KKR and Bain’s $4bn takeover battle set to open up M&A in Japan

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A clash between KKR and Bain Capital over a $4bn buyout of Fuji Soft has entered a new phase of confrontation, creating what bankers and activist funds believe will become a template for corporate takeovers in Japan.

On Friday evening, KKR said it would offer ¥9,451 a share for Fuji Soft — beating Bain’s competing offer by ¥1 and putting it in pole position to gain control of the Japanese software company.

Fuji Soft’s board responded by saying it rejected Bain’s offer while approving KKR’s proposal, which was made with the backing of two activist shareholders collectively holding about 33 per cent of the company. 

People close to the situation said that while KKR’s move appeared decisive, the fight had now evolved into what one called “a straight bidding war” where both private equity funds would have a maximum they would pay, and the coming weeks would establish where those limits lay.

It is the latest, and perhaps most significant, step in a competition that has demonstrated the potential for heated clashes over the ownership of Japanese companies in a mergers and acquisitions market that has traditionally produced only modest activity. Bankers said it was also creating a new definition of a “hostile” approach.

The progress of the battle, in which both activist and private equity funds have tested tactics never previously used in Japan, is being closely watched around the world as investment bankers eye hundreds of potential M&A deals that could be unleashed following the new template. 

“This is the most complicated piece of M&A in Japan,” said one banker involved in the deal. “The risk to everyone’s reputation is high.”

Bankers and advisers said Fuji Soft was an ideal private equity target due to a valuable real estate portfolio and the presence of two battle-hardened investors in the stock — 3D Investment Partners and Farallon Capital Management. It was 3D, the group’s largest shareholder, who proposed the company go private and solicited offers for its stake.

KKR agreed a deal with 3D and then announced a tender offer in August, aimed at taking the company private at ¥8,800 a share. 

Those plans were thrown into disarray when Bain put out a non-binding proposal, shocking the market, before following up with a binding offer that was 7 per cent higher than KKR’s. The offer also came with the backing of Fuji Soft founder and major shareholder, Hiroshi Nozawa. In a public letter Nozawa called Bain a “white knight” and lambasted the manner in which KKR put together its deal.

The move by Bain pushed KKR to split its tender into two parts. The first involved 3D and Farallon agreeing to sell their stakes and KKR gaining more than a third of the company’s shares. That created a blocking position, which meant Bain could not hope to win enough shares to initiate a squeeze-out to take control and would face the prospect of deadlock even if it did gain a sizeable holding. 

Although 3D and Farallon tendered at the lower price in the first tender, KKR has said it will now pay them at the same, higher level, as other shareholders. 

The question now is if Bain gives in or pushes ahead with its tender offer — potentially raising its price again — going against the board’s direction but backed by Fuji Soft’s founder. That decision might be further complicated by the board’s directive that Bain should destroy confidential information obtained so far during the process. Bain declined to comment. 

Prolonging the fight could risk the reputations of both companies by asking the market to adjudicate on which approach fits the criteria of “hostile” or unsolicited — one side has the founder in its corner, the other now has full-board approval.

“In this case, it’s hard to say definitively who is hostile. It is more art than science . . . and that means it’s a communications battle,” said one adviser on the deal. 

If KKR does succeed then the fact that it did so through a separate process with an activist, that then won board approval, sets a new precedent and invites copycat deals. 

“Even if Bain loses, it might not be too unhappy since everyone is looking at the way it was done as an opportunity,” said the adviser.