Japan: A bridge too far?

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The bridge loan Softbank has taken out to acquire Vodafone in Japan is enormous, negotiated on onerous terms and costly by Japanese standards.

By Chris Wright

Vodafone chief executive Arun SarinVodafone’s Sarin: chose Softbank’s bid of $15 billion because it required no further scrutiny of assets
M&A has never looked like this before, particularly in Japan. Softbank’s leveraged buyout of Vodafone KK, the Japanese operations of the Vodafone group, is a landmark for a host of reasons, not all of them all that encouraging.

For a start, there’s the sheer scale of the deal. The ¥1.8 trillion ($15.3 billion) purchase price is funded in the main through a ¥1.28 trillion loan, quadrupling the previous record of ¥224 billion secured by Ripplewood Holdings when it bought Japan Telecom in 2003.

Liquidated damages

Then there’s the fact that the entire funding requirement is structured as a one-year bridge loan; this is highly unusual, particularly for a deal of such size, where more typically the funding would be divided between a bridge, a syndicated loan and other structures. On top of that, there’s the extraordinary agreement that was in place on break fees. Instead of the norm – where the seller commits a break fee to the buyer – in this case Softbank pledged to pay Vodafone a whopping ¥60 billion (Vodafone calls it “liquidated damages”) if it couldn’t go through with the deal.

Next there’s the speed with which the funding was arranged. Unspecified penalties were to apply to Softbank if it couldn’t arrange the funding by April 4, having only announced the deal on March 17. Several banks originally linked with the deal – among them Barclays, Royal Bank of Scotland and Bank of Tokyo-Mitsubishi UFJ – didn’t make it to the finish line for one reason or another, leaving seven equally mandated arrangers contributing the lot: Deutsche Bank, Mizuho Corporate Bank, Citigroup, Goldman Sachs, Sumitomo Mitsui Banking, Calyon and WestLB.

And on top of that there’s the fact that there was a rival bid, offering a higher sum and having arranged an even greater volume of funding, that was declined, from private equity groups Cerberus Partners and Providence Equity Partners. When Vodafone chief executive Arun Sarin was asked why he chose the Softbank bid, he said it was because Cerberus and Provident still had to perform due diligence, whereas Softbank’s offer – for a $15 billion business, mind – required no further scrutiny of the assets. One can only assume that Softbank did whatever due diligence it thought necessary while negotiating with Vodafone KK as a potential roaming network partner over the last six months.

“Tell me if I’m crazy,” one person close to the deal says. “Here we have a double B credit, going out and acquiring a big company and raising $10 billion on a one-year bridge. What the hell is going on?”

For the banks involved, the rewards might be high but so might be the risks. None is prepared to comment on the deal, having been instructed to be silent by Softbank, but the interest rate on the bridge is believed to be 3%. (Softbank spokesman Takeaki Nukii declined to confirm this or any other deal details except to say: “We’ve had lots of offers from financial facilities.”)

Nikko Citigroup analyst Toru Hosoi notes that 3% is “lower than normal for an LBO” and says “it seems that the largest example of M&A in Japanese history will be carried out with financial institutions shouldering most of the risk.” But in a Japanese context, 3% is far from low. “I assume the spread portion to be more than 2.5%, and that spread in the Japanese commercial bank loan market is substantially high,” says Satoru Aoyama at Fitch Ratings in Tokyo. “It’s still a very low interest rate environment in Japan and this 3% is hugely attractive for the Japanese banks.”

Loaded gun

A leveraged debt expert at a bank not in the deal says the margin is “within the market”, and could be thought of as mild considering that by agreeing to penalties under such a short deadline Softbank had “effectively handed a loaded gun to the arranging banks to put to their heads.” For that fee banks are taking huge exposure to a single credit. “That’s top-of-credit-cycle conduct, in my view,” the banker says.

But a bigger question is what happens to the bridge loan next. “When you come into a bridge you do so expecting to be involved in the longer-term refinancing but to get that away you need to hold an amount of the financing,” says a syndicated loan banker. “Will a bank take and hold half a billion US? Apparently the answer to that is yes.”

Practically every major investment bank in the world was connected to this deal in some way. ABN Amro, JPMorgan, Morgan Stanley and Credit Suisse had provisionally arranged ¥15 billion for the rival bid, while UBS, the only major name missing from either deal, was adviser to Vodafone.

It’s hard to say whether this deal tells us much about bank and market behaviour in a newly vibrant Japan, or simply shows us once again the unique approach of Softbank CEO Masayoshi Son. “He’s not a standard private equity guy, he runs businesses in a completely opposite way,” says one banker familiar with his transactions. “He’s an aggregator, it’s all about creating a market: if you spend it, they will come. His vision is great. But he’s still got to manage the thing.”

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