TOKYO -- Japanese gym operator Rizap Group is halting mergers and acquisitions, it said Wednesday, as an aggressive diversification effort leaves it with the prospect of a 7 billion yen ($61.5 million) net loss for the year ending in March.
After the news of the projected net loss, Rizap shares drew a flood of sell orders on the Sapporo Securities Exchange's Ambitious market on Thursday, hitting limit-down.
The group, which counts 85 companies on its consolidated balance sheet as of this month and employs about 7,000 people, is also considering withdrawing from underperforming segments as it shifts its focus to profitability.
The process of rebuilding some subsidiaries that were expected to turn profitable in two to three years has fallen short of hoped-for results. The company will have to book losses of 15.5 billion yen for the full year related to straightening out unprofitable businesses.
For the six months through September, Rizap suffered a net loss of 8.5 billion yen under International Financial Reporting Standards as it logged losses in units such as Pado, which circulates free daily newspapers, and CD and video game retailer Wonder.
Though the group has a capital-to-asset ratio of 26.5% thanks to fundraising moves including a public stock offering this summer, it shelved plans for a year-end dividend of 5.73 yen per share, meaning there will likely be no payout this fiscal year.
Chairman and CEO Takeshi Seto will voluntarily return his executive compensation for the year through March 2019 to clarify management responsibility, and will continue returning his pay until group operating profit climbs back above 23 billion yen, the company's original forecast for fiscal 2018.
The company will concentrate management resources in areas like its core Rizap-brand personal-fitness gyms and English conversation schools, which continue to expand and increase profit.
Rizap has snapped up businesses in fields from apparel to daily goods that, in Seto's words, are "linked to self-actualization, just like one's diet." It was hoped that these acquisitions could provide mutual benefits with the core gym business through product development and the ability to refer customers to other group companies.
But now, the group will "discuss actively curtailing, withdrawing from and selling businesses with few prospects for group synergy," Seto told reporters Wednesday at a news conference.
This about-face will leave Rizap unable to take advantage of an accounting tactic that had greatly boosted profit on paper.
When it paid a purchase price for a company that was less than the value of that company's net assets at the time, Rizap could book the difference as profit -- known as "negative goodwill," a reversal of the goodwill generated when a purchaser pays above ticket price. Negative goodwill contributed about 60% of last fiscal year's 13.56 billion yen operating profit as Rizap focused its purchases on struggling and money-losing companies.
Rizap started incorporating negative goodwill into earnings forecasts "about two years ago," said Seto. Its initial outlook for the present fiscal year had included negative goodwill regardless of whether the purchases in question had actually taken place. Now, with M&A frozen, that avenue has been closed off, subtracting over 10 billion yen from profit.
The company's perhaps hasty rush to bulk up undeniably made it harder for management to exert control, and Rizap now aims to strengthen involvement at subsidiaries. "We shifted control away from the center, but that ended up creating neglect," Seto said.
Overseeing the group's reform effort will be the former CEO of snack company Calbee, Akira Matsumoto, who helped steer the once-struggling potato chip maker into profitability. He joined Rizap's management team in June.
At the Wednesday news conference announcing the changes, Matsumoto likened Rizap to a "toy box with a few broken toys that have to be fixed."
"I asked Mr. Seto if he was prepared for the pain that would come with reforms, and he said yes," Matsumoto continued, stressing Rizap's commitment to improving governance.
In October, Matsumoto was shifted to a post heading up the restructuring effort from his prior position as chief operating officer, a move the former Calbee executive said was made with an eye to removing layers from the decision-making process and making management nimbler. He downplayed concerns that his urgent push for reform would cause friction with executives at subsidiaries and impede management, saying "there is opposition, but it's healthy opposition."
"We should narrow down our business territory," Matsumoto told Nikkei in a recent interview. "We need to prioritize companies by their impact on earnings and handle them in order." Wonder, with annual revenue of about 70 billion yen, will likely be a top target for restructuring.