Japan pension fund in spotlight over takeover rift

The world’s largest pension fund, Japan’s GPIF, is under intensifying pressure to draw a “line in the sand” on corporate governance standards in the country as other investors rail against a controversial takeover deal.

The imbroglio centres around Panasonic’s proposed purchase of PanaHome. Investors say it represents one of the sternest tests to date of Japan’s stewardship and governance codes, guidelines introduced in 2014 as part of the “Abenomics” drive to improve transparency and make investing in the equity market easier.

The pivotal question is whether the Government Pension Investment Fund’s claimed leadership in the push for stronger corporate governance standards will oblige it to take a stand against either PanaHome or Panasonic. The GPIF declined to comment on its individual holdings.

Brokers at three houses said they had received a barrage of calls from furious shareholders “demanding an explanation for what looks much like Japan reverting to pre-governance code norms”.

Shareholders have queried the share price at which Panasonic is buying out its listed housebuilding subsidiary. Panasonic already holds a 54 per cent stake in PanaHome and plans to buy the remainder. Under the acquisition agreement, 0.8 shares of Panasonic will be swapped for each share of PanaHome based on an independent calculation conducted by SMBC Nikko Securities, commissioned by PanaHome.

That implies a value of ¥1,009 ($8.78) per PanaHome share, based on the closing price of Panasonic’s shares when the deal was announced on December 20. But stripping out its net cash pile brings the value down to ¥339 per share, giving a forward price/earnings ratio of just 5.6 times, according to Credit Suisse.

That level would make PanaHome cheaper than 95 per cent of shares listed on the Tokyo Stock Exchange’s first section — after stripping out cash holdings — despite the company being among the 10 per cent showing most profit growth, another broker says.

Pricing also looks cheap on SMBC’s discounted cash flow metric. The share exchange ratio is calculated in part on some ranges that ascribe a value for the entire company at below its cash holdings.

Critics further object to the choice of comparable peers to benchmark the pricing off. The selected peer group includes one company with an entirely different business model and another that is a micro-cap stock that listed just three years ago.

SMBC Nikko declined to comment. Panasonic said the valuation was vetted by its third-party adviser and reflected the financial conditions, earnings trends and share price movements of the two companies.

PanaHome said it believed the share exchange ratio was fair since it was agreed after thorough negotiations with Panasonic and based on the findings of a special committee that had a mandate to protect the interests of minority shareholders.

Some 48 per cent of the minority shareholders are non-Japanese funds, but by far the largest, with a stake of 3.5 per cent via multiple fund managers, is the GPIF. While the GPIF is barred from owning individual stocks, its officials have indicated that in general they expect outside managers running portfolios on its behalf to apply active pressure for better corporate governance.

“The overseas investors have criticised this deal, but Japanese shareholders should raise their voice as well,” said Masahiro Mochizuki, housing analyst at Credit Suisse. “The GPIF especially is in many ways a symbol of the growth of Japan’s equity market so one would hope they would take action.”

Although widely criticised by minority shareholders, the Panasonic offer was welcomed in some quarters as a positive development. Part of the corporate governance reform push has been aimed at convincing large Japanese companies to buy-in or sell-off their many listed subsidiaries. Over the past decade, the number of parent-subsidiary listings fell to 281 from a peak of 417, according to Nomura Securities.

Jiro Nakano, the head of equity fund management at Nikko Asset Management said: “There are two governance issues in this matter. One is whether it [Panahome] has been fairly priced, but we think that the more important issue for governance in Japan is that companies with listed subsidiaries should resolve the situation in some way. In that sense, we would tend to see corporate moves in that direction as examples of good corporate governance.”