Mitsubishi Heavy to Keep Car Stake Amid Fuel Testing Crisis

Mitsubishi Heavy Industries Ltd., the biggest shareholder in Mitsubishi Motors Corp., will hold onto its stake in the automaker that Carlos Ghosn is seeking to turn around following a fuel-economy test scandal.

The maker of power plant equipment, aircraft and ships will refrain from selling its holdings in Mitsubishi Motors even as it plans to raise 200 billion yen ($1.9 billion) for other businesses by selling shares and real estate, Masanori Koguchi, chief financial officer at Mitsubishi Heavy, said in an interview in Tokyo on Monday. Last month, Nissan Motor Co. Chief Executive Officer Ghosn rescued Mitsubishi Motors by agreeing to buy 34 percent of the company.

“We’re not thinking of doing anything soon” with our Mitsubishi Motors shareholdings, Koguchi said, adding any action this year or next would be unlikely. “Its shares are low at the moment. We want to see what happens when things settle down,” he said, when asked if the company had any intention to sell later.

Gaining Control

Mitsubishi Motors shares have plunged to record lows and are 40 percent down since the automaker admitted in April to overstating the fuel economy of its minicars and improperly testing other models as far back as 1991. Ghosn seized the moment to gain significant control of the company with the $2.2 billion deal that is set to close in October. At present, Mitsubishi Heavy owns 12.6 percent of the embattled vehicle maker, according to data compiled by Bloomberg. 

After overstating the fuel economy of its minicars by as much as 10 percent, Mitsubishi Motors faces the prospect of compensating owners of those vehicles for their shortcomings in performance. It also may have to pay back Japan’s government for tax rebates that its minicars shouldn’t have been eligible for.

The transaction with Nissan eases concerns about the viability of the Japanese automaker, which has dealings with 7,777 companies affecting 410,000 people, according to Teikoku Databank Ltd. estimates. Mitsubishi Motors has enough cash to handle the compensation and costs related to the cheating scandal, Chairman Osamu Masuko said last month. The company doesn’t foresee any financial shortage as a result, he said.

Veto Power

After the deal is completed, Nissan will wield veto power over major decisions at Mitsubishi Motors. The combined shareholding of Mitsubishi Group companies -- Mitsubishi Heavy, Mitsubishi Corp. and Mitsubishi UFJ Financial Group Inc. -- will fall to 22.4 percent from 34 percent, according to Mitsubishi Motors.

Mitsubishi Heavy is seeking to raise funds after delays in building cruise ships cut annual net income to the least in four years. The development of its regional jet also raised costs.

Shares of the Tokyo-based company fell 0.8 percent to 400 yen as of 10:01 a.m. on Tuesday, extending this year’s losses to 24 percent, compared with a 17 percent decline in the Nikkei 225 Stock Average. Mitsubishi Motors shares fell 2.7 percent to 514 yen.

Development costs for the Mitsubishi Regional Jet have roughly tripled from an original estimate of about 180 billion yen as delivery was pushed back four times since the announcement of the project in 2008. Its subsidiary, Mitsubishi Aircraft Corp., is conducting flight tests with the first two planes in the U.S. and plans to deliver the first plane to ANA Holdings Inc. in the middle of next year.

“The finances will turnaround when we start deliveries of the jet,” said Koguchi. “The MRJ is a core business. It will be profitable over the long term.” The company will fund development costs of the plane internally and the project will be a financial success when it sells about 1,000 planes, he added.

The company’s credit rating was raised one notch to A- by S&P Global Ratings in August, and Mitsubishi Heavy is aiming for another two notches hike as it shores up its finances further, Koguchi said.

“We’ve built confidence while we’ve been raising money to fund the MRJ,” said Koguchi. “We’ve been able to keep a lid on net debt as we’ve expanded. We’d be very comfortable if we could eventually get a AA- rating. We need to deal with our legacy businesses for that though,” he said, referring to businesses such as cruise ship construction.

Mitsubishi Heavy delayed delivery of Aida Cruises’ first ship because it found faults in the main engines, carried out noise reduction measures requested by Aida and a fire broke out on board, it said in April. The company booked one-time charges for last fiscal year of 103.9 billion yen because of the delays.

The company predicts profit will double to 130 billion yen in the year ending March 31, as its cruise ship business improves following the delivery of the first of two ships earlier this year.

“We’re working to raise money for our future investments and our legacy costs,” said Koguchi. “We want to build strength.”

--With assistance from Chua Kong Ho and Lena Lee To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net, Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net, Kazunori Takada in Tokyo at ktakada17@bloomberg.net. To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Sam Nagarajan