When a former vice-president of the most powerful country on earth is forced to appear on Japanese TV to profess his allegiance to a Japanese baseball team and support for minor railway lines out of Tokyo, trouble is surely afoot.
“We’re not a vulture,” Dan Quayle assured public broadcaster NHK. “I have a Seibu Lions T-shirt. I have a Seibu Lions baseball cap. I am a very strong supporter of the Seibu Lions. We are not interested, and we are opposed, to selling the Seibu Lions. Furthermore, we are opposed to closing the railroad lines.”
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| Dan Quayle, chairman of the global investments division of Cerberus, a private equity house with more than $20 billion under management |
After a gaffe-prone term as US vice-president under George Bush Sr, Quayle landed a job as chairman of the global investments division of Cerberus, a private equity house with more than $20 billion under management. In 2006, Cerberus invested ¥94 billion ($913 million) in Seibu Holdings, successor to a sprawling empire of hotels, resorts and railways brought to its knees by hubris and post-bubble malaise, as well as fraud committed by a man who for several years was ranked by Forbes as the wealthiest person alive, Yoshiaki Tsutsumi. For the first few years, Cerberus and Seibu seem to have got along reasonably well. Seibu’s CEO, Takashi Goto, had parachuted into the carnage left behind by Tsutsumi in 2005 together with a few handpicked staff from Mizuho Corporate Bank, Seibu’s biggest creditor, where Goto was vice-president. As Seibu’s top shareholder, with a stake of 32.4%, Cerberus had the right to be consulted on key decisions, and despatched consultants to Seibu, reporting to Goto and his team.
Both sides now seek to take credit for the improvement, but there is no doubt that Seibu today is in better shape. A tangle of about 120 different companies has been reduced to 50. Net debt, which had exceeded ¥1.3 trillion, is down to about ¥800 billion. Cashflow has improved.
The precise cause of the rupture is disputed, but relates to a planned initial public offering of Seibu Holdings. Seibu claims that in June 2011, only three months after an earthquake and tsunami triggered a nuclear emergency near Tokyo, Cerberus began to “press strongly” for an early listing on the Tokyo Stock Exchange. Cerberus counters that Seibu started to restrict access to management from April 2012 and unilaterally ended its shareholder agreement with Cerberus in October when it applied for a TSE listing.
This March, Cerberus launched a tender offer to raise its holding in Seibu by 4%. One month later, citing a “rejection of measures for the restoration of Seibu’s corporate governance”, Cerberus increased the tender offer to 12.23%, which would give it 44.67% of voting rights. The number of directors Cerberus proposed for the Seibu board was increased to eight, including former US Treasury secretary John Snow, as well as Dan Quayle and Hirofumi Gomi, a former head of Japan’s Financial Services Agency. The offer closes on May 31, and will be followed by Seibu’s annual shareholders’ meeting in June.
Cerberus denies it is making a hostile takeover bid for Seibu, but its actions appear to have united all the main Japanese shareholders in disapproval. Tsutsumi reportedly owns one-third of NW Corporation, Seibu’s second-largest shareholder, with a 14.95% stake, and has made public his opposition. Three of the other top-five Japanese shareholders are creditors: Development Bank of Japan, a state-owned policy lender; Norinchukin, the central bank of agricultural cooperatives; and Mizuho Corporate Bank.
“Normally I am not in favour of these Japanese big boys ganging up, but in this case, I am for what they are doing,” says Seijiro Takeshita, a director of Mizuho International in London.
Among a barrage of invective from both camps alleging dishonesty, duplicity and nefarious hidden agendas, one charge by Seibu that has struck a chord in Japan is that Cerberus founder Stephen Feinberg had suggested in an October 12 2012 letter to Goto the closure of five “redundant railways lines” and the sale of the Seibu Lions.
“Cerberus is a vulture fund. They want to make money, end of story. They don’t care about municipalities served by Seibu railways or sustaining local employment,” Takeshita fumes. “This is a war between American and Japanese corporate governance. You’ve got these people who proclaim the rights of shareholders, that the shareholder is king. But that’s not the way it works in Germany or Japan. There are things called ‘community’ and ‘employee’ and they often require sacrifice, even cutting down on profit for shareholders, because shareholders don’t come first.”
Cerberus is named after the three-headed hellhound in Greek and Roman mythology that guarded the entrance to the Underworld. Yet the notion that the firm is a socially irresponsible vulture preying on distressed debtors clearly rankles.
“Seibu has completely mischaracterized our position on the Lions and the rail lines in the media, touching on very emotional points, in our view, to camouflage their own poor management,” chief operating officer Mark Neporent tells Euromoney. “We have invested $1.1 billion in this company since 2006. We have been very patient, long-term investors, and we got shut out by the Seibu management team. We are here for the long term. They’ve tried to paint us as vultures, looking for a quick profit.”
In the US, the reputation of Cerberus was tarnished by its ownership of firearms manufacturer Freedom Group, maker of the semi-automatic rifle used in the December 14 massacre at Sandy Hook elementary school in Connecticut. Feinberg has since been trying to find a buyer for Freedom Group after the California State Teachers Retirement System, one of the world’s biggest pension funds, said it would review its investments with Cerberus.
In Japan, Cerberus can point to salvaging another corporate wreck, the Kokusai Kogyo hotel and transport empire assembled by the late Kenji Osano, a legendary wheeler-dealer and political fixer. Cerberus sold a controlling stake in Tokyo’s iconic Imperial Hotel, but revived Kokusai Kogyo’s five hotels in Hawaii.
“We completely turned around Kokusai Kogyo,” says Neporent. “It was literally one day from bankruptcy, with billions of dollars of debt, when we arrived. It is now a thriving, well-performing company.”
A foray into Japanese banking proved an even bigger success.
The collapse of the Japanese asset bubble of the late 1980s brought down the Long-Term Credit Bank of Japan and the Nippon Credit Bank. Both were nationalized and sold off to investors with the generous sweetener that allowed bad loans to be sold back to the government at par. Shinsei (‘new life’), the old LTCB, took full advantage of this offer and made fortunes for its US investors when its shares were sold to the public. Its subsequent financial performance was dismal, in spite of having former Federal Reserve chairman Paul Volcker as senior adviser. Aozora (‘blue sky’), the former NCB in which Cerberus held 58%, never availed of the controversial put option. “We thought that would not be consistent with our long-term commitment to Japan,” says Neporent. Yet Aozora still made more money than Shinsei.
“What we did was basic blocking and tackling. We did not engage in wholesale reductions in the workforce,” Neporent explains. “We simply attacked the inefficiencies in the system.”
Earlier this year, Cerberus sold most of its Aozora holding for a healthy profit, earning quiet applause from the Japanese government.
Taiji Okusu, CEO of Singapore-based Japan Governance Partners and a former head of investment banking at Credit Suisse Japan, thinks there was a lapse in political judgment when it came to Seibu Holdings.
“Train fares are set by the government based on the total cost of operation. It is not feasible for management to terminate local lines. Cerberus should have been more careful in dealing with the railway business as it is semi-public in Japan,” Okusu says, adding that he hopes Cerberus “will win” the tender offer.
The battle for Seibu Holdings involves more than a clash of business cultures. The Bank of Japan’s monetary shock treatment has brought a dramatic upturn in the Japanese economy. For Seibu, this is turning a chronic invalid into a potentially rich prize worth fighting over. The Prince Hotels division, one of the largest hotel chains in Japan, should be a big winner from increased consumption, particularly as the devalued yen encourages more Japanese to holiday at home and the nation’s first baby-boom generation enters retirement.
Cerberus insists that prospects would be even rosier were Seibu better managed. “These hotels underperform their comps by multiple double digits. They are just not efficiently run,” says Neporent.
Even on a rising-tide-lifts-all-boats basis, however, the implied valuation of Seibu by Cerberus looks cheap. Cerberus says that its tender price of ¥1,400 a share represents a premium of 29.51% over the final trading price of Seibu Railway before the announcement of Tsutsumi’s fraud and the company’s delisting in 2004. Comparisons are rough and ready, but the share price of Tokyu Corp, a rival operator of railways and hotels (and department stores) has doubled in the past year.
Over the horizon, for the moment, is the transformation that would occur were Japanese land prices, stagnant for two decades, to take off once again. After all, what made Seibu the biggest private landowner in Japan, and then nearly destroyed the company, was its ability to borrow and borrow against the value of its land.
