Ambitious Mazda to set path for Japan stock offerings

TOKYO Fri Mar 2, 2012 9:53am GMT

A Mazda car is reflected in a Mazda dealership in Tokyo October 18, 2010. Shares of Mazda Motor Corp slipped on Monday after news at the weekend that top shareholder Ford Motor Co plans to sell almost all of its remaining stake in the Japanese automaker it once controlled. REUTERS/Toru Hanai

A Mazda car is reflected in a Mazda dealership in Tokyo October 18, 2010. Shares of Mazda Motor Corp slipped on Monday after news at the weekend that top shareholder Ford Motor Co plans to sell almost all of its remaining stake in the Japanese automaker it once controlled.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - The sale of $2 billion (1 billion pounds) in new stock by Mazda Motor Corp (7261.T) this month is as significant for Japan's equity capital markets as it is for the automaker, with the outcome expected to set the tone for a backlog of equity offerings.

Big technology companies such as Sharp Corp (6753.T), Panasonic Corp (6752.T) and Sony Corp (6758.T) are among firms talked about by investment bankers as prime candidates to also hit the market with equity offerings. Hurt by the strong yen and dwindling sales, all three have warned of multi-billion dollar losses this year.

If successful, Mazda's stock issue could open the floodgates for these and a long list of other offerings by Japanese firms, many of which need to recapitalize after suffering big losses or stretching their balance sheets with overseas acquisitions.

The Mazda deal is ambitious. The car maker is seeking to boost the number of outstanding shares by nearly 70 percent in the biggest follow-on offering by a Japanese manufacturer in more than 2 years.

If the deal were to fall into trouble, the worry is that other firms would turn gun-shy and another dismal capital-raising year would follow.

"A lot of Japanese manufacturers are suffering from a strong yen and have strong potential needs," said Kenichi Onuma, head of equity capital markets at Barclays Capital Japan. "If the market welcomes the Mazda deal other companies might start thinking about or preparing their own financing."

Mazda has earmarked the estimated 163 billion yen ($2.01 billion) in proceeds for factories and developing new technologies, and is raising another 70 billion yen in subordinated loans for emerging market investments and to repay existing debt.

The Japan market's view of Mazda's offering is similar to Hong Kong's view of Sunshine Oilsands (2012.HK), the Canadian oil explorer that Greater China equity capital markets bankers hoped would set the tone for the rest of the year. The company's weak debut and underwhelming demand -- albeit in a tough market -- didn't quite provide the inspiration bankers hoped it would.

Mazda will price its shares between March 5 and 8, with payment to follow a week later. Investor sentiment may get a slight lift from the recent reversal of yen strength, which has been eating into its overseas profits, one fund manager said.

"It depends on what kind of a growth picture the management presents to investors," said Shigeo Sugawara, senior investment manager at Sompo Japan Nipponkoa Asset Management. "The worst run of the stock performance might be over now with the yen retreating from earlier highs."

NIKKEI SPARK?

Japanese companies raised 1.8 trillion yen in equity-related deals in 2011, according to Thomson Reuters, down by more than 60 percent from a year earlier, reflecting the impact of the March 11 earthquake and the European debt crisis. It was the weakest year for equity finance since 2008, when the global financial crisis limited offerings to just 1.5 trillion yen.

With the benchmark Nikkei average .N225 up 15 percent this year to around 9,750, Japanese companies could tap the market for 3 to 3.5 trillion yen in 2012 if stocks remain firm, according to ECM bankers interviewed by Reuters.

The tally is expected to be boosted by the initial public offering of Japan Airlines, which is seen fetching more than 500 billion yen when it launches in the fourth quarter, as well as possible listings by ball-bearings maker Tsubaki Nakashima and railway and property group Seibu Holdings, bankers say.

Unlike the equity raising booms in 2009 and 2010 which were driven by banks and brokers rushing to comply with new capital rules, an uptick in follow-on offerings is expected to be widespread across industries.

"After putting a very tough year behind them there are companies that are poised to take action," said an ECM banker at a Japanese securities firm who asked not to be identified. "The Nikkei retaking the 10,000 level would act as a spark."

Sharp, the liquid crystal display and solar cell maker, fits the profile of the type of company that may need equity to support its balance sheet. Last month the Osaka-based firm posted a massive quarterly loss, erasing about 180 billion yen in equity and prompting Fitch to downgrade the outlook on its BBB- rating to negative, raising the possibility of a future cut to speculative grade.

As of the end of December, Sharp's net debt-to-equity ratio stood at 1.03, six times the industry average and the highest among electronics firms, according to Thomson Reuters data.

Sharp declined to comment. Spokesmen for Sony and Panasonic, whose ratings were cut by Fitch to BBB-, the same level as Sharp's, said their companies would consider the optimal method for raising funds if the need arises.

COMPETING WITH BANKS

Equity bankers are also looking to capture the business of companies that may be looking to replace debt taken on for acquisitions with equity. On the back of the strong yen Japanese firms have cut some $220 billion worth of outbound deals over the past four years, mostly funded with cash and bank loans.

Simon Roue, head of equity capital markets at Deutsche Securities in Tokyo, says trading houses and beverage and other consumer-related firms were in focus because they have been very active in acquisitions. TMT (technology, media and telecommunications) was another sector to watch.

"I think there is going to be some interesting activity off the back of acquisitions or in preparation for them," Roue said. "The other significant area is likely to be TMT, considering the amount of restructuring that has been done in that industry over the last 18 months to 2 years - and there is likely to be more of that to come."

Roue cautions that the pressure to replenish capital after big acquisitions is likely to be less pronounced in Japan, where acquisition financing is often set in terms of years without the need for short-dated bridge financing typically seen in other major markets.

And with loan demand so weak in Japan, commercial banks are also likely to keep extending loans to their prized customers, many of which are flush with cash -- Japanese firms collectively have about 60 trillion yen of funds on hand. These factors could also somewhat mitigate the rush to sell equity.

"Loans are quite cheap right now so any company will basically choose the bank loan first of all and then look to replace the loan with an equity or equity-linked offering," said Takashi Sakai, head of equity capital markets at Nikko SMBC Securities, one of the underwriters on the Mazda share sale. "To be honest we haven't got so much in the pipeline at the moment." ($1 = 80.9800 Japanese yen)

(Additional reporting by Taiga Uranaka; Editing by Michael Flaherty and Muralikumar Anantharaman)

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