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Market Scramble: PanaHome valuation dispute renews debate on cash-rich subsidiaries

Panasonic unit isn't the only listed Japanese company to 'deposit' money with group members

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TOKYO -- Panasonic's closely watched bid for listed subsidiary PanaHome is a classic case of the problem of protecting minority shareholders during takeovers, with the added twist of a big pile of a cash.

Under an agreement to be put before shareholders in June, Panasonic will seek to acquire the portion of the homebuilder it does not own through a share swap. It has proposed a swap ratio of 0.8 share of Panasonic for each of share of the subsidiary.

Overseas shareholders are not happy with this idea. Hong Kong-based Oasis Management, which owns a 5% stake in PanaHome, is calling for a revision of the exchange ratio, saying the numbers are disadvantageous to minority interests. Another asset management company in Asia also sent a letter protesting the deal.

The dispute over valuation has partly to do with PanaHome's cash pile, which totaled 97.5 billion yen ($862 million) at the end of December -- equivalent to 60% of its market capitalization. This cash may not have been fully taken into account in assessing PanaHome's enterprise value, said analyst Masahiro Mochizuki at Credit Suisse Securities (Japan).

How the cash has been used is also controversial, because 74 billion yen of total has been "deposited" with Panasonic and other group members as financing. Funds that should have been used for PanaHome's growth have been confiscated by the parent, Oasis CIO Seth Fischer asserted.

Listed Japanese subsidiaries often make such "deposits" with their parents.

Mitsui Home, a Mitsui Fudosan unit, had 13 billion yen of its 22.5 billion yen in cash holdings deposited at the end of 2016, while the figure for Toshiba subsidiary Toshiba Plant Systems and Services was 87.7 billion yen out of its 98 billion yen pile.

These funding arrangements have been called out as problematic before. "Companies say they are more advantageous than bank deposits, but investors want a return in the upper single digits at the least," said Masakazu Hosomizu, a Japanese equities portfolio manager at RMB Capital.

Pressure from overseas shareholders for corporate governance reform has led to a sharp dividend hike at factory robot maker Fanuc and a contentious leadership change at retail group Seven & i Holdings. Resulting increases in shareholder returns have won investor praise. Earlier this week, Fuji Electric said it would reduce its cross-shareholdings with former subsidiary -- and now far larger -- Fujitsu, using proceeds for growth-oriented investments. This was seen as a step forward for corporate refrom in Japan.

Turning PanaHome into a wholly owned subsidiary is part of Panasonic's strategy for improving competitiveness and enhancing capital efficiency. But foreign investors have once again raised the perennial issue of protecting minority shareholders.

The swap ratio is appropriate for small holders as well, a person familiar with PanaHome said Thursday, adding that additional information would be released. Investors will be watching closely to see whether any convincing arguments are made.

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