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JR companies defy US investor by boosting cross-shareholdings

Moves billed as building trust run counter to activist demands on governance

Bullet trains operated by JR East, JR West, JR Central and JR Kyushu. (Nikkei montage)

TOKYO -- The operators of Japan's famed bullet trains increased their mutual cross-shareholdings last fiscal year to strengthen their relationships, bucking a broad trend of unwinding such arrangements amid criticism from investors.

East Japan Railway, Central Japan Railway, West Japan Railway and Kyushu Railway had boosted their holdings of each other's stock by between double and well over triple their year-earlier levels at the end of March. These holdings covered about 1% of each company's outstanding shares, up from about 0.2%, and JR East, JR Central and JR West each held more than 1% of JR Kyushu.

The rail operators say the moves are meant to promote sharing information on disaster responses and developing new technology, as well as to facilitate new mobility services that combine rail and other transit methods for more efficient transportation. "Cross-shareholdings are an effective method of fostering trust," JR Kyushu President Toshihiko Aoyagi told Nikkei.

But another possible factor is pressure on JR Kyushu from U.S. investment fund Fir Tree Partners, which owns 6.1% of the company. Fir Tree pushed multiple proposals at JR Kyushu's last two annual general meetings, most recently nominating three independent directors to the board -- all rejected -- and opposing two of the company's reappointments, citing their "questionable independence."

JR Kyushu "may have increased its cross-shareholdings as a response to Fir Tree," said Masatoshi Kikuchi of Mizuho Securities.

It remains unclear when the shares were acquired, but JR West said the moves were unrelated to the coronavirus pandemic.

Railway operators tend to be especially partial to cross-shareholdings due to the number of partners they work with. Listed nonfinancial companies owned cross-shareholdings for strategic purposes equivalent to 9% of their total capital at the end of March 2019, while the figure was 13% for the ground transport industry, which includes rail, data from Nomura Institute of Capital Markets Research shows.

The four JR companies' earnings have slumped amid the coronavirus outbreak. Rail and hotel operators are expected to face steep drops in revenue along with high fixed costs for the April-June quarter. And demand for rail travel may not return to pre-pandemic levels, heightening the need for longer-term strategies such as new mobility services.

Yet Japanese companies in general are unwinding cross-shareholdings amid a push for improved governance, and the market gyrations sparked by the pandemic have highlighted the risk of losses on such stakes.

"Companies have a responsibility to provide a rational explanation of whether [cross-shareholdings] will provide a benefit or a return on the investment," said Nomura's Kengo Nishiyama.

The companies in the JR Group had almost no capital relationship with each other after the 1987 privatization and breakup of the former Japan National Railways. This changed in fiscal 2016, the year that JR Kyushu went public, though the stakes were limited to the 0.05% to 0.4% range and did not increase until last fiscal year.

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