KKR and Bain in all-out $4bn fight for Japan’s Fuji Soft

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Two of the world’s biggest private equity firms, KKR and Bain, have entered an all-out fight over a $4bn Japanese software company, as Tokyo’s M&A markets step into uncharted territory. 

The battle, which has been brewing for more than a year, entered a new phase on Friday after Fuji Soft’s board decided to maintain its backing for KKR’s long-standing bid of ¥8,800, or $59, a share — but refused to reject outright Bain’s more recent offer and the 7 per cent extra it had put on the table.

“We believe that Bain Capital’s proposal is a sincere proposal and will continue to consider it,” said Fuji Soft’s board on Friday evening in Tokyo.

The board’s qualified support for KKR comes after a public intervention earlier this week from Fuji Soft founder and major shareholder, Hiroshi Nozawa, who called Bain a ‘white knight’ and urged its rival to step aside.

A straight contest between two private equity firms of this size is unheard of in Japan, say analysts and traders. Companies, and the assets they hold, are often not valued as if there is a market for corporate control.

“Investors have a choice between two offers, one higher than the other but both from extremely experienced PE firms,” said one person close to the situation. “Stock holders in Fuji Soft will have to explain to their investors, if they tender to the lower offer, exactly why they made that choice. The contest itself is testing important new ground.”

Fuji Soft is an ideal private equity target, due to what people familiar with the matter say could be a real estate portfolio worth close to $1bn. Another factor is the presence of two battle-hardened investors in the stock — 3D Investment Partners and Farallon Capital Management, which were both pivotal in the multiyear battle for control of Toshiba.

Fuji Soft, which sells cloud software and digital systems, has been in play ever since Singapore-based fund 3D, its largest shareholder, proposed the company go private, kicking off an auction process and pulling in the private equity firms.

KKR, which said on Friday that it was pleased to have Fuji Soft’s continued support, first agreed a deal with 3D and then announced a tender offer in August of this year, aimed at taking the company private.

Those plans were thrown into disarray when Bain put out a non-binding proposal in September, sending Fuji Soft shares up sharply and shocking the market.

In response, KKR accelerated its tender and split it in two, the first part involving 3D and Farallon Capital agreeing to sell their stakes. That means, as things stand, that KKR controls 32.7 per cent of the stock.

KKR’s second half of the tender offer is to run from late October to late November, is at the same price and allows shareholders time to assess Bain’s move. It also has a requirement of bringing in enough shares to trigger a mandatory squeeze-out.

However, last week, Bain once again threw things into doubt, following up on its initial planned proposal with its binding takeover offer for Fuji Soft of ¥9,450 a share. Bain’s bid would value the group at $4.2bn, versus close to $4bn for KKR.

The company currently trades at ¥9,660, above both offers, which some bankers and analysts say indicates a belief in an escalating bidding war.

Bain, which said in a statement that it “continues to support Fuji Soft as a white knight to the management and founder of the company”, shows no sign of dropping out, despite Friday’s board announcement.

But, despite the share price optimism, other bankers have poured cold water on the idea of another higher offer, since the shares already won by KKR represent a de facto blocking position.

“The Japanese market is ready for this kind of fight between PE firms, but nobody is going to risk their reputation going hostile,” said one Tokyo-based banker familiar with the deal.

3D declined to comment. Farallon did not immediately respond to a request for comment.