RPT-BREAKINGVIEWS-KKR-Bain standoff tests Japan’s buyout patience

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates in the fifth and sixth paragraph, and context news, to reflect KKR’s raised offer on Tuesday.

By Hudson Lockett

HONG KONG, Feb 4 (Reuters Breakingviews) - Missteps were inevitable in Japan’s fledgling M&A trade as foreign investors and listed companies work out best practices. But the slow grind between U.S. private equity rivals KKR KKR.N and Bain Capital for Fuji Soft 9749.T, a $4 billion IT firm with chunky real estate assets, is anathema to Tokyo’s desire for efficient value-creating deals. The longer it drags on, the more it risks damaging foreign investors' reputations.

The last six months have seen a preponderance of left feet and crushed toes. The first surprise came from Bain in September, when it floated a non-binding offer, about 5% above a binding one from KKR of 8,880 yen per share. Bain cast itself as a white knight and conditioned its promises to firm up a bid on a recommendation from Fuji Soft’s board.

Fuji Soft's special committee demurred and stuck by KKR, who took the unusual move of splitting its tender offer into two successive parts. That allowed it to snap up a 34% stake from activist investors including 3D Investment Partners, who first solicited buyout offers in 2023.

The plan was perhaps too clever by half, however. KKR bagged enough shares to block any rival takeover but is left holding a minority stake in a publicly listed company, a position through which it can't add much value. KKR subsequently raised both parts of its offer to 9,451 yen. Nonetheless, unconvinced investors have forced the buyout firm to extend the second tender offer three times, with the latest ending on Feb. 7.

In a fresh attempt to draw a line under the saga, KKR raised its offer again on Tuesday to 9,850 yen per share, taking the price only 11% above its initial bid and less than 3% above Bain’s latest proposal.

For now, Fuji Soft shares are trading slightly above the best bid but there is also a time value to money. Japanese regulators ought to consider how they can hasten M&A proceedings and whether introducing something akin to the UK's "put up or shut up rule" might help to give targets more certainty. It was only a decade ago that foreign private equity groups were seen as vultures, and one protracted messy deal could be a setback for everybody.

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CONTEXT NEWS

U.S. private equity group KKR on Feb. 4 raised its offer price for Fuji Soft to 9,850 yen per share. The deadline for investors in the Japanese IT company to tender their shares is Feb. 7. The stock closed at 9,990 yen in Tokyo following the announcement.

KKR has extended its deadline for the offer three times in just over a month. The offer values the company's equity at about $4 billion. KKR picked up its existing 34% stake in Fuji Soft in the first tender offer, which closed in November.

Rival Bain Capital announced on Dec. 18 that it would pursue a take-private of Fuji Soft at 9,600 yen per share even without management's support. The two buyout firms have been sparring over the company since KKR first announced its binding offer at 8,800 per share in August.

Activist 3D Investment Partners kicked off a sale process for Fuji Soft roughly a year earlier by soliciting take-private proposals and submitting them to the company's board.