Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Private equity firms have raised record amounts for Asia and are sitting on a cash pile. They just can't seem to spend it in one of the few markets with really big companies for sale: Japan.

Toshiba's sale of its healthcare division is the latest case of an attractive Japanese asset that offers few chances for foreign private equity, even in partnership with a local firm. Canon clinched the deal, according to a person familiar with the matter, after suitors were told they would have to pay more than $6.2 billion. A bid by Konica Minolta with Permira Holdings was said to have missed the threshold.

Big Spender
Japan is the top Asian country for spending on health as a percentage of GDP
Source: World Heatlh Organization (2013 data)

Toshiba is selling Toshiba Medical Systems, a maker of CT scanners and ultrasound equipment, as it disposes of assets to raise cash after an accounting scandal. Not surprisingly given Japan's aging population, the unit has done well, even as the parent grapples with losses in its PC and chip businesses.

Too Small to Matter
Toshiba's quarterly operating income from healthcare has stayed positive but this remains a small business (yen)

At least 10 potential buyers, foreign and local, expressed interest in the medical division. That private equity firms flocked to the Toshiba party shouldn't be a surprise: They have that cash to spend, and lack targets in China, where firms for sale tend to be smaller and the economy is slowing. From 2011 through 2015, private equity firms raised $263.6 billion to invest in Asia. By the end of December, they still had $53.7 billion of dry powder, according to the Centre for Asia Private Equity Research.

But $6 billion is a lot for one deal,  even for KKR, one of a handful of recent successes in Japan. The New York firm in 2013 raised the largest fund devoted to the region, coincidentally of $6 billion. KKR even had a Japanese healthcare win: It spent $1.7 billion for a controlling share of Panasonic's medical business almost three years ago. That deal was the second-largest acquisition in Japan by private equity, according to the research group, behind the $2 billion that Bain Capital, HarbourVest Partners and Japan Industrial Partners forked out five years ago for Skylark, a family restaurant firm. The chain went public in September 2014.

Even with a local partner, foreign private equity firms will have a tough time going up against the big Japanese companies, which are cash-rich and have ready access to bank funding. That was the case with Toshiba: KKR joined with Mitsui, while Permira tied up with Konica Minolta, people familiar with the matter said.

Flush With Cash
Japanese companies have among the lowest median net debt-to-Ebitda levels among regional peers and compared with the U.S.

Overlay the size of the deal with Japanese resistance to corporate change -- seen most recently in Sharp's on-off romance with Taiwan's Foxconn -- as well as an impression of private equity as vulture funds, and the difficulties of foreign buyers shouldn't be surprising.  

Dwindling Interest
Private equity investing in Japan fell last year
Source: Centre for Asia Private Equity Research Ltd.
Footnote: 2016 data until March 3

The experience of Cerberus, a private equity favorite after Japan's asset bubble burst in the early 1990s, is a cautionary tale. The New York-based firm led a bailout of Seibu after the hotel and railway operator delisted in 2006, then spent years clashing with the company over its IPO and failure to control the board. Cerberus, which at one point tried to get former U.S. Vice President Dan Quayle on Seibu's board, whittled down its stake in the past year.

Foreign private equity will always find change hard to effect in Japan. Now, however, the firms are also up against domestic bidders desperate for growth and the failure of Abenomics to overhaul Japanese corporate culture. They may need to cut their losses and stick with markets where there's less push-back and competition, like Australia, or cash-hungry tech startups in China. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net