Elliott Management bets on Japan property with 5% stake in Tokyo Gas

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Elliott Management has become one of the three biggest shareholders in Tokyo Gas, as the activist investor seeks to push the Japanese utility provider to focus on its core energy business and scale back a property portfolio that it estimates could be worth as much as $9bn.

Elliott, whose 5 per cent stake was made public on Tuesday in a stock exchange filing, has calculated that the unrealised market value of Tokyo Gas’s real estate holdings is worth about ¥1.5tn ($9.7bn), almost the equivalent of its market capitalisation, according to people familiar with the US activist fund.

It plans to pressure Tokyo Gas management to sell or monetise its property portfolio, which consists of undeveloped parts of Tokyo’s Toyosu district, two hotels — including the Park Hyatt where the movie Lost in Translation was set — and apartments and office buildings, said the people.

As at many Japanese companies, there is a significant gap between Tokyo Gas’s stated book value of its properties and their market value, since property prices have risen over the years, according to analysts.

Elliott’s move comes as Japanese companies are under increasing pressure to justify their non-core businesses, with shareholders demanding better returns and greater capital efficiency.

The $4bn takeover battle for Fuji Soft between rival private equity groups KKR and Bain also revolves around real estate. Both firms believe much of the cost of the deal could be recouped by selling the Japanese software company’s valuable property holdings.

Non-real estate companies, including Tokyo Gas, held almost half of ¥26tn in unrealised property gains reported by Japanese companies in the Prime Section of the Tokyo Stock Exchange in 2023, according to a September report by Goldman Sachs.

Those companies “may be under some pressure from shareholders to restructure non-core assets and realise any unrealised gains in the process”, said Goldman Sachs Japan equity strategist Bruce Kirk.

Tokyo Gas, which was founded in 1885, has built a real estate business by converting properties into hotels, apartments and office buildings. The company made close to 10 per cent of its ¥220bn operating profit last fiscal year from its real estate activities.

As of March 2024, Tokyo Gas had ¥449bn in unrealised non-core property gains, equivalent to roughly one-third of the company’s market capitalisation, according to Kirk.

Elliott estimates that Goldman’s figure, based on Tokyo Gas’s reported real estate values, is conservative, and that the true value of properties considered non-core could be triple that amount, according to people familiar with the activist investor.

The Tokyo Gas stake is Elliott’s sixth major investment in companies listed on the Tokyo stock exchange.

In June, the Financial Times reported that the fund had rebuilt a substantial stake in SoftBank and was pushing the Japanese tech conglomerate to launch a buyback.

Tokyo Gas has been expanding its core energy empire, including through international expansion, as import-dependent Japan works to secure supplies.

It has done a series of US deals in recent years — including the $2.7bn purchase of Texas-based natural gas producer Rockcliff Energy last year — as it tries to increase its foothold in the US shale patch, the world’s largest source of gas.

Elliott declined to comment. Tokyo Gas did not immediately respond to a request for comment.