Aug. 7 (Bloomberg) -- Mitsubishi Corp. has become the biggest shareholder of Hokuetsu Paper Mills Ltd. with a 24.4 percent stake, as the paper manufacturer seeks to thwart a $1.4 billion hostile takeover by bigger rival Oji Paper Co.

Mitsubishi, Japan's biggest trading house, today bought 50 million new Hokuetsu shares for 30.4 billion yen ($266 million), Hokuetsu said today in a press release distributed through the Tokyo Stock Exchange.

Nippon Paper Group Inc., which holds 6.4 percent of Hokuetsu, said it may raise its stake to 10 percent. An alliance of the three would make it difficult for Oji to acquire control because they would hold more than a third of Hokuetsu and have veto rights. Daio Paper Corp., Japan's fourth-largest listed paper maker, said it may file a complaint with Japan's Fair Trade Commission against Oji's bid, charging it violates anti-monopoly law.

``It's become messy with all the anti-Oji movement,'' said James Abbegglen, chairman of Asia Advisory Service and author of 10 books on Japanese business. ``It will cast a very deep doubt on future takeovers. Companies will be more reluctant than in the past to attempt hostile takeovers.''

Oji released a statement, saying it hasn't changed a plan to acquire Hokuetsu. Mitsubishi, Oji, Hokuetsu, and Nippon Paper are all based in Tokyo.

Hokuetsu said it will use the money raised from the share sale to Mitsubishi to increase its production capacity. The company has Japan's biggest plant for coated paper, which brings higher margins than newsprint and corrugated paperboard. Oji said it aims to expand Hokuetsu's facilities and scrap its own older plants to trim costs.

Oil & Competition

Oji Paper Co.'s takeover bid is more driven by the surge in energy costs and competition from China than any shift in corporate Japan's distaste for hostile acquisitions, according to analysts and the company's strategy documents.

Power and materials costs soared as oil prices tripled in the past five years, eroding margins at papermakers even as imports undercut their charges. The wholesale price of A4-size copier paper, an industry benchmark, fell 21 percent in the same period.

``It's obvious the industry has been damaged by the increase in the price of oil,'' said Takaaki Muramatsu, an analyst at UBS Securities Japan Ltd. ``Japanese paper companies don't have the technology to compete with overseas players.''

Acquiring Hokuetsu's technology would enable Oji to reduce the earnings impact of low-cost imports from China and upgrade its production technology for less than developing its own. The paper producer would be able to cut $65 million in annual costs, Akiko Kuwahara, an analyst at Morgan Stanley in Tokyo, said on July 24. She has an overweight/in line recommendation on Oji shares.

Oji, which reported profit fell by half to 21 billion yen in the year ended March 31, lost 10 percent of its market value in the past five months. The shares rose 2.4 percent last week. Hokuetsu shares have risen 34 percent so far this year, compared with an 8 percent decline in the Topix index.

Quality Market

Kuwahara estimates that 25 percent of Japan's 3 trillion yen pulp, paper and fiberboard market is for quality paper. Importers now hold 8 percent of that segment, up from less than 2 percent a decade ago, she said.

In a business plan released in May 2005, Oji said imports held almost 35 percent of Japan's market for less-expensive copier paper in 2004, up from less than 5 percent a decade earlier.

The same business plan cited mergers and acquisitions as a means to deal with a surge in energy costs and competition from China.

Oji Paper was founded in 1873 by Eiichi Shibusawa, an adviser to the ruling Tokugawa shogun. The company controlled as much as 80 percent of paper production in Japan until 1949 when it was split into three parts, one of which became Nippon Paper.

To contact the reporter on this story: Eijiro Ueno e.ueno@bloomberg.net; Finbarr Flynn in Tokyo at at fflynn@bloomberg.net

Last Updated: August 7, 2006 03:45 EDT