Japan’s first hostile takeover in the $130bn real estate investment trust sector has ended with a stunning success for the acquirer, ripping up received wisdom on mergers and acquisitions in the country as consolidation pressures build across the market.
The successful move by Star Asia to seize control of the $300m Sakura Sogo Reit Investment marks what one closely involved investor described as a “moon landing” landmark event for the Japanese market in terms of proving what is technically possible.
The move hits a market that has numerous reits and hundreds of stocks trading at far below their book value but in which unsolicited takeovers have traditionally failed as a means of boosting or extracting value.
Despite that, M&A bankers and lawyers say a “profound” change of attitude is slowly embedding itself in Japanese boardrooms, making hostile bids a more plausible reality. Elsewhere in the Japanese market, a hotel chain, Unizo, is also at the heart of a takeover tussle that began with a hostile tender offer and which investors believe is likely to attract further bids in coming weeks.
The victory for Star Asia follows an unprecedented pair of back-to-back special meetings of unit holders last Friday that forced investors to decide the fate of Sakura with a choice between two competing deals — Star Asia’s takeover or a proposed “white knight” merger with the larger Mirai reit run by Mitsui.
Two proxy advisory services, ISS and Glass Lewis, recommended unit holders vote against both proposed deals but they appear to have been largely ignored.
The outcome remains a matter of dispute for Sakura, which alleges that certain votes that would have changed the outcome were not counted in the meeting in which unit holders voted on Star Asia’s proposals. A Sakura representative said it was “considering its options”.
Malcolm MacLean, the founder and managing partner of Star Asia, said: “I really believe that institutional investors saw this as something good for the J-reit industry as a whole. It should make management teams of J-reits work harder, apply stronger corporate governance and work aggressively for unit holders.”
Star’s victory follows a campaign that, while strongly criticised by the target company for exploiting a loophole in the way shareholder votes are counted, has highlighted soaring levels of direct engagement among once docile domestic investors now under pressure to prove good stewardship.
Star’s gambit involved a two-step strategy to take control: initially by acquiring via an affiliate a large enough stake in Sakura to convene a special meeting of unit holders, and then by proposing at that meeting to dismiss Sakura’s executive director and asset manager then install itself as the successor to both.
Those proposals were approved by unit holders at the earlier meeting on Friday. Unit holders voted against Sakura’s proposed merger with the Mirai reit at the second meeting.
The second phase of Star’s plan, which it now hopes to conclude before the end of the year, will see it merging the Sakura reit with its own.
Sakura’s management fiercely resisted Star’s move and warned that it would have a destabilising effect on the Japanese reit sector — a market that is only 20 years old and until now seemed an unlikely testing-ground for hostile financial manoeuvres.