FSA Asking to Sell in Administrative Guidance. Share Price Sits on the High End, and China may be the Only Buyer?
August 31, 2017
The news story reported by NHK, Japan's national TV network, that Japan Post would acquire Nomura Real Estate Holdings fell apart in just one month. The initial rise in share price was quelled after the both companies announced the end of negotiations. However, Nomura Real Estate HD is still up for sale (a Nomura official). Administrative pressure from the Financial Services Agency ("FSA") led by Nobuchika Mori increasing. The parent company, Nomura Holdings, is willing to dispose the holding, but there remains some blocking issues.
It seems apparent that the Prime Minister Office suggested the dissipation of the news, but the fact the deal did not materialize would cast a shadow to the proposed offering of Japan Post shares.
"Nomura HD was looking for a buyer of Nomura Real Estate HD from last year" (the Nomura official). Contacted first to a major real estate company M, then a major developer, and searched for further candidates, but received only negative responses; "marketing concept is different", "industry type is different", "conflict with Nomura condominium brand of Proud", and "price being simply expensive" etc. Nomura HD is still looking for a buyer. The source said.
"Conflicts of interest" cannot be removed
After stock market collapsed in Tokyo in 1965, Nomura Securities established Nomura Land & Building in 1970 as a company that leases and manages branches owned by Nomura Securities, and at the same time established Nomura Real Estate to conduct other real estate brokerage business. At the time, the authorities (Ministry of Finance) tolerated the diversification of the business of brokers. Currently Nomura Land & Building (unlisted company), a wholly owned subsidiary of Nomura HD, holds 34% of Nomura Real Estate HD (listed company). In other words, Nomura HD is in the position of major shareholder of Nomura Real Estate HD.
A loss of more than 1 trillion yen, caused by reckless lending of Nomura Finance (which was sold to a distressed fund Lone Star in 2000), coupled with Nomura Securities' overseas loss, was offset by the capital gains from the sale of Nomura Real Estate shares. Nomura Real Estate has been a good boy making ends meet for the Nomura group.
From Nomura HD's viewpoint, the real estate market is now booming, it seems there is no reason to sell the Nomura Real Estate HD who earns steady cash. However, FSA and the Fair Trade Commission are seeing the stock holding with questionable eyes.
"When Nomura originally established a securities holding company, we in a way overlooked on holding company's scope of activities" an ex- MOF bureaucrat commented. In 1997's revised Anti-Monopoly Law permitting a financial holding company, details were determined in line with the business laws of each financial categories, and strict restrictions were imposed on banks and insurance companies, but the securities companies were somewhat applied a lukewarm rule. There was no provision to restrict the scope of operations of subsidiaries of the securities holding company. However, under the Antimonopoly Act, the holding company has the general framework of "only managing the subsidiary's business management and some additional services."
How to deal with the real estate subsidiary was the problem at the time. Nomura Land & Building was deemed all right as it manages branches of Nomura Securities. But whether to allow property brokerage business of Nomura Real Estate became an issue. As there are no bank holding companies or insurance holding companies keeping real estate companies as subsidiaries.
Although Nomura HD has been reducing the shareholding ratio of Nomura Real Estate HD, the government has not completely approved the shareholding structure. This year, FSA introduced a "Fiduciary Duty Principles on Principles Concerning Customer-oriented Business Operations" and it puts further pressures To the Nomura Group. These principles include a clause; "an appropriate management of conflicts of interest". "Concerning conflicts of interest in the case where a company sells and recommends financial products provided by another group company" it must "formulate concrete policies to fend off such conflict of interest in advance".
The following is an example of conflict of interest concerns. "Nomura Real Estate Master Fund Investment Corporation is a real estate investment trust ("REIT") with asset size exceeding ¥ 900 billion and the management company is invested by Nomura HD. The REIT's management company is Nomura Real Estate Investment Advisor, a subsidiary of Nomura HD, and its property management is run by Nomura Real Estate HD. And the REIT certificates are marketed by Nomura Securities. With such an entangled business relations among Nomura group companies, there is a suspicion of conflict of interest, even though one can claim the REIT pricing are done by market forces. One real estate executive once asked to an executive of a REIT: "Can you assure that prices of properties in the REIT fair and correct?" To dispel such a concern, Nomura HD must reduce shareholding ratio of Nomura Real Estate HD.
Authorities keeps questioning the shareholding structure
The scoop of Japan Post to acquire Nomura Real Estate was singlehandedly reported by NHK. It is unusual for related parties to talk about M&As of listed companies because it will lead to suspicion of insider trading. Media other than NHK sees the report as "a leak engineered by the Prime Minister's Office", intended to conceal the past acquisition fiascos of the Japan Post.
On June 19, Japan Post announced a blunt comment; "there is no fact that we are considering an acquisition of a domestic real estate company at the moment". Meanwhile, Nomura Real Estate HD also said, "we have been going over an acquisition of our company's shares by Japan Post from viewpoint of maintaining and improving our corporate value, but we inform you that we have decided to terminate the negotiation." I
Japan Post, which is preparing for the second share offering held by the Japanese government this year, was deemed "incompetent" as this story did not come true. The disappearance of much needed "equity story" will cast shadow on the offering. On the other hand, what would happen to Nomura Real Estate HD? The company's stock price is now around 2,200 yen. From the book value per share (BPS), 2500 yen could be the fair value. If Proud's brand goodwill is added, it may be valued at 3000 yen per share. If Nomura HD sells 20% of the stock, it will be over 100 billion yen proceeds. The current stock price is in the high end historically. The average annual salary of 6,500 strong employees averages at 9.5 million yen. Who would want a condominium developer with such high personnel costs? The authority is asking to sell property subsidiary. Bubble-hyped Chinese money may be the only buyer at last.