NEC rejected private equity offer before selling stake in iPhone supplier at discounted price, people said

Japan’s NEC has received multiple takeover offers from global private equity funds for iPhone supplier Japan Aviation Electronics Industry, and will sell most of its 51% stake back to the Japanese company at a discount. five people involved said.

At least three global funds have all made offers for both NEC and its listed subsidiary JAE, indicating they are willing to pay a hefty premium to acquire the electronic components maker, according to people familiar with the matter. All spoke on condition of anonymity because the negotiations were private. .

Governance experts say the previously unreported proposals have led to criticism that IT services and software companies NEC and JAE Electronics may not be acting in the best interest of shareholders. He said he could be exposed.

The Tokyo Stock Exchange and regulators are calling on Japan Inc. to improve its governance and boost profits, including by eliminating cross-shareholdings and “parent-child” listings, where companies keep listing their subsidiaries. But critics say this practice is unfair to minority shareholders. .

Enforcement of regulations has helped Japanese stocks reach multi-decade highs, but governance experts say more needs to be done. Kazunori Suzuki of Waseda University Business School said, “If it is true that there was a higher offer, this deal will not make anyone happy except JAE executives.”

Companies applying for shares are not required to disclose whether they have discussed alternatives in such cases, but Suzuki said NEC could still face backlash from investors at board level or in court. He said there is.

JAE manufactures connectors used in iPhones. The company’s market capitalization started the year at 290 billion yen ($1.94 billion), but it plummeted following news of the discounted tender offer.

NEC and JAE declined to comment.

tender offer

On January 29, the two companies announced that NEC would sell approximately half of its JAE shares to NEC through a tender offer.

The price was 2,605 yen, a 14% discount from JAE’s last closing price. Such discounts are common when companies unwind cross-shareholdings, allowing them to bid for stock without competing with other sellers.

The timing of the private equity offer was not entirely clear. One in five said some were made in the past year or as early as 2022.

Some of the officials, including some with direct knowledge of the talks, spoke on condition that the global funds not be identified. According to three people involved, the highest offer price reached approximately 4,000 yen per share. This will value JAE at approximately 369.2 billion yen ($2.5 billion), representing a 54% premium over the tender offer price.

At least one of the private equity proposals has been submitted in writing with details such as price and detailed post-acquisition strategy, two people familiar with the matter said, under new takeover guidelines introduced. The government announced in August that this means it is likely to meet the criteria for a “genuine proposal.”

The guidelines state that such offers should be seriously considered by the board of directors.

It is not clear whether the NEC and JAE boards have discussed this proposal.

fiduciary responsibility

Quiddity Advisors’ Travis Lundy, writing on the independent investment research platform SmartKarma, said it was unusual for a private equity firm’s approach not to be considered a “genuine proposal.”

“But the new acquisition guidelines are just that: guidelines,” he said. “Other countries have laws and penalties regarding poor performance of fiduciary duties, particularly with respect to bona fide offers.”

JAE stock has fallen about 20% since the announcement of the tender offer on Jan. 29, a decision that dashed hopes for the company’s takeover and wiped out nearly $350 million in market capitalization.

“There was widespread speculation that NEC would eventually sell JAE to eliminate the parent-child dual listing structure,” said a private equity firm executive who said the company was not a bidder. .

Hitachi and other electronics conglomerates have been selling off their publicly traded subsidiaries, in some cases to private equity firms.

Waseda University’s Suzuki said cases involving changes in corporate control may require additional disclosure rules.

“NEC shareholders missed the opportunity to benefit from a higher bid,” Suzuki said. “Meanwhile, JAE shareholders watched the stock price plummet.”