Hokuetsu Says 40% of Shareholders Oppose Oji's Bid

Hokuetsu Paper Mills Ltd. said about 40 percent of shareholders support its efforts to block Oji Paper Co.'s $1.4 billion hostile takeover bid, indicating Japan's largest paper producer may fail to buy the smaller rival.

Hokuetsu has the support of shareholders including Daishi Bank Ltd., a lender based in Niigata prefecture where the company was founded in 1907, President Masaaki Miwa told reporters today. Miwa was visiting the mayor and other business and political leaders in the Niigata city where one of its main factories is located to seek support to block the bid.

``The news is an amber light for Oji's attempt,'' said Hiroyuki Natsume, an analyst at Tokio Marine Asset Management Co. in Tokyo. ``It seems like everyone in this deal except Oji has opted for feelings over economic rationality.''

Rising energy and other input costs have spurred consolidation among global papermakers. Oji's bid for Hokuetsu pits two members of the benchmark Nikkei 225 Stock Average against each other for the first time. The smaller company's claim to have won 40 percent backing to block the takeover suggests Oji may face an uphill struggle to gain control.

Oji spokesman Masayuki Yada told Bloomberg News the company's position hadn't changed. ``We will continue our efforts to succeed in the bid.''

Growing Opposition

Hokuetsu last week rejected Oji's 800 yen a share offer for 100 percent of the Tokyo-based company and sold shares at a lower price to Mitsubishi Corp. to block it. Japan's largest trading company became the biggest shareholder in Hokuetsu with a 24.4 percent stake after it bought 50 million new shares this week for 30.4 billion yen, or 607 yen each.

Nippon Paper Group Inc. (3893), Japan's second-largest producer, this week completed the purchase of an 8.85 percent stake, and has offered a friendly alliance to help block Oji's bid. It has said it will hold no more than 10 percent of the company and yesterday Hokuetsu said it welcomed Nippon's offer.

Hokuetsu's independent panel also recommended the company take defensive steps. Hokuetsu, Mitsubishi and Nippon Paper can work together to form a veto block of 33 percent and thwart any proposal requiring shareholder approval even if Oji maker wins a majority of more than 50 percent of the shares. Daishi Bank has a stake of about 2 percent.

Costly Defense

Miwa yesterday told reporters Oji's proposed acquisition might cost Hokuetsu as much as 17.9 billion yen ($156 million) due to a decline in staff morale, lost production and an exodus of clients. He also said the firm would consider ties with Mitsubishi in paper businesses, which could generate at least 4 billion yen in cost savings by 2010.

Global papermakers, under pressure to consolidate, have been raising prices to contend with rising fuel costs. Nippon Paper said in May it will raise prices by more than 25 percent to reflect higher oil costs. Oji in November agreed to pay Nippon Oil Corp. the highest price in 20 years for fuel oil used in factories.

``Oji is trying to survive through a drastic challenge,'' said Hiroyoshi Nakagawa, who helps manage $590 million at Societe General Asset Management Co. in Tokyo. ``But this will likely end in a very traditional way as Hokuetsu's management seems to believe the company is theirs and not shareholders.''

The deadline for Oji's bid is Sept. 4 by which time it will have to secure a majority stake. It had offered to raise its bid to 860 yen a share if Hokuetsu's plan to sell shares to Mitsubishi was canceled.

``This takeover bid shows that a Japanese company can go ahead and make a bid if it wants to become bigger,'' said Yuuki Sakurai, who helps manage the equivalent of about $42.6 billion in assets at Fukoku Mutual Life Insurance Co.

``But in this case, it looks like Oji will fail and only increase anti-Oji feeling.''

Hokuetsu, Mitsubishi, Oji, and Nippon Paper are all based in Tokyo. Nomura Holdings Inc. (8604) has been advising Oji and Credit Suisse Group has been advising Hokuetsu.

To contact the reporter on this story: Junko Fujita in Tokyo at jfujita@bloomberg.net.

To contact the editor responsible for this story: Ben Richardson at at brichardson8@bloomberg.net

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