Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber? Sign up here. Drop us a line and join the conversation: Due.Diligence@FT.com

Buffet’s bet on Japan

For some years now, one of the big questions hanging over the Japanese stock market has been when Warren Buffett might sweep in and invest at scale. 

On Monday his company, Berkshire Hathaway, revealed that the Sage of Omaha had finally taken the plunge, buying 5 per cent stakes worth about $6bn in each of the country’s five largest trading houses — companies whose business models have morphed over the years, and now sit somewhere between commodity trading and private equity investment. 

© Reuters

All five of these companies, say analysts, do look like good value, but the move might be even more canny.

For the trading houses — Mitsubishi, Mitsui, Itochu, Marubeni and Sumitomo — to be the target of Buffett’s first big move in Japan is highly significant. On paper, the Tokyo Stock Exchange should be a target-rich hunting ground for the world’s most famous intrinsic value investor. 

Great swaths of the Topix index (which tracks the bulk of the market) have been trading below book value for years: a good number of companies are trading well below the value of their stock holdings in other listed companies, a fair number are even trading below the value of their cash. 

And since around 2015 there has been a steady rise of shareholder activism, disposals of non-core assets, buy-ins, buybacks, restructurings and other mechanisms that have prompted some interesting re-ratings on companies that once seemed doomed to be value traps forever. 

Buffett paid his first visit to Japan in 2011 (pictured above), igniting speculation at the time that he might be ready for the big move. That didn’t happen, but the chatter grew even louder 12 months ago when he raised about $4bn with a straight bond issuance in Japan. 

The question, now that he has his stakes in the trading houses, which he may even raise closer to 10 per cent, is what the famed investor plans to do. 

We told you about Berkshire’s rocky second quarter, when its mammoth $26.3bn profit was bruised by its last big M&A bets in recent years, including taking a near-$10bn writedown on its largest manufacturing business Precision Castparts

And let’s not forget that Buffett’s heavy investment in the US financial sector contributed to what would become his worst performance in a decade versus the S&P 500 in 2019.

Many of Berkshire's biggest shareholdings are financials, which have sunk this year

So why hedge a similar bet on Japan, after the coronavirus crisis toppled his holdings in financial institutions stateside?

The most likely reason for the purchases, say both analysts who cover the trading houses and M&A bankers who know them as permanent dealmakers around the world, is that as a major investor in each company, Buffett may be giving himself access to a stream of potential investments as the trading houses themselves seek out venture capital and private equity-style deals around the world.

Even if that is not the plan, he has bought himself into a segment of the Japanese economy with a quite extraordinary capacity to reinvent themselves as the world changes. They’ve been doing that for decades.

Could Tata be making a Brexit of its own?

More than 10 years ago, former Tata Group head Ratan Tata went on a buying spree in Europe (especially in Britain).

Timeline chart showing elected Tata overseas acquisitions, 2000-2010, by company (circle size indicates deal value), $m

As he scooped up Jaguar Land Rover, Tetley Tea and the Anglo-Dutch steelmaker Corus for his sprawling 152-year-old conglomerate, the Indian business tycoon became a revered symbol of rebalancing global economic power in a post-British colonialist world.

A string of unforeseen obstacles would later bog down the iconic multinational: the 2008 great recession and a bitter 2017 feud between Tata and his successor Cyrus Mistry.

Now, following the controversy plaguing the old regime, the company’s newest chairman Natarajan Chandrasekaran (pictured above), who took the helm in 2018, faces a new era of challenges spurred by the coronavirus crisis.

At the company’s ailing steel plant in Wales, the UK’s largest, he’s considering replacing its furnaces with more sustainable alternatives, a move that could result in severe job losses, or shutting down its UK factories altogether.

Chart showing Tata Steel’s European business has struggled since the financial crisis, earnings (£bn)

Tata’s automotive operations aren’t looking much brighter — Jaguar Land Rover has fallen victim to a global industry slowdown like many of its rivals, coupled with an ill-conceived vehicle line-up that pitted its own luxury brands against one another.

Chart showing Jaguar Land Rover’s strong performance has waned in recent years, revenue vs net income (£bn)

Even the group’s seemingly unshakeable tea business is grappling with a Britain craving more coffee.

Should Tata cut its losses in the UK and focus more on its faster-growing home market in India? 

Analysts and investors are urging the company to return to its Indian roots, where a tech cold war with China has frozen over as of late, creating the perfect conditions for Chandrasekaran to carry out his goal of evolving Tata into a digital consumer-facing group.

Go deeper with the FT’s Big Read on Tata’s survival plan here.

BT awaits a call from KKR

When a company’s share price halves in a matter of months, it’s not all that surprising that private equity firms start to size up a deal. But the tale of KKR’s interest in the beleaguered BT Group is worth paying attention to. 

The buyout firm is monitoring a situation that several of its rivals have already decided to steer well clear of. (Though, while KKR has BT on its radar, there are no concrete plans — get the full picture with this story from DD’s Kaye Wiggins and James Fontanella-Khan and the FT’s Nic Fildes.) 

Senior figures from three other large buyout groups told the FT they weren’t even considering a move for BT, even as bankers attempt to drum up interest. 

That’s largely down to the UK telecoms group’s pensions problem. Analysts predict it will have a deficit of between £8bn and £9bn when a new valuation is completed next year — not far from the company’s entire market capitalisation of £10.4bn. 

© Reuters

In the words of one dealmaker at a rival group, “screwing around with people’s pensions” is not what private equity should be doing. It’s not clear how any buyout group would get around this, or persuade BT’s pension trustees they had the answer. 

There are other obstacles too, like the UK government’s ability to veto any deal. Dig deeper with this Lex column from last week. 

But what piques buyout firms’ interest is a business-school-textbook idea that BT’s parts alone are worth more than the group as a whole: analysts value its Openreach broadband division at £20bn. 

BT’s chief executive Philip Jansen (pictured below) is no stranger to private equity: he used to run Worldpay when it was owned by Advent International and Bain Capital

© Bloomberg

Putting all those details to one side, it’s worth keeping an eye on BT because of the place any private equity group, especially with KKR, would occupy in the history books as a symbol of capitalism’s development over the past four decades. 

Rewind to the early 1980s. BT was a telephone monopoly owned by the British government and KKR was a little-known group of American investors just beginning to raise their first fund. 

By the end of that decade, BT was a listed company after a wave of privatisations by Margaret Thatcher’s Conservative government — becoming for many Brits one of the first shares they ever bought. KKR, meanwhile, had made a name for itself as the “barbarians at the gate” behind the 1988 takeover of RJR Nabisco

Any move for BT would show just how much bigger and more powerful private equity has got since then — or as the rival dealmaker put it, would make the RJR Nabisco-era dealmakers “look like children”. 

Job moves

  • SoftBank government affairs chief Ziad Ojakli has resigned. He will be replaced by Bruce Andrews and Brian Conklin, who will co-lead the Japanese company’s government affairs division.

  • Jennifer Jarrett is leaving her role at Uber as head of corporate development and capital markets, which she began in January 2019, as reported by Axios.

Smart reads

Follow the (drug) money The Sackler family rerouted more than $10bn amassed by its opioid empire through an elaborate maze of companies ultimately registered in Luxembourg, the British Virgin Islands and Delaware before the public reckoning that led to their bankruptcy. (Bloomberg)

Billionaire on a budget The billionaire real estate developer behind Manhattan’s most lavish properties thinks New York is too expensive. But that’s not Stephen Ross’s only contradiction. (New York Times)

Anchored in debt The cruise industry is sinking, and its abandoned vessels remain hefty financial burdens as operators struggle over whether to scrap their ships for parts or attempt to stay afloat through the remainder of the pandemic. (FT)

News round-up 

KKR sells software group Epicor to CD&R in $4.7bn deal (FT)

Reliance to pay $3.4bn for India’s second-largest retailer Future Group (FT)

Nestlé agrees $2.6bn deal for Aimmune Therapeutics (FT + Lex)

KKR buys €1.8bn stake in Telecom Italia’s last-mile network (FT)

Marshall Wace makes record bet against Lloyds (FT)

Veolia moves on Suez to try to forge new global player (FT)

TikTok’s US sale put at risk by new Chinese tech rules (FT)

Salt says it rebuffed Liberty Global prior to Sunrise deal (FT)

Aveva chief brings US-style ambition to UK’s Silicon Fen (FT)

Airline analysts warn ‘the hardest part’ is yet to come (FT)

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt, Mark Vandevelde and Francesca Friday in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com

Get alerts on Mergers & Acquisitions when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article