Japanese firms earn $57bn in latest divestment spree

Japan’s listed companies, many of which operate in the energy sector, have earned the equivalent of $57 billion from divestitures over the last three years as they look to boost their capital efficiency and stock valuations.

Many of Japan’s largest listed firms are conglomerates that include diverse businesses. But their market value is below the value of the separate businesses, the so-called conglomerate discount, as Nikkei Asia reports.

The drive to boost market value and return on investment has led to a shift in strategies among Japanese firms in recent years.

In addition, the Tokyo Stock Exchange has introduced new regulations aiming to improve capital efficiency, shareholder value, overseas investment, and accountability for management.   

As a result of these regulatory changes and a shift in corporate mindset, Japanese conglomerates have been selling off subsidiaries, affiliates, and stakes in projects to divest from less profitable and non-strategic assets.

Over the past three years, these divestments have earned Japanese listed firms $56.8 billion (8 trillion Japanese yen), according to cash flow statements compiled by Nikkei.

Some of these asset and unit sales have taken place in the energy metals and mining industries.

Tokyo Gas Co., Ltd, for example, completed earlier this year the sale of its interests in a portfolio of Australian liquefied natural gas (LNG) projects to MidOcean Energy. The buyer is formed and managed by EIG, an institutional investor in the global energy and infrastructure sectors. Last year, Saudi oil giant Aramco entered the international LNG market by signing definitive agreements to buy a strategic minority stake in MidOcean Energy for $500 million.

Eneos Holdings, a Japanese energy group, said in June that its subsidiary JX Advanced Metals Corporation will sell 19% of its 49% ownership in copper miner SCM Minera Lumina Copper Chile to LMC Caserones SpA, a wholly-owned subsidiary of Lundin Mining Corporation.

Mitsubishi could be considering a sale, among other options, for Mitsubishi Tanabe Pharma Corporation, the conglomerate said earlier this week in response to media speculation.

“We are continuously reviewing the ideal business portfolio of the entire group for all of our businesses, including the Pharma business, and are promoting portfolio reform with all options, including divestiture, in mind,” Mitsubishi Chemical Group Corporation said.

These divestitures are part of a wave of asset sales as Japanese firms look to bolster their market valuations and improve capital efficiency, which is now part of a “name and shame” list of companies undertaking capital efficiency measures. The list is published monthly by the Tokyo Stock Exchange (TSE) as of the beginning of this year.  

Although companies are not obliged to disclose such measures and don’t face any penalties if they do not, many firms are selling off assets, including in the energy sector.

The regulatory changes, led by the Tokyo Stock Exchange, could lead to improved stock prices for companies that make governance changes, such as improving board independence, Morgan Stanley said in a June report on the turnaround and rebound in the Japanese economy and stock market.

Following three decades of stagnation, Japan is now set for strong nominal GDP growth this year, at 3.1%, which would put it on track for the strongest two-year period of growth since 1991, the investment bank’s analysts said.

Japan’s corporate governance reforms have helped to improve return on equity, which gauges a company’s profitability.

“Japan’s economy is undergoing a significant transformation with the end of deflation, the return of steady growth and a renewed corporate dynamism, which could set up a compelling opportunity for global investors,” Morgan Stanley said.

Japanese stocks remain the bank’s top picks in Asia and are preferred compared to emerging markets overall.