(The following statement was released by the rating agency)
Oct 25 - Standard & Poor’s Ratings Services said today that its ratings on Sumitomo Corp. (A/Stable/A-1) would be unaffected by Sumitomo’s announcement that it would jointly purchase the remaining shares of its equity affiliate, Jupiter Telecommunications Co. Ltd. (J:COM; not rated), through a tender offer with KDDI Corp. (not rated), and subsequently merge their cable TV networks. Sumitomo said that it plans to merge J:COM, a major Japanese cable TV provider, with KDDI’s Japan Cablenet Ltd. (JCN; not rated). In our view, although these transactions would increase the goodwill to be recognized by Sumitomo and put pressure on its capital quality, we believe that the deterioration is likely to be manageable, given the risk volume in its business investment portfolio, profitability, and capitalization.
According to the announcement, Sumitomo and KDDI would each take a 50% stake in J:COM, and JCN would become a subsidiary of J:COM. Under Sumitomo and KDDI’s plan, they will set up a special-purpose company (SPC) to make a tender offer for the remaining J:COM shares. Following the tender offer, J:COM will merge with the SPC and cancel its shares that would have been acquired in the transaction. Therefore, Sumitomo will not pay any cash in the deal. The outstanding assets related to J:COM, which will be recorded on Sumitomo’s balance sheet, will be unchanged. Sumitomo and KDDI will guarantee the borrowings of the SPC for the tender offer in the ratio of 50:50. On the other hand, J:COM’s net assets will substantially decrease due to a share buy-back, and a large amount of goodwill due to the transaction. J:COM will continue to be Sumitomo’s equity affiliate even after Sumitomo raises its stake to 50%. Sumitomo will own the 50% stake with the current J:COM’s total assets, which are worth JPY800 billion, as well as JCN’s assets on a consolidated basis. A large amount of goodwill will likely accrue in this deal, given the share acquisition cost. Combined with the goodwill that was accrued when Sumitomo purchased additional shares of J:COM in 2010, the concentration risk in the accrued goodwill could increase further and weaken its capital quality. Sumitomo could face impairment losses if it experiences a significant decrease in profitability.
Nevertheless, Standard & Poor’s believes that the impact of the planned tender on Sumitomo’s financial profile would be manageable, based on the following: the balance between Sumitomo’s risk assets and its profitability and equity capital is likely to be consistent with the current rating level, even if its asset quality were to deteriorate on increased goodwill; and potential impairment losses stemming from the accrual of goodwill are likely to be manageable because Sumitomo has generated relatively stable profits from its cable TV business, including J:COM.