Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
One of the most prominent shareholder activists in Japan has accused Nippon Steel of harming minority investors in one of its biggest subsidiaries, as the steelmaker attempts to push ahead with a politically fraught $15bn takeover deal in the US.
3D Investment Partners, which was pivotal in the take-private deals of Toshiba and Fuji Soft, has built a roughly 10 per cent stake in IT services group NS Solutions and is pushing for Nippon Steel to grant the subsidiary far more independence.
The steelmaker owns 63.4 per cent of NS Solutions, which has a market capitalisation of $4.7bn.
“NS Solutions is currently grappling with issues such as missed growth opportunities, under-realized profitability and an inefficient balance sheet,” said the Singapore-based fund on Monday in its first public comment on the investment. “The root cause of these issues is NS Solution’s lack of independence from its parent company.”
The corporate governance concerns come as the Japanese group tries to position itself as the ideal owner of US Steel.
The deal was blocked by Joe Biden in one of his last acts as president, and Donald Trump has reopened the door to an agreement but said a condition would be that Nippon Steel only takes a minority stake. Talks are ongoing between both sides.
3D argues that NS Solutions’ board is not sufficiently independent and that its relationship with its parent hampers its ability to win contracts with competitors.
It also noted a deposit by NS Solutions of about ¥96bn ($644mn), roughly 40 per cent of its net assets, that was earning just 0.2 per cent in annual interest from Nippon Steel.
“This rate is significantly below [NS Solutions’] cost of capital,” said 3D. “This deposit enables Nippon Steel to secure low-cost financing at the expense of [NS Solutions’] corporate value and the interests of its minority shareholders.”
The fund said if NS Solution could achieve complete independence from Nippon Steel and better allocate capital, its earnings per share could double.
Nippon Steel and NS Solutions did not immediately respond to a request for comment. 3D also owns a small stake in Nippon Steel.
3D’s campaign mirrors that of another prominent activist, Strategic Capital, in relation to Osaka Steel. The Japanese fund is urging Nippon Steel to either reduce its stake in Osaka Steel, in which it owns more than 65 per cent, and make the company more independent or delist the subsidiary through a full takeover.
Both funds allege that Nippon Steel secured low-cost financing through the subsidiaries to the detriment of their growth prospects and the interests of minority shareholders.
The funds are in positions where their holdings could force Osaka Steel and NS Solutions to delist from the Tokyo Stock Exchange because the public shares outstanding would fall below minimum thresholds.
Osaka Steel’s low return on equity “is largely due to the deposits and loans with which Osaka Steel has been providing Nippon Steel for many years, funds which could have been used more effectively for the business”, said Strategic Capital late last year.
Nicholas Benes, chief executive of the Board Director Training Institute of Japan, said an argument could be made that the reason behind the subsidiaries’ “lacklustre performance” was that “they are not being allowed to invest robustly” in their own businesses.
Benes added that Nippon Steel “should be more aware than it seems to be” that “more people are going to point out how they treat their investments here in Japan” because its relationship to them mirrors the proposed structure of the US Steel deal.
Read the full article here