Japan's NEC received multiple buyout offers from global private equity funds for iPhone supplier Japan Aviation Electronics Industry before agreeing to sell back much of its 51% stake to the Japanese company at a discount, five people said.
At least three global funds all made offers to both NEC and its listed subsidiary JAE, indicating they were willing to pay substantial premiums to buy out the maker of electronics components, the people said, all of whom declined to be identified because the talks were private.
The existence of those offers, which has not been previously reported, could open IT services and software firm NEC and JAE up to criticism they potentially failed to act in the best interest of shareholders, governance experts said.
The Tokyo Stock Exchange and regulators are pushing Japan Inc to improve governance and bolster returns, including by unwinding both cross-shareholdings in each other and "parent-child" listings, where companies keep subsidiaries listed, a practice critics say is unfair to minority shareholders.
The regulatory drive has helped power Japanese stocks to their highest in decades, but governance experts say more needs to be done. "If it's true that there were higher offers, this deal will make nobody happy except for JAE management," said Kazunori Suzuki of Waseda Business School.
While companies tendering their shares aren't required to disclose whether they discussed alternative offers in cases such as this, Suzuki said NEC could still face a backlash from investors, either at the board level or in court.
JAE makes connectors used in iPhones. It started the year with a market capitalisation of 290 billion yen ($1.94 billion) before sliding sharply after news of its discounted tender offer.
NEC and JAE declined to comment.
TENDER OFFER
On Jan. 29, the companies said NEC would sell about half of its stake in JAE back to it via a tender offer.
The price of 2,605 yen represented a 14% percent discount to JAE's last close. Such discounts are common when companies unwind cross-shareholdings, allowing them to tender shares without having to compete with other sellers.
The timing of the private equity offers was not entirely clear. One of the five people said some were made over the last year or as early as 2022.
Some of the people, including those with direct knowledge of the talks, spoke on condition the global funds would not be identified. The highest offer reached around 4,000 yen per share, three of the people said. That would value JAE at around 369.2 billion yen ($2.5 billion) and represent a 54% premium to the tender offer price.
At least one of the private equity proposals came in a written form with specifics such as price and detailed post-buyout strategies, two of the sources said, meaning it likely met the standard of a "bona fide offer" under new corporate takeover guidelines introduced by the government in August.
The guidelines say such offers should be given sincere consideration by boards.
It's not clear whether the boards of NEC and JAE discussed the proposals.
FIDUCIARY DUTY
It would be unusual if a private equity firm's approach would not be considered a "bona fide offer," said Travis Lundy of Quiddity Advisors, who posts on independent investment research platform Smartkarma.
"But the new takeover guidelines are just that - guidelines," he said. "Other countries have laws about and penalties against weak execution of fiduciary duty, especially as regards a bona fide offer."
JAE shares have fallen almost 20% since the Jan. 29 tender offer announcement, losing nearly $350 million in market value, as the decision dashed hopes for a buyout of the company.
"There was widespread speculation that NEC would eventually sell JAE to unwind the parent-child dual listing structure," said an executive at a private equity firm who said it was not one of the bidders.
Hitachi and other electronics conglomerates have been duly selling off their listed subsidiaries, sometimes to private equity firms.
Waseda's Suzuki said cases involving the change of corporate control may need additional disclosure rules.
"NEC shareholders missed a chance to obtain profits that could have been generated through a higher bid," said Suzuki. "While JAE shareholders saw their shares plunge."
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