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Business deals

Itochu purchase marks Japanese hostile-takeover milestone

Trading house amasses 40% stake in sportswear company Descente

Itochu has criticized Descente for not expanding its Chinese business fast enough to capitalize on the 2022 Winter Olympics in Beijing.

TOKYO -- Trading conglomerate Itochu appears to have acquired enough shares in sportswear maker Descente to complete what is seen as the first successful hostile takeover between major Japanese companies.

Itochu looks to have secured the 40% target stake in Descente -- up from about 30% -- as of Thursday's closing date for the tender offer. The trading company offered a 50% premium over Descente stock's Jan. 30 closing price, more than the typical 20% to 30%. It drew a response of nearly twice the shares sought, a knowledgeable source said. An announcement is expected Friday.

The stake of more than one-third will give Itochu veto power over acquisitions and other key shareholder proposals. The company will also have a greater say in nominating board members, who require simple majorities to be appointed.

Taking into account attendance rates at Descente shareholders meetings, board nominees would need only 45% of the vote. Ding Shizhong, chairman and CEO of China's Anta Sports Products, owns nearly 7% of Descente with his family. This stake would lift Itochu over the threshold, and Ding has told Nikkei that he supports the Japanese group.

The focus now shifts to the future of Descente President Masatoshi Ishimoto.

Descente's 10-member board has two outside directors and two directors from Itochu, with the other six appointed by Descente. Itochu and Descente representatives have met privately four times since the Jan. 31 launch of Itochu's tender offer to negotiate on the board's future makeup. Itochu wanted more of its own appointees, but Descente pitched more outside directors -- a prospect that would dilute Itochu's influence.

The two sides reportedly reached a compromise at one point where Ishimoto would resign and Itochu would install Shuichi Koseki, a senior managing executive officer who is president of Itochu's textile business. Descente ultimately decided against this in later internal discussions, with executives reasoning that another outside director should be seated.

But the "lost compromise" in which Ishimoto himself was prepared to step down will set the stage for later talks. The mood inside Descente is resigned toward his exit, an executive reports. "The question of who will be at the top is not that much of a problem," the source said.

Itochu's determination to strengthen its grip may seem puzzling. Its textile segment's roughly 30 billion yen ($268 million) annual net profit will not get much of a boost from Descente's 2 billion yen-plus contribution. Against the trading house's projected 500 billion yen net profit groupwide for this fiscal year, the numbers appear small.

But Itochu started out in textiles, and Chairman and CEO Masahiro Okafuji rose through the ranks in those operations. Meanwhile, Japan's apparel market is trending smaller, a potential blow to one of Itochu's few competitive fields. Descente specializes in "athleisure" -- casualwear designed for both exercise and everyday use. The company's Mizusawa Down jacket brand has also taken off.

Demand tied to the 2020 Summer Olympics in Tokyo and the 2022 Winter Olympics in Beijing is anticipated for Asia. On the other hand, Itochu has complained that Descente was in little rush to expand Chinese operations. Itochu believes that Descente can no longer stall on building operations to expand sales of winter sportswear that would be ready by 2022.

Itochu sees the decision-making process at Descente's board as an impediment to change. Any additional outside directors risk further slowing things down, in Itochu's view.

The trading house will explore a formal request to open an extraordinary shareholders meeting, where it will submit proposals to replace board members. The likelihood is great that Itochu will redraw Descente's board. But 1,040 employees at Descente, nearly 90% of its Japanese workforce, have signed their names in opposition to the takeover.

Winning the naysayers over will likely require Itochu to lay out how the new management team will contribute to Descente's growth. "Even if the executives are switched out, the company itself is not going to change," an executive at the trading house said.

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