Japan News: Breaking down the Panasonic/Sanyo proposal

Nov. 12, 2008 – There’s been no shortage of analysis of the proposed M&A involving Panasonic and Sanyo in Japanese media, with reports analyzing presumed synergies to investors’ reactions to the cash situation.

Though Sanyo and Panasonic share lineage (Sanyo’s founder was related by marriage to Panasonic founder Konusuke Matsushita), years of harsh competition have created an environment more of rivalry than family. And Sanyo’s recent deal to work with Nippon Oil for solar cells came quickly after first overtures from Panasonic, suggesting initial resistance to the offer, notes the Nikkei daily. The spreading global financial crisis, however, heightened the need to find buyers for the three institutional investors’ stakes.

The Nikkei also tracks the three meetings held between the two companies’ CEOs, noting the proposed deal “did not come about overnight or without difficulties” and involved “a healthy dose of compromise.” Sanyo President Seiichiro Sano and Panasonic counterpart Fumio Ohtsubo met twice in September, resulting in rejected bids by Sanyo as Sano wanted to keep the company’s name/brand intact, a capitulation agreed to prior to the third meeting.

Ohtsubo reportedly held reservations about a Sanyo bid until four months ago, the paper noted, adding that back in 2005, with Sanyo facing insolvency, main creditor Sumitomo Mitsui Banking approached Panasonic (then Matsushita Electric) but was rejected in belief that “Sanyo’s restructuring plan was weak and its corporate governance too ambiguous.” However, Panasonic’s lofty goals of ¥10T sales and 10% return on equity were in jeopardy due to sales of subsidiary JVC and a stake in Victor Co.; meanwhile, “slimming measures” undertaken by Sanyo including selling its mobile phone biz made the timing now better to revisit the M&A and get back on the planned track.

Not so fast

But the paper notes that Panasonic shares have slumped in the days following announced plans to turn Sanyo into a subsidiary, indicating the lack of details in the combined entities is causing confusion and doubt in the market, and the three main Sanyo share sellers are likely to jostle for position in negotiations. Goldman Sachs apparently wants Panasonic to buy all shares in Sanyo, including common stock, but the fact that the company didn’t specifically say Sanyo would be turned into a “wholly owned” unit implies common stock may not be pursued.

Typical M&A deals come with ~30% premiums, the paper notes, which would value Sanyo shares at about ¥130, but it noted some analysts think dilution of share value through converting preferred stock to common stock has not been fully factored in. Goldman and other investors, who of course want the highest buyout price possible, argue that this has been factored in and the Sanyo shares are undervalued, in an effort to pinpoint the takeover price closer to Sanyo’s stock price from the past 3-6 months, which is ¥192-¥226.

But Panasonic has yet to set a target share price for its takeover terms, the paper notes, nor has it decided whether to buy just the three investors’ preferred shares or Sanyo common shares held by other investors as well. “First of all, Panasonic needs to present the purchase price,” said the Nikkei, citing an unidentified source. “Until then, real negotiations cannot start.”

Complicating matters, the Nikkei notes that if Panasonic does take over all Sanyo shares and turn it into a wholly owned subsidiary, thus delisting it from the market, “shockwaves would reverberate throughout the entire Sanyo organization, a backlash would ensue and it would become nearly impossible to harmoniously integrate the two electronics firms.” The smarter play, the paper suggests, would be to keep the company listed with a certain degree of independence, and then revisit a full takeover in a few years. The example of Toyota Motor Co.’s absorption of Toyota Motor Sales Co. in 1982 serves as an example of “painstaking efforts” typical in Japanese <&A deals.

Making the case

No matter what the eventual structure, finding synergies will be key to the success of the combined Panasonic-Sanyo entity — but after years of paring at Sanyo there may not be much overlap, notes the Nikkei Business Daily. Sanyo’s share of TVs was a scant 1.6% vs. Panasonic’s 8.6%, though it has Wal-Mart as a key customer, giving Panasonic a strong inroad into lower-price markets in North America. In digital cameras Panasonic is second domestically while Sanyo specializes in OEM low-cost mass production, another opportunity for synergy.

In semiconductors, though, there is likely to be difficulty combining the two firms’ operations. Panasonic is shifting to leading-edge LSI chips, while Sanyo specializes in analog ICs. There is little duplication, and Sanyo’s business has been slumping for some time; how Panasonic deals with this will be key to the overall combination, the paper notes.

The Nikkei also cited an unidentified exec that Panasonic wanted to get Sanyo’s lithium-ion and solar cell businesses “by any means.”

Panasonic’s net liquidity (cash minus borrowings) surpasses ¥800B (US $), second domestically behind Nintendo, giving the firm deep pockets for leverage, particularly in the current times of financial pressures.


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