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Sovereign fund inflow morphing Mitsubishi Motors into blue chip?

TOKYO -- In a sure sign that Mitsubishi Motors is returning to health, big investors that previously steered clear of what they regarded as a non-investable stock have flocked to its latest share offering.

   Sovereign wealth funds in Singapore and the Middle East are among those that have purchased stock in the Japanese automaker through the public offering, according to several sources familiar with the matter. The issuance is designed to raise funds so Mitsubishi Motors can buy back and retire all its preferred shares -- amounting to 380 billion yen ($3.7 billion) -- held by other firms in the Mitsubishi group that bailed it out a decade ago.

   Mitsubishi Motors has sharply improved earnings, as it expects a second straight year of record profit on the back of a weak yen and robust sales in Southeast Asia. But the massive amount of preferred shares, along with a speculative-grade rating on the stock, have kept sovereign funds and other foreign investors at bay. The story may change now that the company is working to clean up the preferred stock. Rating and Information Inc. said on Jan. 8 it may upgrade the rating by at least one notch after the offering, a move that brings Mitsubishi Motors a step closer to attaining investment-grade status.

Good news keeps coming

The company stands to raise up to 270 billion yen from the share sale, based on an issuance price of 1,120 yen each set last Wednesday, far larger than the 210 billion yen projected when it announced the capital restructuring plan in November.

   To maintain a certain level of influence in the carmaker's management, Mitsubishi Heavy Industries and two other Mitsubishi firms that hold preferred shares planned to keep their voting rights at 34%. But with the larger-than-expected public offering amount, more preferred shares will need to be converted into common stock to maintain the three affiliates' combined stake.

   This will effectively reduce Mitsubishi Motors' preferred stock buyback burden, leaving it with up to 86 billion yen in funds it can use freely. Moreover, it has a shot at achieving a 30% capital ratio for the first time since it went public in 1988, should it achieve its 100 billion yen net profit forecast for the year ending March 31, combined with the 86 billion yen windfall.

   The company initially allotted 25% of the stock offering for foreigners, but later increased the figure to 30% due to strong demand. "Currently, the scope of our investors is limited (to individual investors). We want powerful overseas institutional investors to buy shares and help expand our shareholder base," said Executive Vice President Hiizu Ichikawa at an extraordinary shareholders meeting at the end of last year, explaining the importance of retiring preferred shares.

   Frequent investor relations presentations overseas, led by President Osamu Masuko and other executives, to showcase the company's growth strategy seem to have helped drum up interest among foreigners.

Broader investor base comes with caveats

Until now, Mitsubishi Motors has only had to answer to sister companies in the Mitsubishi group and retail investors. Now, it will need to face foreign institutions and other meticulous investors that scrutinize capital efficiency and other details. "The pressure on our management will vastly increase," says a midlevel executive at Mitsubishi Motors.

   In terms of capital partnership, Mitsubishi Motors doesn't belong to any big auto group such as Toyota and Volkswagen. Its global sales of roughly 1 million units ranks it 17th. Some institutional investors that bought shares through the latest offering "did so in anticipation of a future consolidation in this sector," says an official at a brokerage.

   President Masuko has denied that the company is seeking a capital alliance with other firms. But to be independent at its current size, Mitsubishi Motors will need to set itself clearly apart from the competition.

   The focus then shifts to how the company will use the extra money it raises from the offering. Though it has to pay around 10 billion yen in brokerage commission fees, it still should have access to cash on a par with the 80 billion yen it earmarked for this fiscal year's capital spending. Foreign investors may well pressure the company for credible explanations of how it will invest the money to further strengthen its strong suits, such as a plug-in hybrid.

   Finally freed from a decade-long burden of preferred shares, Mitsubishi Motors has no time to waste in its bid to become a true blue chip.

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