News media has reported that Nippon Telegraph & Telephone plan on turning listed wireless carrier NTT DOCOMO into a wholly-owned subsidiary in a potential deal worth US$40 billion, but NTT has denied these claims.
The deal was said to be the largest ever for a Japanese Company, according to Nikkei.
“There is no fact that the Company has decided at this time. The Company will immediately make an announcement if the board of directors today makes a resolution which should be disclosed,” said NTT in a brief statement.
NTT will discuss the matter internally and will make an announcement if the board of directors reaches a resolution.
Under the potential deal, the telecommunications group was said to be looking at purchasing roughly 34% of outstanding NTT DOCOMO stock held by other shareholders and will delist the wireless carrier once the transaction is complete.
Reports had estimated the US$40 billion value of the deal by adding the typical 30% premium for a tender offer to the stock price. The acquisition is said to be funded by loans from Japan’s biggest three banks and others, with Mitsubishi UFJ Financial Group being the largest lender.
Responding to Government Pricing Pressures
The buyout talk comes amidst pricing pressures from the Government.
Japan’s new Prime Minister Yoshihide Suga had earlier called on wireless carriers to lower prices, with the Government hoping those savings will stimulate consumer spending elsewhere in the economy.
On Tuesday, Chief Cabinet Secretary Katsunobu Kato reiterated the call for ‘visible progress on lowering mobile phone charges’.
“NTT DOCOMO’s financial base will become stronger giving us the capacity to cut prices,” NTT Chief Executive, Jun Sawada, told a news conference.
NTT, a former state monopoly, still counts the Government as its largest shareholder with a 34% stake.
Should the deal proceed, DOCOMO will be able to respond more easily to Government pressure to cut wireless service prices. While lower wireless rates will mean a temporary hit to DOCOMO’s earnings, having NTT as the sole shareholder will mitigate the negative impact on the company.
“Post acquisition, DOCOMO will no longer be answerable to shareholders. If the Government instructs it to cut prices, it will oblige,” Jefferies analyst Atul Goyal wrote in a client note.
Previous efforts by the Government to enhance competition include the backing of e-commerce firm Rakuten’s entry into the wireless service sector. However, the company’s low-cost plan model could be under threat, should prices fall more broadly.
Government pricing pressure comes as carriers spend big to build 5G services, widely seen as critical to ensuring Japan’s competitiveness.
The buyout is ‘driven more by the potential to develop 5G and IoT services than regulatory pressure’, as ‘the industry is seeking new, less regulated revenue streams’, according to Kirk Boodry, an analyst at Redex Research.
DOCOMO has long been the driver of the group’s earnings, but Japan’s wireless market has plateaued, and how the company plans to keep growing remains unclear.
“DOCOMO is too focused on what’s happening internally. There has been little appetite for change within DOCOMO, causing the unit to lag behind our group wide strategy. It didn’t have the ability to conceptualise business ideas in new fields and has since shied away from overseas markets” an NTT executive told Nikkei Asia.
DOCOMO made some efforts to expand overseas by investing in overseas companies, including AT&T Wireless, but it failed to make much headway with these partnerships and ended up with about US$9.4 billion (1 trillion yen) in impairment losses.
DOCOMO was previously spun off NTT in 1992, ahead of listing in 1998, as the Government sought to stimulate competition in the telecoms sector. However, there have been concerns that the unit placed too much weight on its own goals over those of the group as a whole.
By bringing DOCOMO back into the fold, NTT hopes to generate greater synergies within the group and reallocate resources so that it can better compete with overseas rivals in areas like 5G and the IoT. Buying back NTT DOCOMO would mark the end of a prominent parent-child listing that is frowned upon abroad, yet common in Japan.
“Making DOCOMO a subsidiary has a large political background. The acquisition will enable NTT to turn aggressive in pricing, which will negatively affect KDDI and SoftBank,” Tatsunori Kawai, Chief Strategist at Kabu.com Securities told Nikkei Asia.
Should the $40 billion dollars (roughly 4 trillion yen) deal be completed, it will be the largest tender offer for a Japanese company on record. It is also the second-largest merger and acquisition deal, after the three-way merger that formed what is now Mizuho Financial Group.
NTT’s share price fell as much as 5.8% after the company said it was considering the buyout, while NTT DOCOMO ended up 16% at its daily trade limit.
In other news from Japan, AirTrunk announced a new 300 MW hyperscale data center in Tokyo, set to be one of the largest in Asia. Japanese chipmaker Kioxia has also said that they will be postponing their $3.2 billion initial public offering due to concerns over the pandemic and market volatility.
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