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Itochu-Descente feud escalates into full-blown takeover war

Sportswear company urges stockholders to reject trading house's tender offer

Sportswear maker Descente said it had little recourse but to hope as few people as possible accepted Itochu's tender offer for its shares. (Photos by Kento Awashima, left, and Keiichiro Sato, right)
Sportswear maker Descente said it had little recourse but to hope as few people as possible accepted Itochu's tender offer for its shares. (Photos by Kento Awashima, left, and Keiichiro Sato, right)

TOKYO -- Japanese sportswear company Descente announced its opposition Thursday to what it called a "strong-arming" tender offer by its top shareholder, trading house Itochu, escalating their long-simmering tensions into a seldom-seen case of an attempted hostile takeover in Japan.

In a 13-page response to Itochu's tender offer revealed on Jan. 31, Descente said it had little recourse to defend itself.

The trading house's attempt to increase its stake is inconsiderate to shareholders as a whole, Descente director and managing executive officer Kenichi Tsujimoto told reporters in Osaka, with "only a certain number will be able to sell for the premium price." He urged shareholders to reject the offer.

Such possible defensive measures as a management buyout are not under consideration, Tsujimoto said. "We're hoping that as few people as possible" take Itochu's bait, he said.

An Itochu spokesperson said the trading house will "just proceed quietly and according to the rules" with its tender offer.

The trading house seeks to enlarge its interest in Descente to about 40% from just over 30% via an offer through March 14, paying 2,800 yen ($25.50) per share. The roughly 50% premium over the sportswear company's share price at the time is unusually high compared with typical tender offer premiums of around 30%.

Many market watchers view Itochu's offer as "clearly overpriced from a profit standpoint," as a Japanese securities analyst put it. Descente shares closed Thursday at 2,638 yen -- up 40% from when just before Itochu announced the bid.

The two companies have been at odds over Descente's exposure to the South Korean market, which accounts for about half its sales, as well as its overall direction.

Descente claimed in Thursday's announcement that it is "already implementing" management decisions suggested by Itochu. But it has not put forth a new strategy bold enough to change the minds of shareholders hoping to score Itochu's premium-boosted offer.

The hoped-for 40% stake would let Itochu vote down certain key management decisions but still fall short of an outright majority, meaning continued clashes even if the tender offer succeeds.

The next battleground will likely be the makeup of Descente's management structure -- a matter on which changes need approval from a shareholders meeting. The sportswear company has proposed that it have one internal and four external directors on its board, for five in all, a move it says will increase transparency. Itochu is weighing a proposal to have two directors each from Descente, Itochu and outside, for a total of six.

If the standoff continues, a proxy fight for a majority of shareholder support could develop. Itochu would likely be able to count on Chinese sportswear maker Anta Sports Products, which has deep ties with the trading house and holds a 7% stake in Descente through an asset manager -- enough to put Itochu within spitting distance of a majority vote if it reaches its 40% target.

Though the combatants' hostilities over the tender offer and Descente's management structure will eventually end, serious contention over governance persists.

Descente said in Thursday's announcement that before 2013 -- when the sportswear maker installed a member of its founding family as president after a string of Itochu-appointed leaders -- the trading house had forced its way between Descente and clients in order to hit goals for expanding business between the two companies. It expressed opposition to having its management steered by Itochu.

Itochu, for its part, has said the sportswear maker's current leadership behaved improperly in launching a tie-up last year with underwear maker Wacoal Holdings without advance notice to directors from the trading house.

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