Japan paper market braced for change

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Industry analysts have taken a keen interest in a hostile takeover bid launched by Oji Paper for Hokuetsu Paper Mills, signalling Japan’s first ever aggressive buy-out bid by a blue-chip company.

 

Experts believe this could be a turning point for Japan’s notoriously protectionist industry. Despite the predicted failure of Oji’s bid at this time, the move has triggered a process that is likely to revolutionise the paper industry and have massive knock-on effects for Japanese corporate culture.

 

Since the 1970s, Japan’s paper market has been over-crowded with over 20 paper companies trying to survive. A progressive takeover climate may stimulate the industry by reinvigorating productivity and innovation instead of defending management’s rights to jobs. This will obviously be a bitter pill for industry executives to swallow.

 

Masatomo Nakamura, president of Nippon Paper, has voiced his concerns about the impact of a more cut-throat corporate culture descending on the Japanese paper industry.

 

Nippon has taken an 8.49 percent stake in Hokuetsu to help the company fend off Oji’s hostile bid.

 

Daio Paper, Japan’s third-largest papermaker, has also been quick to dampen down hopes of Oji’s bid by criticising the move on monopoly grounds. Daio is preparing a report for the Fair Trade Commission, Japan’s anti-monopoly watchdog, that outlines how a union of Oji and Hokuetsu would violate anti-monopoly law and unfairly stifle competition by creating a goliath with a market share of more than 60 percent in high-quality white board paper, used to make tissue paper.

 

However little has been said about the prospect of an alliance between Hokuetsu and Nippon infringing anti-competition law in just the same way as would result from Hokuetsu joining forces with Oji. In fact, even though Nippon’s 8.49 percent stake in Hokuetsu is within the 10 percent limit set by the Fair Trade Commission, a Hokuetsu/Nippon alliance would have an overall printing paper market share of 37.2 percent, compared to 31.7 percent share generated by a Hokuetsu/Oji alliance.

 

Instead, more emphasis has been placed on the predicament normal investors now find themselves in. Oji’s initial tender offer for common shares of Hokuetsu was ¥860 per share but by refusing to reconsider its defensive strategy of selling 50 million shares at ¥607 ($5.3) per share to Mitsubishi, Hokuetsu prompted Oji to reduce its offer to ¥800 per share.

 

Many Hokuetsu investors now have to decide whether to accept Oji’s offer of ¥800 per share or wait for Hokuetsu to fulfil its commitment to boosting market capitalisation to ¥284.1 billion or ¥1,300 per share in four years time.

 

Unsurprisingly, Oji claims that Hokuetsu’s target is over ambitious as it is too heavily based on earnings before interest and taxes.

 

Commentators remain sceptical about the ability of a more aggressive takeover culture to reinvigorate the industry. GFC Economics told OPI that the purpose of takeovers such as Oji’s attempted takeover of Hokuetsu, is to line the pockets of investors and don’t always make much strategic sense.

 

Yet other commentators are much more optimistic about the legacy of Oji’s attempted takeover bid. Hokuetsu’s president, Masaaki Miwa’s claim that the company’s factory in Niigata "is the most efficient in Japan" clearly underscores Oji’s interest in acquiring majority ownership of Hokuetsu’s mills.

 

Katsuhiko Ishibashi, analyst at the Japanese branch of Deutsche Bank said: "A merger of Oji and Hokuetsu would be the best outcome of this takeover battle…It would result in a rationalisation of capacity and improve the demand-supply balance in the industry."

 

Japan’s paper industry has been largely stagnant since 2000, experiencing limited growth of between one and two percent per year. The industry faces stiff competition from cheap imports from China, Korea and North America.

 

Imports now account for between seven and 15 percent of the demand for printed paper. The high number of domestic producers in the market is putting downward pressure on prices because of the availability of cheap substitues.

 

Additionally, new coated paper machine technology will be implemented in 2007, further compounding the deflationary pressure on prices. On top of all this, energy and material costs have rocketed as oil prices have tripled over the last five years and the wholesale price of A4 copier paper fell 21 percent in the same period, a grave warning to the industry.

 

Although Oji has conceded defeat in round one of the consolidation of the Japanese paper industry saga, its plan to make Hokuetsu a subsidiary remain firmly in place for the future. An Oji/Hokuetsu alliance would create the world’s fifth-biggest papermaker behind International Paper, Stora Enso Ojy, Svenska Cellulosa and Georgia-Pacific.