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Business deals

Coronavirus curbs Japan's appetite for corporate dealmaking

Further decline in M&As feared after value plunges in first three months of year

Seven and i Holdings withdrew its bid for the Speedway chain of gas stations in March, as Japanese companies reined back overseas deals in the first quarter. (Source photo by Keiichiro Sato and AP) 

TOKYO -- Corporate Japan is reining in investment as the coronavirus spreads worldwide, driving first quarter merger and acquisition deals to decline for the first time in three years.

The value of deals struck by Japanese companies fell 42% in in the three months through to the end of March compared with the same period a year ago, according to data from Tokyo-based M&A consultancy Recof. The number of deals fell 4.5% to 978 year-on-year.

Large-scale acquisitions -- those with a transaction value of more than 100 billion yen ($918 million) -- dried up completely in the first quarter, according to Recof, after nine such deals in the same quarter of 2019. The overall number of overseas acquisitions fell 7.8% to 190 while domestic deals also dropped about 1% to record 746.

Ritsuko Nonomiya, managing director at global M&A advisory GCA Advisors, said she expected a further slowdown in acquisitions as businesses adjust to the uncertainty caused by the coronavirus pandemic. "Companies will be much more focused on protecting their balance sheets and employees," she said. "Investors want that too. They want safety and liquidity, not investments right now."

Companies have been exposed to disruptions in their supply chains with business landscapes being altered while border control and lockdowns threaten economic fallout.

Last week, Kobe Steel announced it would delay plans to transfer parts of its copper tube business assets to investment fund CTJ Holdings, citing market uncertainty caused by the coronavirus. The transaction, initially slated for completion on March 31, will be postponed three months until June 30.

Japanese retail giant Seven & i Holdings also dropped its plan to purchase U.S. gas station chain Speedway at the beginning of March. The retail group was worried about the estimated $22 billion price, and Nikkei also reported that concerns about a global economic downturn due to the coronavirus played a part in the decision.

Corporate governance reforms, combined with a shrinking and ageing domestic market, have spurred Japanese companies to accelerate strategic investments, including foreign acquisitions, in recent years.

"In the last few years, Japanese companies had shifted away from focusing on repaying debt to increasing investments related to long-term business strategy," said Katsuyuki Nakai, a primary credit analyst at S&P Global Rating Japan. As financial burdens related to the coronavirus impact emerge, "there could be pressure to scale-down growth investment plans and management's focal point could turn to financial security," he added.

Steven Cochrane, managing director of Moody's Analytics, said Japan's growth rate will likely remain weak because of the shrinking labor force and graying society. "Japanese companies will have to look globally for growth," he said. "Right now firms are in a period of reassessment but in the end, it will be difficult to stay solely in Japan and hold on cash with no returns."

Nonomiya at GCA Advisors said: "Companies will begin to think about proper portfolio management, which could lead to an acceleration in really meaningful M&As once the coronavirus crisis subsides." 

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