Private equity firms rescue Japan's NIWS

Two private equity firms have come to the rescue of NIWS Co. HQ, a company specialising in tailor-made software, hardware and consulting services and listed on the Tokyo Stock Exchange.

The two investors will pump Ñ20 billion ($175 million) into the company, of which Ñ6.5 billion is for new common shares, and Ñ11 billion and Ñ2.5 billion is for type-A and type-B new preferred shares respectively.

With no old shares being disposed of, the transaction amounts to a major capital infusion for the company, setting the scene for a possible turnaround.

NIWS has been performing badly in recent times, with the parent company recording negative net income of Ñ13.9 billion for the past year to June 2007, and Ñ30.27 billion on a consolidated basis (including nine subsidiaries).

Longreach Group is the lead investor, putting up Ñ13.5 billion for 6.5 billion new common shares, equivalent to 67% of the total number of shares. It will invest Ñ7 billion in preferred shares. Longreach will own 67% of the company at the end of the transaction.

Longreach's partner in the transaction is Phoenix Capital, a local private equity company set up in 2001. Phoenix is investing Ñ6.5 billion for 67% of the preferred shares - it will not hold any common shares. The preferred shares have no voting rights, leaving Longreach firmly in control.

Preferred shares are often used by investors to protect themselves in private equity or venture capital situations, say specialists.

The investors intend to keep their Tokyo listing, implying they anticipate making the company profitable in the near future.

Following a string of poor quarters, the company had become an easy target for a private equity takeover. The parent companyÆs performance was especially woeful in the past financial year (to June 2007) with full-year unconsolidated results showing revenue of Ñ4.5 billion, compared to Ñ36.5 billion a year earlier. Operating profit for 2007 came in at Ñ1.37 billion compared to Ñ2.65 billion a year earlier. Net income in 2007 was negative Ñ13.9 billion.

The company also comprises nine domestic subsidiaries in Tokyo, Hiroshima and Okinawa. The group results for the 2007 financial year showed an operating loss of Ñ438 million and a net income loss of Ñ30.27 billion. Those figures were down 107% and 1079% respectively on the previous year.

NIWS' stock price has mirrored the decline, currently trading at Ñ15,690 or down Ñ55,810 year-to-date. The companyÆs year-high for the past financial year was Ñ90,600. The stock price popped almost 15% on news of the deal on Wednesday, however.

It's a sad end for a company that was founded in 1992 to provide cutting edge IT solutions for financial institutions. The two founding partners were IBM Japan and Nomura Research Institute. According to the company's website, NIWS was a pioneer in 'massively parallel processing technology'. The company was listed in 2002.

But hope remains: according to the press release put out by Longreach, the companyÆs insolvency is as a result of too much growth, rather than too little.

ôThe companyÆs performance has suffered as a result of rapid expansion efforts in the medical service sector and new Application Service Provider (ASP) services for the financial services providers," says Longreach.

The private equity players are clearly aiming to turn the company around by installing strict new management: Longreach has put five of its people on the board, and Phoenix one. One Japanese press report mentioned that the whole of the old board was retiring.

The deal still has to be approved by the shareholders at an extraordinary general meeting scheduled for October.

It's the second major deal for Longreach, set up in 2003 by former UBS banker Mark Chiba, this summer. In June, the group snapped up Taiwan's EnTie Commercial Bank for $567 million in a private placement, turning the local lender into a foreign-owned bank.

Daiwa SMBC advised NIWS on the deal. The buy-side opted to do without an advisor.