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Business deals

Itochu tender offer for sportswear affiliate raises stakes in feud

Hefty 50% premium reflects desire to shape Descente's management

Itochu's tender offer for Descente shares carries a 50% premium on the stock price, prompting one analyst to question the "economic rationality" of the offer.

TOKYO -- Itochu initiated a tender offer Thursday for shares in sportswear affiliate Descente with an unusually high 50% premium on the price, as the Japanese trading house seeks greater influence over the company's management amid an escalating feud between the two sides.

Itochu's offer of 2,800 yen per share lasts through March 14 and compares with Descente's closing price of 1,871 yen Wednesday. The trading house owns a roughly 30% stake in the sportswear company and looks to reach a maximum of 40%. A stake of more than one-third would let Itochu vote down resolutions on key matters.

The nature of the bid reflects the frayed relations between the two companies. "This announcement was made unilaterally, with no prior notification to our board of directors nor any opportunity for advance consultation," Descente said. The Osaka-based company said it would refrain from expressing an opinion at this time.

Masatoshi Ishimoto, the president of Descente and a member of the founding family, has said he also was not informed when Itochu moved in October to increase its shareholdings.

Itochu decided on the tender offer after receiving what it calls an unacceptable proposal from Descente in November for a management buyout, senior managing executive officer Shuichi Koseki, head of Itochu's textile operations, told reporters in Osaka on Thursday. The buyout involved borrowing to take Descente private, according to Itochu.

"It's impossible to accept a proposal that would leave the company immersed in debt and let the management team stay on," Koseki said.

Itochu has objected to Descente's heavy reliance on its South Korean business, urging it to seek revenue growth in other markets including Japan and China, but the company "has yet to demonstrate that it has the intention to sincerely consider such demand," the trading house said in its statement announcing the tender offer.

Itochu intends to discuss developing Descente's operations in China -- a strong point for the trading house -- and other plans after completing the tender offer, along with any changes to the management team.

Asked whether the trading house will push for Ishimoto's resignation, Koseki said the plan remains a "blank sheet of paper" at this point. But if Descente shows no sign of cooperation, he said, Itochu would bring its proposals to the general shareholders meeting.

Premiums for tender offers are usually in the 20% to 30% range. Descente's stock price soared 21% on Thursday to 2,271 yen.

"Given [Descente's] current profit levels, we cannot erase doubts about the economic rationality of the tender offer," said Akira Morimoto, a senior analyst at SMBC Nikko Securities.

Descente contributes less than 2 billion yen ($18.3 million) in profit annually to Itochu, whose net profit tops 400 billion yen. A source close to the matter says Itochu's fixation on Descente involves "a sense that the company repaid kindness with ingratitude" despite repeated support.

Descente fell into financial difficulties in 1984 and 1998, and Itochu offered a helping hand both times. In the latter case, around the time that Descente lost a hefty source of earnings with the end of a licensing contract with German company Adidas, Itochu helped set up joint venture Nautica Japan in an effort to expand Descente's operations. Current Itochu Chairman and CEO Masahiro Okafuji headed that venture as president.

But in 2013, Descente appointed Ishimoto as its president "without giving any prior notice to the directors who had been dispatched from Itochu," the trading house said in its statement.

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