Sapporo faces take-over attempt by U.S. American buy-out fund

The Japanese were not amused when in February this year, Steel Partners, a New York-based buy-out fund and one of its leading shareholders, announced that it may launch a tender offer to raise its stake in Sapporo to 66.6 percent. The battle of words has since heated up.

Steel Partners, a New York-based buyout fund, and ally Liberty Square Asset Management LP, a Boston-based hedge fund, have been stalking Japan’s number three brewer, Sapporo, for a while yet. Only in June 2006 had the two increased their ownership of Sapporo to 18.59 percent from 17.59 percent.

The heat is on Japanese companies. International capital hopes to benefit from accelerating growth in the world’s second-biggest economy, which will boost asset values. In particular, real estate prices in Japan’s three largest urban areas began rising in 2005 - the first time since 1990. Sapporo owns vast property in metropolitan areas. That land will gain value as Japanese real estate prices rise.

Sapporo, which redeveloped its main Tokyo brewery as a hotel and leisure complex 13 years ago, had gross fixed assets equivalent to USD 5.8 billion, triple its USD 1.8 billion market value, according to data compiled by Bloomberg in 2006. In this respect, it is a prime example of an undervalued company, which appeals to corporate raiders out for a quick buck. If the value of the company is less than the value of its individual parts – as it seems to be in the case of Sapporo – then a careful filleting will yield a much higher profit than Sapporo in its present entity will be able to provide in the near future.

Analysts say that Sapporo has been struggling with its main business because it does not have a strong beer brand and is losing market share to its rivals. The brewer, based on Japan’s northern main island of Hokkaido, has 25 subsidiaries and 14 affiliates that sell beer, wine and brandy. It also runs bars and restaurants in Japan and operates several real estate businesses.

In February 2007, Sapporo Holdings, the holding company for Sapporo Breweries, reported that net profit tumbled by 35.6 percent last year because of falling sales of its beers and beer-like drinks.

Sapporo Holdings posted net profit of 2.3 billion yen (USD 19 million) for the last year, down from 3.6 billion yen for 2005.

The company said that shipments of regular beers had fallen by 2 percent, shipments of low-malt “happoshu” had fallen by 9 percent and shipments of “third-sector” drinks had fallen by 24 percent. This meant that revenue fell by 4 percent to 453.1 billion yen (USD 3.8 billion) and that operating profit dropped by 16 percent to 8.6 billion yen (USD 73 million).

“Third-sector” drinks taste like beer but are made of peas and so taxed at a lower rate. Sapporo Breweries introduced these beverages first, but its rival, Kirin Brewery, has since become the largest producer of this kind of drink.

Sapporo Breweries recently entered the market for distilled spirits made of yam, oats and rice, but this has failed to counter declines in its sales of beer and beer-like drinks.

Since Steel Partners has made its takeover offer for Sapporo, there has been a persistent rumour that Sapporo was either considering a share buy-back of the shares already held by Steel Partners or opting for a management buy-out. Obviously, Sapporo was not prepared to comment on these rumours.

Sapporo’s shares have jumped more than 10 percent since Steel Partners announced its takeover attempt.

Japanese media have reported that rival brewers Asahi Breweries or Kirin Brewery might come in as white knights for Sapporo. Japan’s number one and number two brewers could seek tie-ups with Sapporo in order to increase their share of the domestic beer market, which has been flat for some time, while enabling Sapporo to avoid a Steel Partners takeover. That option, however, would require Sapporo to study the option of a management buyout because an alliance with another brewer would likely force it to close several breweries. Not a very popular thing to do in Japan.

In the meantime, Sapporo has introduced an emergency measure, a so-called poison pill, which goes by the name of “Advance Warning System” (AWS). This tool, should it be adopted by Sapporo’s shareholders at the next AGM, would allow Sapporo’s management to frustrate all offers made to its shareholders. In a letter of 22 March 2007 Steel Partners wrote to Sapporo’s shareholders, urging them to vote against the proposed Advance Warning System, arguing that the new “AWS proposed by Sapporo puts management in a position to frustrate offers being made to you, its shareholders. Management can demand virtually any information from an offeror and management can do so repeatedly. After that, an offeror has to wait while management decides if it is satisfied with the offeror’s responses. This process could take many months or longer. In certain cases, the new AWS may preclude interested parties from even considering making an offer to you.”

It looks like the tense deadlock between Sapporo and Steel Partners will continue for some time.

In October 2006 Sapporo Breweries acquired a controlling stake in Canada’s third largest brewery, Sleeman, for a total of CAD 400 million including debt through a friendly takeover to expand its presence in North America.