U.S. fund Carlyle Group and Kyocera Corp. said on Monday they would buy a mobile operator from KDDI Corp for $2 billion in the biggest leveraged buyout in Japan so far this year.
Washington-based Carlyle, which has more than $18 billion under management, and Kyoto-based Kyocera will take a 90 percent stake in DDI Pocket, a unit of KDDI and a leading provider of a "no frills" wireless phone service that is seen having growth potential in developing telecoms markets across Asia.
"We believe DDI is at a competitive advantage in the medium to long term, particularly in the corporate mobile data market," Carlyle Japan managing director Tamotsu Adachi told a news conference, adding that Carlyle's investment would not be short-term.
The 220 billion yen ($2.03 billion) deal strengthens a commitment on the part of Kyocera, a maker of electronics parts and cell phones, to the wireless phone service called the Personal Handyphone System (PHS), originally developed as a home-use cordless phone that could also work as a mobile phone.
It also marks the biggest deal to date since Carlyle, which has 30 percent of its money in telecoms business worldwide, came to Japan in 2003 and allows KDDI, Japan's second-biggest telecoms operator, to reduce debt and focus on its main mobile brand "au".
"It's a low multiple on a high free cash flow business," said Kirk Boodry, a Tokyo-based telecoms analyst with Dresdner Kleinwort Wasserstein. "This is an operation that has been run for free cash flow. It has some of the highest margins in the sector."
Shares of Kyocera ended up 2.12 percent on the Tokyo stock market on Monday and KDDI rose about 3.3 percent.
DDI, which operates the PHS service and has about three million customers, has recently found its niche in offering fixed-rate data services in Japan, but PHS has failed to take off because of a spotty service and limited coverage area.
Still, the deal gives Kyocera, which makes PHS phones and infrastructure, a springboard into rapidly growing telecoms markets such as China, where PHS services are attractive because the phones are relatively cheap and the networks comparatively inexpensive to maintain.
"Expanding the potential subscriber pool is very important (for Kyocera)," said Boodry. "It does give (Kyocera) a test bed in order to do more things with the service."
Boodry added that Kyocera and Carlyle may offer niche services in Japan through DDI, but they were unlikely to offer mainstream mobile services that would compete with KDDI's "au" service since Kyocera is also KDDI's largest shareholder.
The deal will see Kyocera raising its stake in DDI Pocket to 30 percent from 13.3 percent, with Carlyle taking a 60 percent stake. KDDI will retain a 10 percent stake.
Out of the 220 billion yen to be given to DDI Pocket by a consortium made up of Carlyle, Kyocera and KDDI, equity will make up 25 percent, with the rest coming from money borrowed from foreign and Japanese banks.
After debt repayments are made, DDI Pocket's current shareholders will receive money from the deal, which is expected to see Japan's smallest mobile operator change hands in mid-October.
KDDI said the deal will give it a 31 billion yen profit on a consolidated basis, which will boost its net profit by 23 billion yen for the business year to next March.
KDDI doubled its net profit to a record 117 billion yen last year and forecast 62 percent growth to 190 billion yen for this business year, higher than analysts' average forecast of 176 billion yen, according to Reuters data.
Japan's telecoms industry has witnessed a series of shakeups this year. Last month, Internet service provider Softbank Corp bought Japan Telecom Co, the country's third-largest fixed-line telecoms operator, from U.S. buyout firm Ripplewood Holdings for $3 billion.
Ripplewood had acquired Japan Telecom in August 2003 from Britain's Vodafone Group Plc for $2.4 billion in the biggest ever leveraged buyout (LBO) in Japan.
Carlyle and Kyocera's DDI Pocket purchase is Japan's second-biggest LBO -- in which investors buy a company with borrowed money and pledge its assets as collateral.
Japan has seen 12 mergers and acquisitions deals worth $7.8 billion in the telecoms sector so far this year, dwarfing the 12 deals worth $2.6 billion in 2003, according to data provider Dealogic.
Japan's M&A activity comprises a large chunk of the $23.5 billion in telecoms M&A deals this year in Asia, the world's second-busiest region for telecoms mergers activity. The total is nearly equal to the $24 billion in telecoms M&A in 2003.
Telecoms deals are making up a big part of Japan's buyout market, which is soaring with the help of investment funds such as Carlyle and Ripplewood after two years in the doldrums following the bursting of Japan's IT bubble.
The value of private equity-led buyouts in Japan soared nearly fivefold in 2003 to a record 516 billion yen.
"More mega-deals are expected," said C.J. Wilson, managing director of Global Alliance Ltd, an M&A and investment advisory firm in Tokyo. "Interest has been building among financial investors for two years. Patient determined negotiation pays off in Japan."