TOKYO/BANGKOK Japan's Itochu Corp (8001.T) entered into a $1 billion tie-up with Thai billionaire Dhanin Chearavanont's Charoen Pokphand Group (CP) to target rising demand for meat and livestock products in China and other parts of Asia.
The tie-up involves the sale of a stake in one of Japan's oldest trading houses to a non-Japanese investor. The size of the stake, at almost 5 percent, is relatively huge for strategic deals between Japanese trading houses and foreigners.
Itochu is cementing ties with a group that has operated in China for more than three decades. Through the tie-up, Japan's third-largest trading house can expect to deepen its already significant presence in China.
Last year, the trading house paid $1.7 billion for two Dole Foods units. It also has a stake in a major Chinese food distribution company.
"It sits well with Itochu's business because Itochu has a very good pipeline in the region," said Thanh Ha Pham, an analyst at Jefferies who covers Japanese trading houses.
"Also, the non-resources business has much less volatility than the resources business... so this lowers the volatility of Itochu," said Pham, who has a "buy" rating on the company.
Itochu said it will sell 102.4 billion yen ($1.01 billion) of shares, equal to a 4.9 percent stake, to two units of Charoen Pokphand. One of the units has the Development Bank of Japan as a partner.
The transaction - which will make the Thai group Itochu's third-biggest shareholder - prices the shares at 1,313 yen. That compares with the market closing price on Thursday of 1,315 yen.
The funds raised by Itochu will mostly be used to buy a 25 percent stake in Hong Kong-listed C.P. Pokphand Co (CPP) (0043.HK) from Charoen Pokphand Foods PCL (CPF) (CPF.BK). Both companies are units of Charoen Pokphand Group.
"CPP's main businesses are in China, so our main target through this alliance is China," Koji Takayanagi, senior managing executive officer at Itochu, told reporters.
Itochu is expecting a net profit contribution of 4-5 billion yen a year from the investment in CPP, with an aim to boost that to 10 billion yen in the long term.
The rest of the proceeds from Itochu's share issue will be used as funds for investment and general spending on joint businesses in Asia.
Itochu said it will buy back as many as 78 million of its own shares - the same amount to be issued to Charoen Pokphand group - to avoid shareholder dilution.
The deal also highlights the Thai billionaire's efforts to trim his debts and to secure an alliance with one of Japan's leading trading houses to help grow its food business in China.
Dhanin's CP group leverage soared after taking billions of dollars of loans for its acquisitions, which include the $6.6 billion purchase of Siam Makro (MAKRO.BK) last year and the $9.4 billion acquisition of HSBC's (HSBA.L) stake in Ping An Insurance in 2013.
The 27.4 billion baht ($860 million) in proceeds from the CPP stake sale will be used mostly to repay debt, CPF said in a statement on Thursday.
After the sale, CPF and CP group will own 50.4 percent of CPP, which runs 80 animal feed plants in 28 provinces in China. CPP also operates in Vietnam.
Analysts expect CPF to book a gain of about 2.3-2.5 billion baht from the sale of its stake in CPP.
CPF Chief Executive Adirek Sripratak said in March that CPF planned to reduce its holding of CPP to help lower its net debt-to-equity ratio to below 1 over the next three years.
CP group, which has businesses in China for more than 30 years, has branched out from seed into feed, farms, grain trading and to retail, real estate, auto and telecommunication. It has also expanded into Indonesia, Vietnam, India and Turkey.
($1 = 101.4600 Japanese Yen)
(Reporting by Yuka Obayashi in TOKYO and Khettiya Jittapong in BANGKOK; Additional reporting by Aaron Sheldrick; Editing by Ryan Woo)