Panasonic Faces a Limit of Predatory V-Shaped Recovery

Parent Company Toils Restructuring Using Cash of Suppliers and Subsidiaries. Downfall Would Wreak a Havoc, and Panasonic Needs to Show Growth Path.

May 18, 2017

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Panasonic's proposed share-swap of subsidiary Panahome - for a stake which it does not own yet - scheduled in August, is in a trouble.

Skirmishes continue with a Hong Kong-based hedge fund Oasis Management who owns the second largest block of Panahome shares. As one can easily predict, the fight relates to the swap ratio. The disclosure announcement said that 0.8 shares of Panasonic common share would be handed over to each Panahome common shareholders. Oasis went ballistic on this offer, claiming Panahome must be valued higher. Selection of comparable companies was unfair, Oasis argued, such as including low-valued Mitsui Home and Tama Home, whereas excluding better companies such as Daiwa House and Sekisui House, and not reflecting value of cash sitting on Panahome balance sheet. Panahome, on its part, acquired a fairness opinion from third party firms, and prepared 30-plus pages document dubbed "FAQ on the Share Swap with Panasonic shares" The argument is now in stalemate. The commotion looks like a ubiquitous debate between activist funds claiming more distribution of hoarded cash, and cash-rich companies claiming the cash hoarding is necessary for future business. But if we take closer look, we can see vital questions such as; ① why Panasonic turns Panahome 100% subsidiary, ②why Panasonic would not apply TOB method used when it took Panasonic Electric Works private, ③ the result of cash collection of the past. We feel a thirst to cash as an obsession of Panasonic, "the king of Japan's consumer electronics", celebrating the 100th anniversary in 2018.

Welcomed to Home after Amendment
It started from the announcement on December 20th, 16th. President Ryuji Matsushita of Panahome was regarded as Panasonic's president Kazuhiro Tsuga's "favorite lieutenant" (a Panasonic official). That might have been a reason of delisting a well-known public company with sensitivity-lacking announcement wordings. Panahome had sluggish performance until several years ago. Consolidated results for the fiscal year ending March 2010 was down 8.5% year on year to ¥ 260.3 billion, and operating income was down 43.7% to ¥ 5.3 billion. Net cash, subtracting debt from cash holding, then stood at 63.9 billion yen. Within the Panasonic group it belonged to group of subsidiaries needed strategic decision, and there were rumors of selling it to major housing makers or merging with Toyota Home, a subsidiary of another big manufacturing parent. However, after that, home-reform business turned successful by capital support from the parent. In the year ended March 2016, Panahome's consolidated sales rose to 352.9 billion yen, operating profit rose to 15.8 billion yen. Net cash amounted to 124.3 billion yen. A bad boy amended himself, and welcomed by the parent who moved to buy all of the company. The synergy effect shown in the share-swap announcement included three goals. Firstly, blending technologies of home appliances / equipment and housing under the Panasonic brand. Secondly, Panahome will be able to make partnerships and large-scale investment in the housing sector with Panasonic's strong finance. And thirdly, it is easy to quickly reallocate management resources beyond the boundaries of the Panasonic group companies, meaning effective cash usage held by Panahome.
Oasis had sent a letter to Panahome in September last year before announcement of the share-swap, saying that "stock price was undervalued and should be corrected". Oasis has launched a web site titled "Protecting Panahome" now insisting a special dividend of 670 yen per share unless it does not change the share swap ratio, calling for other minority shareholders to fight together, while accumulating Panahome shares to 8.95% of the outstanding as of the end of March. If Panahome succumbs to the request of Oasis, Panasonic's cash strategy needs a major regrouping.

Sudden Share Swap without a TOB
Oasis does not make it an outright issue, but it is questionable for the welfare of minority shareholders that a share-swap scheme was adopted to delist a public subsidiary without any tender offer. An analyst knowledgeable in M&A said, "TOB rules are detailed, various information are given to minority shareholders, and competitive bids may emerge, and minority shareholders would be better off, so it is desirable to implement the TOB". To be sure, when Panasonic turned Panasonic Electric Works into a wholly owned subsidiary 11 years ago, Panasonic implemented TOB. Using 264.1 billion yen to buy shares until the shareholding ratio reached 82.69% from 51.00%, and subsequently implemented share swap to Panasonic shares for remaining shareholders did not responded to the TOB. This time around, it seems that Panasonic is scurrying to absorb cash hoarded by a subsidiary. Panasonic's Public Relations Division stated, "Many factors were taken into consideration, to decide the share-swap scheme, and we will refrain from responding on detailed consideration process and its contents." Since 2000, Panasonic has been hailed by mass media for its "V-shaped recovery" every time it carried out massive restructuring. Yet, the operating income recovery was mostly engineered by lowering the breakeven point with reduction of personnel and fixed expenses. As Panasonic's results are reported on the US accounting standards which does not have recurring P/L, "extraordinary loss" is hard to detect, but since the restructuring requires a hit on net profit, of which not appearing "V-shaped "(see graph I).

No Powerful New Business Created
Panasonic requested an extension of payment site period to suppliers in summer of 2013, following the initial extension in 2012 .The payment site to suppliers which was practiced in the era of founder Konosuke Matsushita,--closed at the end of the month and paid on the 15th of the following month--was postponed to the closing at the end of month, and paid in 135 days (4 months + 15 days), nothing different with competitors. As a result of this change, Panasonic's free cash flow dramatically improved in the 4Q of FY 2013 (Jan. to Mar 2014), but now it started to dwindle. The y-o-y change in operating profit shows slow trend after the peak in the 3Q third quarter of 2013(October - December 2013), illustrating weak recovery in power to earn (See graph II). Why Panasonic cannot achieve a real V-shaped recovery despite of its repeated robbing of cash at group companies and suppliers? Because it cannot nurture cash-creating new business and unable to reshuffle business lines like General Electric and Hitachi. Meanwhile, it is increasingly reliant on businesses with a high risk of cash outflow, such as the battery business with Tesla Motors.The Panasonic official is worrisome that "it is like a big bet reminding us of the plasma display televisions (which failed after a huge investment)." In February, a news disseminated that Panasonic Avionics, a US subsidiary of aircraft-related businesses is under investigation by the US Justice Department and the US Securities and Exchange Commission based on "Foreign Corrupt Practices Act," which may damage future cash flow. The news of inviting ex-Chairman of Microsoft Japan, Yasuyuki Higuchi, as a senior executive officer as of April 1, was highly hailed by Japan's mass media, but the Panasonic official quipped him as "one of Tsuga chums, both graduates of Osaka University". Further improvement of cash flow by extending payment site is no longer possible as parity already reached with competitors. Further absorption of cash-hoarding subsidiaries may be blocked by activist funds. As the parent turtle stumbles, everyone rolls, so the child turtle had only to get on silent till now, but from now on, unless the parent turtle inspired, both the parent and the child will disappear.