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Business deals

Mitsubishi Heavy wraps up Mitsui warship deal and hunts for more

Consolidation leaves Japan with three naval shipbuilders

Mitsui E&S launched the submarine-hunting surveillance ship Aki last year. (Photo via Japan's Ministry of Defense)

TOKYO -- Mitsubishi Heavy Industries on Monday announced an agreement to acquire the foundering naval and government shipbuilding operations of compatriot Mitsui E&S Holdings, and signaled that it is hungry for more.

The acquisition, estimated at 5 billion yen ($46 million), will give Japan's largest defense contractor a 54% share of the country's market for naval vessels. Mitsubishi Heavy will take over Mitsui E&S's Tamano Works, where Japan's latest submarine-hunting ship was launched last year, along with about 400 of the 700 workers employed there. The transaction is slated for completion in October.

The consolidation will leave Japan with just three naval shipbuilders -- Mitsubishi Heavy, Japan Marine United and Kawasaki Heavy Industries -- in a tough environment for the country's defense sector.

A 2006 switch to open competitive bidding for defense contracts cut into profitability as companies competed fiercely for orders. A recent increase in imports through the U.S. Foreign Military Sales program under previous President Donald Trump's administration has further eroded business.

"We'll respond by taking on" other companies' defense operations, Mitsubishi Heavy President Seiji Izumisawa said in a news conference announcing the Mitsui E&S deal.

The purchase marks the first realignment among Japanese warship builders since IHI and JFE Holdings merged their shipbuilding operations in 2013 to create Japan Marine United. It was driven not only by weakness in the defense sector, but also by recent Chinese and South Korean competition for commercial ship orders.

"Orders for naval ships have their ups and downs, and market conditions have been rough for the commercial vessels that we had used to fill the gap when there was no demand," Mitsui E&S President Ryoichi Oka said.

The company's naval ship operations brought in about 37.5 billion yen in revenue for the fiscal year ended March 2020. Its shipbuilding segment, which includes commercial vessels, is expected to report a sixth straight year of operating losses for fiscal 2020, and is struggling to afford to keep its workers employed.

Meanwhile, Mitsubishi Heavy is expected to report about 500 billion yen in annual revenue for its aircraft, defense and space segment.

The two companies have complementary shipbuilding specialties -- destroyers for Mitsubishi Heavy and supply and patrol vessels for Mitsui E&S.

"By expanding our lineup, we will strengthen the foundation of our business and fulfill our responsibility in maritime security," Izumisawa said.

Mitsubishi Heavy aims to grow sales in its defense and space segment by 10% to 20% in as little as five years.

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