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KDDI Offers $2.7 Billion to Buy Out Jupiter With Sumitomo

KDDI Offers $2.7 Billion to Buy Out Jupiter With Sumitomo Corp.
An employee of Jupiter Telecommunications Co. looks at a television monitor displayed in the reception area of the company's headquarters in Tokyo. Photographer: Robert Gilhooly/Bloomberg

KDDI Corp., Japan’s second-biggest mobile-phone company, gained in Tokyo trading after it offered as much as 216 billion yen ($2.7 billion) with Sumitomo Corp. to buy out Jupiter Telecommunications Co. and create a cable TV provider with more than half the country’s subscribers.

The carrier and Sumitomo, which already own a combined 71 percent stake, offered to buy the remaining shares at 110,000 yen each, the companies said in a statement yesterday. The offer is 33 percent higher than Jupiter’s price Oct. 19, the last trading day before the Nikkei newspaper published a report about the plan announced yesterday.

The deal values Jupiter at 759 billion yen and will also fold KDDI’s Japan Cablenet Ltd., which controls 12 percent of the country’s cable TV market, into Jupiter, giving the merged operator a 53 percent share, according to the companies’ joint presentation yesterday. Jupiter has boosted subscribers 11 percent to 3.7 million in two years to Sept. 30.

“Competition for subscribers is increasing and this gives us stability to manage the business,” Yoshio Osawa, Sumitomo managing director, told reporters yesterday in Tokyo. “The deal will also speed up management decisions.”

KDDI shares surged 5.5 percent, the most since March 16, 2011, to 6,370 yen at the close of trading in Tokyo. Jupiter dropped 2.2 percent to 108,800 yen, while Sumitomo gained 1.4 percent to 1,090 yen.

Higher Margins

The offer values Jupiter at about 2.1 times 2011 revenue, compared with the 2.6 times average of 32 global cable TV deals over the past 5 years, according to data compiled by Bloomberg.

Jupiter, also known as JCOM, had an operating margin of 19.3 percent in 2011, higher than KDDI’s 13.4 percent and Sumitomo’s 6.7 percent, according to data compiled by Bloomberg. Operating profit at JCOM is targeted at 90 billion yen in 2015 from 71.1 billion yen last year, the companies said.

“The acquisition will help KDDI improve how its income statement looks because of Jupiter’s higher margin,” Hitoshi Hayakawa, an analyst at Credit Suisse Group AG in Tokyo, said. “Still, it isn’t clear whether KDDI can create positive synergies that will match up with the additional investment.”

KDDI will invest 70.9 billion yen, and a venture being set up by the Tokyo-based phone company and Sumitomo will pay about 145 billion yen, bringing each company’s stake to 50 percent, according to the companies’ joint statement. The venture will be delisted between July and September 2013 after the buyout is completed, and the tender offer will start in February.

Revenue Growth

KDDI will finance the acquisition with cash and borrowing, according to the statement. The carrier had about 100 billion yen in cash, near cash and short-term investments as of June 30, while Sumitomo had about 833 billion yen.

Jupiter’s net income fell 1.1 percent to of 37.3 billion yen last year on sales of 369 billion yen, according to data compiled by Bloomberg. Revenue growth averaged about 11 percent at Jupiter over the past five years, compared with 1.5 percent for KDDI and 2 percent for Sumitomo, the data show.

Jupiter, also known as JCOM, will eventually help Sumitomo sell entertainment content and cable TV infrastructure in Asia and will take advantage of the rising popularity of phones and other mobile devices that can download or stream videos and entertainment content, Osawa said.

“We see JCOM and its operational know-how as a way to enter the Asian media market,” Osawa told reporters yesterday in Tokyo. “JCOM will also seek to expand offerings for new devices such as smartphones.”

Shopping Channel

KDDI paid about 363 billion yen in 2010 to buy 38 percent of Jupiter from billionaire John Malone’s Liberty Global Inc. in the phone company’s biggest investment, a stake it has sought to boost. Sumitomo founded the cable TV operator in 1995 with Englewood, Colorado-based Liberty, and has also bid for control of the company.

Sumitomo, the least dependent of Japan’s trading houses on mineral resource earnings, has been bringing in partners to help it share the costs of expanding in media.

Bain Capital LLC, the Boston-based private-equity firm co-founded by Mitt Romney, in June agreed to pay more than $1 billion for 50 percent of Sumitomo’s Jupiter Shop Channel Co.

Jupiter Telecom was Sumitomo’s biggest single earner among media and lifestyle businesses last year.

Sumitomo also controls 30 percent of Japan’s TV shopping via the Shop Channel and plans to expand it in Thailand, China and Malaysia.

Sumitomo currently owns about 40 percent of Jupiter, while KDDI’s holding amounts to about 31 percent, according to data compiled by Bloomberg.

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