BREAKINGVIEWS-Toyota $19 bln stock unwind can tick many boxes

By Katrina Hamlin

HONG KONG, March 5 (Reuters Breakingviews) - A mega buyback could make a lot of sense for Toyota Motor 7203.T. The potential 3 trillion yen ($19 billion) share unwind, which Reuters reported on Thursday, citing sources, would be a modest step towards a punchy 20% return-on-equity target and would enhance corporate governance. It might help incoming CEO Kenta Kon win over more minority investors, too.

The transaction involves banks and insurers selling shares, the report says. While Toyota plans to repurchase stock, it may allow other investors to buy instead.

Either is encouraging for corporate governance reformers pushing Japan Inc to unravel strategic shareholdings – stock held by a company to support business relationships, sometimes involving reciprocal stakes. While Toyota is the country's largest listed company, it isn't always a governance role model: the carmaker was slow to answer the Tokyo Stock Exchange's call to disclose strategies to enhance capital efficiency, for example.

A buyback is best. Although Japanese business etiquette dictates sellers secure Toyota's blessing, actively buying back shares merits extra credit, especially given the scale: it would be equivalent to more than the sum of the company's stock repurchases in the five years to the end of March 2025, and 6.5% of its roughly $290 billion market cap.

Minority investors would win as well: fewer fellow shareholders would have a vested interest in siding with management, and the initial unwinding may facilitate Toyota unloading reciprocal stakes, freeing up capital. The company and the market should both benefit from unlocking liquidity.

Toyota Motor can afford it. Its auto unit had 18 trillion yen ($11 billion) in total liquid assets as of December, despite tariff-related costs and investments in new technology. Cancelling shares after repurchasing them would also help a tad with its ambitious target of almost doubling ROE to 20%. While its current 11%, based on 2027 earnings estimates, bests local peers, it lags rivals General Motors GM.N, Ford Motor F.N and BYD 002594.SZ, per Visible Alpha.

There is more to do. Japanese financial institutions hold strategic stakes in Toyota equivalent to 11% of its market capitalisation, Bernstein analysts reckon. Toyota’s strategic holdings in listed companies ticked up to 8.9% of consolidated net assets as of September, after years of decline, according to its integrated report, released on Friday. That leaves room for improvement, though it’s not one of the worst offenders: at MS&AD Insurance 8725.T and Kyocera 6971.T, for example, such investments constituted half or more of net assets last year, per Goldman Sachs.

Early progress may help Kon counter concerns around his role as an architect in the controversial Toyota Industries 6201.T deal, which substantially undervalued the target and disenfranchised minority investors. But it leaves ample room to make his mark.

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CONTEXT NEWS

Toyota Motor plans a large-scale unwinding of strategic shareholdings that would involve banks and insurance firms selling around $19 billion in shares, Reuters reported on February 26, citing two unnamed sources.

Although the sale will probably total around 3 trillion yen ($19 billion), it could be larger depending on the willingness of shareholders to sell, the sources said.

It aims to acquire shares through buybacks, the sources said. A secondary sale to other investors has also emerged as an option, another of the sources said.