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Wednesday, June 21, 2006
Hankyu-Hanshin deal fails to impress analysts
Hankyu Holdings Inc. said Tuesday it will acquire 63.71 percent of Hanshin Electric Railway Co. for nearly 250 billion yen, paving the way for the first postwar merger of major private railways in October.
Hankyu said 2,219 shareholders had responded to its public tender offer that ended Monday, giving it about 269 million of the 433 million Hanshin shares outstanding.
The tender succeeded after the Murakami fund agreed to sell its entire 47 percent stake in Hanshin at the 930 yen offering price, ending a nine-month standoff.
However, analysts criticized the merger because Hankyu has not shown how it will create greater business synergy. They say the deal was done in haste simply to prevent a hostile takeover by the Murakami fund.
Satoru Aoyama, director at Fitch Ratings Ltd., said Hankyu did not have a plan showing how much revenue the merged company would make or how it intends to reduce the debt created by the buyout.
"In a large-scale merger like this, Hankyu should have a vision of its future financial situation to explain to its stakeholders, but it doesn't," Aoyama said. "I cannot be sure that this merger will be beneficial in the short or medium term."
Analysts are concerned Hankyu's buyout costs will rise because Hanshin stock has plunged. The pricehas fallen along with the Nikkei index over the past month, prompting investors to pick up Hanshin shares and sell them at the higher tender offer price offered by Hankyu.
Hankyu President Kazuo Sumi said at a news conference Tuesday the total buyout cost was about 60 billion yen more than he had expected.
When it announced the public tender offer, saying it would buy all shares offered, Hankyu had hoped only the Murakami fund would step forward, but as Hanshin's stock price fell, other investors also wanted to sell their shares.
Some analysts also criticized Hankyu for not giving a clear picture of how the two firms plan to survive in the railway industry amid a declining number of passengers.
"Revenue from (Hankyu's) core business, which is the railway division, has been on the decline as the population decreases," said Katsuyuki Nakai, associate director at Standard & Poor's. "But it is not clear how (Hankyu) plans to steer its business after the merger."
Nakai said he took a cautious stance on whether the merger will positively affect Hankyu's business, noting the firm needs to offer a road map for management integration and a clear vision of how it will benefit the two firms.
Hankyu said it will discuss the details of its business and financial strategies and map out a medium-term management plan next March.
The two sides are expected to set up a formal committee on the merger after it is approved by the firms' shareholders at meetings next week.
During a gathering with investment analysts last month, Hankyu President Sumi said Hankyu and Hanshin will be able to provide a better rail network through the merger.
As for their bus businesses, Sumi said the two firms would be able to adjust schedules to reduce the number of buses. The two firms also can develop the area north of JR Osaka Station together, he said.
Sumi's remarks were echoed in a report from the Kansai branch of the Development Bank of Japan released June 8.
The government-backed body's report says the merger will facilitate more convenient business in the bus and real estate sectors.
"The merger of the two companies, which control real estate in much of the Umeda area, will encourage a unified management of the facilities surrounding (the station), leading to a more attractive location," the paper says.
However, analysts said these ideas for the future of the two firms are still too vague to convince stakeholders to back the merger.