Problems at overseas subsidiaries eat at Hitachi
Japanese conglomerate in legal fight with foreign activist shareholder
YUSUKE MATSUZAKI, Nikkei senior staff writer
TOKYO -- Hitachi has been trying to resolve the problem of a parent and subsidiary listing their stocks together in the stock market, but the Japanese electronics maker has been troubled by its Italian unit.
U.S. hedge fund Elliot Management, known as an activist shareholder, acquired a 30% stake in Italian railway signal maker Ansaldo STS, in which Hitachi has a 51% stake, to become a top shareholder. Ansaldo's board is now divided into six directors picked by Hitachi and three picked by Elliot.
Hitachi acquired a 40% stake in Ansaldo from Italian defense group Finmeccanica at 9.5 euros ($10.38 at current rates) per share in 2015. Hitachi launched a takeover bid at the same price to increase its holdings.
Elliot responded by buying shares, assuming fair value of 13 euros per share, in an effort to prevent Hitachi from purchasing additional shares. Hitachi later managed to buy additional shares at 10.5 euros each, bringing its stake to 51%.
Elliot, a minority shareholder, has criticized Hitachi and Finmeccanica of colluding. The hedge fund reckons that Hitachi lowering of the share price of profitable Ansaldo in exchange of taking over the money-losing railway manufacturer. Elliot argues that in the eyes of shareholders other than Finmeccanica, Ansaldo's share price was set artificially low.
Italy's market watchdog Consob concluded that Hitachi and Finmeccanica had colluded to keep the price artificially low, and ordered Hitachi to raise its first takeover price to 9.899 euros.
Alistair Dormer, executive officer of Hitachi Rail, denied collusion allegations by saying that Hitachi has acquired the railway manufacturer to secure production capacity. The Japanese conglomerate said turning the railway manufacturer around without acquiring unnecessary plants and taking over unprofitable contracts is the evidence of a fair deal.
Hitachi filed a complaint to the Italian court last year to reverse the administrative punishment. The Italian court is referring to the European Court of Justice whether the punishment is legal or not under EU law.
It is expected to take one to two years before judicial decision is made. Elliot argues that the fair value, which was 13 euros 18 months ago, could have become even higher. Elliot is committed to remaining Ansaldo's shareholder regardless of judicial decision, unless Ansaldo shares are purchased at high prices.
Hitachi, which only holds a 51% stake, would not be free to make a strategic decisions, say, on takeover bid. That is what Elliot is counting on.
"If Hitachi wants to maximize the synergy effect of the acquisition, it should discuss the future with minority shareholders even before the judicial decision is made," said Elliot's fund manager Giorgio Furlani.
Meanwhile, Dormer of Hitachi stands pat on his idea that there has been a sufficient synergy.
Hitachi's rail business was drawn into a seemingly endless fight when it would have otherwise sought growth. U.S. attorney Stephen Givens, who is familiar with shareholder activism, said Hitachi is the victim of Elliot's unreasonable demands, but it was not fully aware of the risk of having foreign minority shareholders.
Activist shareholders are rapidly raising surplus funds. Many companies could face the issue brought by their listed subsidiaries, which could be nastier overseas than at home.