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Hulic’s Shoei Takeover Underscores Woes of Japan Builders

Hulic Co.’s takeover of Shoei Co., in a transaction estimated at 268.7 billion yen ($3.4 billion), underscores the plight of smaller Japanese builders struggling to survive as loans dry up.

Shoei will swap three of its shares for each Hulic stock in the biggest deal among the nation’s developers in at least 10 years, according to data compiled by Bloomberg. Shoei, established in 1931, plans to transfer 493.9 million shares, the Tokyo-based companies said in a statement yesterday. They are worth 268.7 billion yen based on Shoei’s closing price Dec. 19.

Japan’s smaller real estate companies are being starved of cash to develop projects because banks are reluctant to lend after loans climbed following a rush to amass land as prices rebounded in 2007 for the first time in 15 years. Debt at about a third of the 150 publicly traded Japanese real estate companies is more than twice their equity, according to data compiled by Bloomberg. That’s a level that may trigger more bankruptcies, said Nobuo Tomoda, executive director at Tokyo Shoko Research Ltd.

“Our counterpart is in financial trouble,” Shin Ito, a spokesman at Hulic, said yesterday. “They had a hard time getting loans from banks. They want to clean up the assets and start again.”

Hulic Gains

Hulic shares surged 5.6 percent to 890 yen in Tokyo trading, the biggest gain in almost four months. Shoei, which jumped 12 percent yesterday after a Nikkei report on the merger, plunged 16 percent to 508 yen, a record decline.

Suncity Co., a Tokyo-based condominium builder, filed for protection from creditors in September after accumulating 25 billion yen of debt.

The supply of apartments was cut to about half of the 10- year average of more than 81,000 since lenders began tightening loans after the collapse of Lehman Brothers Holdings Inc. in 2008, according to the Japan Real Estate Economic Institute.

“Smaller developers want to expand their business,” said Masahiro Mochizuki, an analyst at Credit Suisse Group AG in Tokyo. “With no profit increase, they can’t expand their asset size. To build an apartment, they have to buy land in advance, but banks are not lending money to those companies.”

The seven-biggest builders took a 51 percent share of Japan’s condominium market in 2010, up from 30 percent three years earlier, according to Credit Suisse. Mitsui Fudosan Co. (8801) and Sumitomo Realty & Development Co., the country’s largest and third-largest developers, are forecasting profit gains for the year ending March 2012 even as the record earthquake on March 11 disrupted sales.

‘Not Alone’

Japan’s real estate market picked up in 2007, prompting builders such as Suncity to buy more land by borrowing more than they could repay. Investment in property funds nearly doubled to 11 trillion yen in 2007, a record high, according to STB Research Institute Co.

“We are not alone,” Tadao Nakai, a director at Suncity, said in an interview. “Real estate developers without strong financial backing will be filing for some kind of corporate protection in coming months.”

More than 1,500 real estate companies filed for bankruptcy protection since the collapse of Lehman Brothers, according to Tokyo Shoko. At least 25 of them were publicly traded firms, according to data compiled by Bloomberg.

Properst Co., a builder of condominiums in the Tokyo metropolitan area, finished the legal process of corporate rehabilitation in February after filing for bankruptcy in May 2010. It was the only company in Japan to remain publicly traded after filing for bankruptcy, according to Tokyo Shoko.

More Mergers

New City Residence Investment Corp. became Japan’s first failed real estate investment trust when it collapsed in October 2008 with liabilities of 112.4 billion yen. At the time, it cited difficulties in raising funds and selling properties because of the impact of the global financial crisis on the Japanese real-estate market.

Urban Life Co. (8851) shifted its focus to office and apartment leasing, and brokerage for existing units, from project development, Manabu Sakui, a spokesman at the company, said in an interview. The Kobe-based company with a market value of 1 billion yen has a debt-to-equity ratio of 94, the highest among 150 real estate companies in Japan, according to data compiled by Bloomberg.

Losing Money

“We have been losing money in the past years due to the deterioration of the real estate market and overall business condition,” Sakui said. “By realigning our business strategy, we hope to lower the debt and improve our financial situation.”

Shoei, which owns office buildings, hotels and apartments, had a net loss of 1.9 billion yen for the nine months to Sept. 30. Hulic reported a profit of 6.55 billion yen for the period.

The deal between Hulic, with a market value of 153 billion yen, and Shoei, with 21 billion yen, will take effect July 1. Hulic’s shares will be delisted and the new company will be called Hulic Co. (3265) Shareholders will decide on the deal at the end of March, the Tokyo-based companies said yesterday.

The deal may mark the start of other mergers, said Hideyuki Shinkai, a fund manager at Norinchukin Trust & Banking Co. in Tokyo.

“A slowdown of business condition is forming outside and within Japan,” said Shinkai. “We may see more small to medium real estate companies seeking mergers or form alliance to survive.”

To contact the reporters on this story: Kathleen Chu in Tokyo at kchu2@bloomberg.net; Katsuyo Kuwako in Tokyo at kkuwako@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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