firms that made their own decisions.
While the deal was widely seen as a test case for corporate governance in Japan, Julie Boote, auto analyst at Pelham Smithers Associates, said the outcome showed there was still a long way to go for safeguarding minority shareholders’ rights in Japan.
“The recent developments do not demonstrate that Japanese corporate governance reforms have prompted changes among companies’ attitudes towards shareholders’ rights – given that Toyota was forced to cave in and put up a fight not to do so,” she said in a note to clients.
Still, Gill said it was important that TICO made an independent director available to answer investor questions and that such an effort should be part and parcel of similar situations in Japan.
“We believe that the company reaching out to investors to get their feedback helped in this outcome, in combination with the activist pressure,” he said.
($1 = 157.3400 yen)
(Reporting by David Dolan; Editing by Muralikumar Anantharaman)
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