Loeb Fund Buys Suzuki Stake as End to VW ‘Paralysis’ Seen

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Suzuki Motor Corp. rose to a record in Tokyo trading after the hedge fund run by Daniel Loeb said it had acquired a stake in the carmaker, predicting a positive end to a years-long dispute with Volkswagen AG.

An almost five-year arbitration between Suzuki and Volkswagen has “paralyzed” the Japanese company, with a resolution in sight, Loeb’s Third Point LLC said in a letter to investors dated July 31. Its Maruti Suzuki India Ltd. unit also enjoys a “sustainable scale-based advantage” over its competitors and has “significant room” to expand its profit margins, the New York-based fund said.

“The company’s greatest asset is its low-cost manufacturing process for vehicles for the emerging market consumer,” Third Point said in the letter, without disclosing the size of the stake. “An overhang from a protracted litigation with Volkswagen has resulted in significant balance sheet inefficiency and created an attractively valued investment opportunity.”

The stake in Suzuki marks the third investment that the billionaire Loeb has made in the last two years at a major member of Japan Inc., making him one of the highest-profile examples of the nation’s wave of shareholder activism. The activity has been spurred on by Prime Minister Shinzo Abe, who has bet that shaking up Japan’s cozy corporate culture will help reinvigorate its stagnant economy.

Suzuki shares climbed 3.4 percent to a record in Tokyo trading, while Maruti Suzuki climbed 2.2 percent as of 12:41 p.m. in Mumbai, also headed for a record close.

Breaching Agreement

Suzuki had been run for 37 years by Osamu Suzuki, who at the end of June ceded the role of president to his son Toshihiro. Osamu, 85, had been the longest-serving head of any major global automaker and continues to be responsible for finalizing arbitration with Volkswagen that began in November 2011. The two have accused one another of breaching an agreement, which was meant to supply Suzuki with technology and provide Volkswagen with wider access to the Indian car market.

The Japanese carmaker in June said arbitration proceedings with Volkswagen have been concluded, and the companies are now awaiting the ruling.

Suzuki has enough cash to buy back the 19.9 percent stake held by Volkswagen if it succeeds in ending the failed partnership, or will find a way to work together with shareholders if the German carmaker is able to keep its investment, the New York-based fund said.

Sustainable Growth

Ei Mochizuki, a Suzuki spokesman, declined to comment on Third Point’s stake, saying the company doesn’t discuss individual investors. Suzuki plans to keep its sustainable growth and improve its corporate value through constructive communication with investors, he said.

Suzuki’s handling of the conflict with Volkswagen is the lone point of criticism made by Third Point. Suzuki’s assets in India are worth more than the entire company’s market capitalization, and it receives a 5.5 percent royalty stream from Maruti that translates to $500 million annually, the fund said in its letter. Suzuki confirmed Third Point’s numbers were broadly correct at a briefing for its first-quarter results.

Maruti Suzuki is introducing new models in higher-end segments and using a dominant dealer service network to increase market share in India, which is benefiting from Prime Minister Narendra Modi’s reform and infrastructure investment, Third Point said.

Even though competition is getting tougher in India, Suzuki is positive about future demand in the country because the Modi government is helping boost demand for entry-level vehicles, Managing Officer Masahiko Nagao told reporters in Tokyo on Monday.

Asked how Suzuki plans to interact with Loeb, who has a stated aim to use minority shareholding to obtain board seats, Nagao said that the company should be able to improve corporate value by following its mid-term plan.

Loeb didn’t immediately respond to an e-mail seeking comment sent outside regular business hours.

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