Cerberus Failure to Win Seibu Seats Shows Japan Challenge

Cerberus Capital Management LP, the biggest shareholder of Seibu Holdings Inc., failed to get its representatives appointed to the Japanese hotel operator’s board, highlighting the challenges overseas investors face in the world’s third-biggest economy.

New York-based Cerberus, which raised its stake in Seibu to 35.5 percent last month, had all its eight director candidates turned down by shareholders yesterday, after Seibu President Takashi Goto vowed no concessions to the fund that helped bail out the company in 2006.

The private-equity firm, which said it is aiming to help improve Seibu’s profitability, is the latest overseas fund that failed to win board seats in a Japanese company after T. Boone Pickens, Christopher Cooper-Hohn’s Children’s Investment Fund Management UK LLP and Warren Lichtenstein’s Steel Partners suffered setbacks in the past. Seibu was backed by investors such as Yoshiaki Tsutsumi, once the world’s richest man, who support the company’s management.

“These guys aren’t the first overseas investors to come here to Japan and be disappointed,” said Yuuki Sakurai, chief executive officer of Fukoku Capital Management Inc., which manages about $19 billion. “They miscalculated from beginning to end.”

Record Long Meeting

Cerberus had recommended Dan Quayle, former U.S. Vice President, John Snow, former U.S. Treasury Secretary, and six others become directors at the unlisted company. The plan was blocked by investors at Seibu’s annual shareholder meeting near Tokyo, which lasted a record four hours and 50 minutes. The shareholders elected the four directors proposed by Seibu.

The fund’s representatives won 39.8 percent of the votes cast, while the hotel operator’s nominees all won at least 59 percent of the vote, according to a statement from Seibu today.

The fund, which oversees more than $20 billion in investments, announced a tender offer in March to increase its stake in Seibu from 32.4 percent to boost its commitment to the company. A month later Cerberus said it would increase the maximum amount of shares it could buy and extended the offer.

“The various players would have benefited from more consideration and training, at many levels, about how to foster a collaborative board that truly considers the needs of all stakeholders,” said Nicholas Benes, a representative director of The Board Director Training Institute of Japan. “This particular event probably says more about the unique history of this company than the overall trend of corporate governance in Japan, which, in general, is improving.”

‘Exactly Contrary’

Cerberus’s failure comes at a time when Japan Prime Minister Shinzo Abe seeks to reform company boards. Abe plans to require companies to have at least one outside director as he aims to double foreign direct investment in Japan to 35 trillion yen ($359 billion) by 2020. Billionaire investor Daniel Loeb is also trying to force change at Sony Corp.

“We think this posture is exactly contrary to the spirit and practice of Abenomics,” Louis J. Forster, a senior managing director at Cerberus, told reporters in Tokorozawa, near Tokyo, after the meeting. “They took a very hostile approach. Seibu is a big company and is a great company and can do much better.”

In addition to Quayle, chairman of Cerberus Global Investments, and Snow, Cerberus had recommended directors including Hirofumi Gomi, a former commissioner of Japan’s Financial Services Agency, Yuji Shirakawa, former chairman of Citigroup Global Markets Japan Inc., and Forster.

Chrysler Stake

Stephen A. Feinberg’s fund has spent about 120 billion yen building its stake in Seibu, which was delisted from Tokyo’s stock exchange in 2004 for breaking exchange rules by misstating stakes. In comparison, Cerberus spent $7.4 billion to buy an 80.1 percent stake in Chrysler LLC in 2007.

Cerberus in 2006 led a bailout of Seibu, the seventh-largest railway operator in the Tokyo area, with Nikko Principal Investments Japan Ltd. Cerberus had said it’s willing to wait as long as three years for an initial public offering of Seibu, while the Japanese company said it’s already “financially prepared.”

During yesterday’s meeting, Seibu’s Goto confirmed his opposition to the Cerberus plan. A total of 940 shareholders attended the event, compared with 363 last year.

The outcome of the meeting is “good for Seibu in the medium to long term,” Goto said. “We want to get ourselves into a good position to list. We believe Cerberus wants the same thing.”

Seibu’s current business strategy was backed by Tsutsumi, who holds 36 percent of Seibu’s second-largest shareholder NW Corp. The investor amassed a $16 billion personal fortune while at the helm of Seibu and was named the world’s richest man by Forbes magazine in 1990.

“With Abenomics, the spotlight is back on the Japanese market,” said Kengo Nishiyama, senior strategist at Nomura Holdings Inc. in Tokyo. “I expect more of these kinds of proposals to be made by foreign funds and the focus would be how Japanese companies would react to those proposals.”