North Asian buyout firm The Longreach Group said it would launch a tender offer to acquire common shares of car parts maker Fujitsu Component, after spotting potential for growth from the boom in electric vehicles at the hidden unit of the IT services’ giant Fujitsu.
Fujitsu Component makes switching devices called relays as well as touch panels and keyboards. Sales from these widgets are driving its sales growth, reflecting the increased usage of relays and control units in automobiles generally, especially in the electric vehicle sector.
In an electric car a relay is a key component for switching electricity and as cars become more connected to electronic services and as electric vehicles become more common there will be more demand for the product, including for larger relays.
These relays are relatively simple, low-value easy-to-make products. The barrier to entry into this market is the need for long-standing relationships with tier one suppliers to the car makers. Fujitsu Component has decades’ old relationships with tier one suppliers in the US, Europe as well as Japan.
A car fits together like Lego, with clear specifications for each part. Car makers and their tier one suppliers prefer not to change the requirements for such simple, small components as relays at all as long as it works consistently, otherwise the specifications would have to change all along the value chain.
CARVE OUT
Fujitsu Component is only a very small, non-core part of Fujitsu’s IT services and enterprise solutions empire. If it needed fresh capital for growth it would have had to tap banks as its market capitalisation is so small.
Including debt the enterprise value of this buyout by Longreach is about $236 million, according to a person familiar with the deal.
Fujitsu Component’s board of directors recommended that its shareholders tender into Longreach’s offer of 935 yen per common share, which represents a premium of 11.2% over the closing price on July 25.
However, for the deal to go through Longreach has to convince a majority of the minority shareholders to tender their shares. The offer is subject to a minimum threshold, requiring that 1,713,900 shares be tendered. The period of the offer is July 27 to September 6. Presuming the tender offer is successful then Fujitsu Component will to buy back its own shares from Fujitsu at 765 yen per share, resulting in equity interests of 25% for Fujitsu and 75% for the Longreach.
Notably Longreach is paying the public a higher price than Fujitsu is receiving; this is partly to ensure a successful tender offer and partly because Fujitsu is selling at a discount because of the size of its holding.
In a similar transaction private equity firm KKR acquired Hitachi Kokusai Electric from Hitachi last year.
Credit Suisse is acting as exclusive financial advisor to Longreach. Longreach is one of the few private equity firms that has sourced carve-outs from other large corporations.
In June 2016, the buyout firm, led by Mark Chiba, bought Wendy’s Japan and combined it with the hamburger and pasta fast food chain First Kitchen, a wholly-owned subsidiary of beverages conglomerate Suntory Holdings. The deal marked the first time Suntory has sold to a private equity-controlled company.
In August 2013, Longreach said it was buying micro drilling-machine maker Hitachi Via Mechanics and in 2010 the buyout firm acquired Sanyo Electric Logistics from Panasonic Corporation and the acquisition of Via Mechanics from Hitachi.
This is the second investment to be made by the Longreach Capital Partners 3 funds.
