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Summit News

China firms take aim at Japan, big deal looms

TOKYO (Reuters) - A movie released in Japan last year created a buzz with the seemingly implausible tale of a China-backed investment fund launching a hostile bid for a major Japanese car maker.

In reality the day when a Chinese firm seeks control of a big Japanese company may not be all that far away.

Chinese firms have made a series of investments in Japanese companies over the past few years, including Suning Appliance Co’s stake in electronics retailer Laox and Shandong Ryui’s investment in apparel firm Renown Inc.

Speakers at the Reuters Japan Investment Summit this week said the deals would likely increase in number and size, as Chinese companies and funds look to accelerate their global expansion by snapping up Japanese technology and brands.

“China is becoming an exporter of capital,” said Takashi Hibino, deputy president of Japanese investment bank Daiwa Securities Capital Markets. “I think the number of deals will increase and we will also try to set up that kind of M&A.”

Japanese managers remain wary of selling part or all of their company to a Chinese firm, and the deals to date have been relatively small and mainly involving target firms in need of a financial rescue they could not find in Japan.

Chinese companies completed 11 investments in Japanese firms in 2009 at a total value of $118 million, up from seven deals for a combined $2 million in 2008 and two for $309 million in 2007, according to Thomson Reuters data.

So far in 2010, the tally has jumped to 14 for $95 million.

The investments in Laox and Renown, both listed and with fairly well-known brands, suggest Chinese companies are getting bolder, setting the stage for bigger and more high-profile transactions down the road.

Likely targets include units spun off by electronics conglomerates, niche technology firms, real estate, and hotels and services targeting the growing number of Chinese tourists visiting Japan, bankers and investors said.

“Outbound deals from China to Japan are active with dialogues happening across multiple sectors. Chinese firms are keen to secure technology, brands and successful business models,” said Brian Gu, head of China corporate finance and M&A at J.P. Morgan.

“People talk about big deals, but it will take a while. As companies get more mature, as their business rationale and operational confidence rise, you will start to see bolder transactions and transformational deals being attempted.”

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Any big acquisition involving a blue-chip firm would likely be met with some resistance in Japan’s conservative business circles, and could test the tolerance of a public not entirely comfortable with its Asian neighbor’s growing economic might.

In the movie “Hagetaka,” or “Vulture,” a Japanese fund manager is brought in to rescue fictional carmaker Akama Motors from the grips of the Chinese government-backed fund out to dismantle it.

Chinese firms will continue to be very careful in selecting targets, bankers and investors said.

“A (minority) investment is OK but Japanese firms will show a psychological aversion to ceding control to a Chinese firm,” said Hironobu Nakano, the Japan head of China’s CITIC Capital Partners, which holds stakes in several Japanese firms.

“As more and more deals are completed, that aversion will fade. But it will take time.”

Chinese have been snapping up hot spring inns in the Hakone resort area south of Tokyo and putting money into ski resorts in the northernmost island of Hokkaido, but those deals have not featured much in the media, said Mori Building Chief Financial Officer Tsutomu Horiuchi.

As the investments get larger, funds from China could help revitalize the sluggish property market and the economy as a whole, and should be welcomed with open arms, added Horiuchi, whose firm built the 101-story Shanghai World Financial Center.

“I’d like to see a rapid influx of China money into Japan,” he said. “China money could breathe life into Japanese property, and if it could help turn asset deflation into inflation that would boost domestic demand and bolster the economic environment.”

At the same time, Japanese firms are expected to pick up the pace of their acquisitions in China to capitalize on an economy likely to soon overtake their own as the world’s second-largest.

Japanese companies spent about $1 billion on acquisitions in China last year, according to Thomson Reuters data.

“When you look at the relative growth rates of both economies I would say ... there will be more deals of Japanese companies buying Chinese firms or emerging market firms than the opposite,” said Kenji Govaers, a partner in the Tokyo office of Bain & Co.

Editing by Michael Watson

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