Showa Denko Unveils $8.8 Billion Deal for Hitachi Chemical

(Bloomberg) -- Showa Denko K.K., Japan’s No. 3 diversified chemicals supplier, agreed to pay more than double its own market value to buy its bigger rival Hitachi Chemical Co., to scale up its lithium-ion battery and advanced materials businesses and keep pace with Chinese rivals.

Tokyo-based Showa Denko offered as much as 964 billion yen ($8.8 billion) for all shares of the chemicals unit of Hitachi Ltd., one of Japan’s largest industrial conglomerates, it said in a statement Wednesday. The tender offer will start around February at 4,630 yen a share, the company said. That’s 34% higher than the closing price Nov. 25, the day before talks between the two companies were reported.

The purchase would be Showa Denko’s largest on record and would boost the company’s revenue from lithium-ion automotive batteries and related materials — segments that are growing fast as carmakers race to make more electric-powered vehicles. Hitachi has been shedding non-core businesses to re-focus on manufacturing equipment and data services that benefit from internet-of-things technologies.

Synergies with Hitachi Chemical, which include lithium-ion batteries and semiconductor mounts, would amount to about 200 billion yen after three years, President Kohei Morikawa told reporters in Tokyo on Wednesday.

Earlier in the day, Hitachi said it had agreed on another sale as it continues to narrow its focus. The conglomerate said it would sell its diagnostics imaging unit to Tokyo-based Fujifilm Holdings Corp. in a 179 billion yen deal.

Chinese Scale

Hitachi Chemical’s board of directors said it will recommend that shareholders tender their stock in the Showa Denko deal, the company said Wednesday in a statement.

Adding the Hitachi affiliate will also give Showa Denko more scale to compete with Chinese rivals that have expanded globally, the company said.

“Chinese material manufacturers have developed a business that takes advantage of the economies of scale and Middle East material manufacturers have also been increasing cost competitiveness,” Showa Denko said in the statement. The company needed a top market share and more scale to remain a major global manufacturer, it said.

To pay for the purchase, Showa Denko is seeking a 295 billion yen loan from Mizuho Bank and will sell preference shares to the bank and to the Development Bank of Japan, it said in the announcement. The company doesn’t plan to sell common shares, it said.

Japan Credit Rating Agency said the deal would hurt Showa Denko’s finances.

“Although the acquisition scheme is designed to reduce the direct financial burden for the company, deterioration in financial structure will be unavoidable,” the agency, known as JCR, said in a statement Wednesday.

Deal Spree

Showa Denko’s bid is among several major deals announced by Japanese companies as the year comes to a close. On Wednesday, Isuzu Motors Ltd. agreed to buy Japanese manufacturer UD Trucks from Volvo Group in a 250 billion yen deal and to forge a strategic alliance.

Separately, Hitachi Ltd. said it will book a 378 billion yen charge as it agreed to settle a dispute with Mitsubishi Heavy Industries Ltd. over losses related to coal-fired power plants in South Africa. Hitachi cut its estimate for full-year net income by 53% to 170 billion yen, while keeping its forecasts for sales and operating profit unchanged, it said in a statement Wednesday.

Hitachi has been focusing its acquisitions toward power grids and data management. It is on track to complete a deal for ABB Ltd.’s power grid division for about $6.4 billion after reaching an agreement a year ago in its biggest-ever purchase. The manufacturer has also said it’s considering options for Hitachi High-Technologies Corp., including making the electronics, medical and chip-making equipment company a wholly owned subsidiary.

--With assistance from Masumi Suga and Reed Stevenson.

To contact the reporters on this story: Yuki Furukawa in Tokyo at yfurukawa13@bloomberg.net;Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

To contact the editors responsible for this story: Emma O'Brien at eobrien6@bloomberg.net, Dave McCombs, Jeff Sutherland

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