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Maeda Road hikes dividend sixfold to fend off hostile bid

Japanese builder willing to unload $480m in cash as last-ditch defense

Street repairs in Tokyo: Maeda Road is trying to block a hostile bid from its top shareholder.   © Reuters

TOKYO -- Japan's Maeda Road Construction aims to spend 53.5 billion yen ($484 million) to pay an extra dividend more than six times the previously planned amount -- a surprise move meant to block top shareholder Maeda Corp.'s hostile takeover bid.

The special dividend of 650 yen per share, announced Thursday, would come on top of the regular dividend of 100 yen to be paid out at the fiscal year-end in March.

The total payout, which would be equivalent to nearly 20% of the company's market value, was not the first choice for a company whose large pile of idle cash had drawn attention. But management's thinking changed abruptly a week ago after its search for a white knight proved fruitless.

That is when a hoped-for bidder operating in the construction and real estate industries backed away from a rescue that was seen as "too expensive," according to a Maeda Road executive, who described the shock of the phone call.

The takeover drama began Jan. 20, when midsize construction group Maeda Corp., which owns about 23% of Maeda Road, said it aimed to lift its stake to 51% through a tender offer of 3,950 yen per share. That represented a 50% premium to the share price at the time.

Maeda Road immediately opposed the bid, saying it lacked clear synergies, and began searching for a partner that could make a counteroffer.

Multiple candidates across a broad range of industries, including foreign investment funds, were approached. Maeda Road even considered allowing a full takeover, but that proposal was opposed by the labor union.

"We were willing to become a subsidiary, as long as there are synergies," said a Maeda Road executive.

The road builder finally found a potential white knight willing to beat the hostile bid and take a roughly 30% stake, but the talks fell through in mid-February.

Maeda Road decided to settle on an escape clause provided by Maeda Corp.: the takeover bid would be withdrawn if the target pays out a dividend equivalent to more than 10% of its net assets. Takeover bids typically contain such language. 

The proposed payout would amount to roughly 60% of the 85 billion yen in funds on hand reported by Maeda Road at the end of December. Maeda Road will hold an extraordinary shareholders meeting April 14 to seek approval for the move.

Maeda Corp. described Maeda Road's decision as "extremely regrettable" in a comment released Thursday. A Maeda Corp. representative declined to reveal how the company will respond at this point.

This drastic step mirrors the "crown jewel" takeover defense, in which the target sells off its most valuable assets with the intent of dissuading an unwanted bidder. When South Korea's Samsung Electronics made an unsolicited play for SanDisk in 2008, the U.S. memory chip maker transferred part of its production capacity to Japanese partner Toshiba. Samsung later withdrew its offer.

Maeda Road's uncommon response to an unusual Japanese-on-Japanese hostile bid raised eyebrows. "Would they really go this far?" asked a source close to Maeda Road.

Yushiro Chemical Industry and dye maker Sotoh successfully used this tactic after U.S. investment firm Steel Partners Japan Strategic Fund announced hostile bids for both targets in 2003. The two companies had copious amounts of retained earnings, but were reluctant to spend them on investments and shareholder rewards.

The stock prices of Yushiro and Sotoh jumped as a result of the payouts. "The real winner was the fund that extracted the extra dividends," said one market watcher.

Maeda Road has faced the same criticism over its use of cash. In the previous financial year, the company's return on equity was only about half of the 10%-plus peak recorded in fiscal 2015. Ironically, its last-ditch effort to stave off a hostile takeover would sharply boost ROE.

Hong Kong-based fund Oasis Management, an investor in both Maeda Road and Maeda Corp., has urged them to reexamine their capital ties. Big cross-shareholdings between listed companies are seen as an inefficient use of capital. The fund has called on Maeda Road to improve shareholder returns, apparently with an eye to company's idle cash.

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