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Activist fund aims to unlock value in Dai Nippon Printing, a conglomerate beset by diverse shareholdings

The activist fund Elliott Management has become one of the largest shareholders of Dai Nippon Printing — a 147-year-old Japanese conglomerate with a huge but unheralded global share in components of electric vehicle batteries and smartphone screens.

The stakebuilding adds to only a handful of investments that Elliott has previously made in Japan — with Masayoshi Son’s SoftBank Group and Toshiba the most prominent. People close to the fund characterised it as an experiment in extracting trapped value that could pave the way for significantly more activity.

Elliott has quietly increased its investment in DNP over the past few months, according to people familiar with the situation, and now holds a stake of a little under 5 per cent worth around $300mn, making it the third-largest external shareholder.

People close to DNP said that Elliott’s initial engagement with the company, which has a market capitalisation of $6.3bn and currently trades where it did 20 years ago, has focused on a series of demands: a more aggressive share buyback scheme, the sale of its sprawling real estate holdings and an accelerated disposal of its extensive portfolio of shares in other Japanese companies.

DNP confirmed Elliott’s investment but declined to comment on details of its engagement with individual shareholders.

If Elliott’s campaign is successful, it could bolster other shareholder campaigns in a market that has already drawn the likes of Dan Loeb’s Third Point and Oasis Management. Earlier this month, US hedge fund ValueAct called on shareholders in Seven & i to back a tax-free spin-off of the conglomerate’s 7-Eleven convenience store business.

Activists, both foreign and domestic, see Japan’s equity market as being rich with targets: about half of companies are trading below their book value, and, according to analysts, over a third of non-financials sit on hoards of cash that represent more than 20 per cent of their equity.

DNP is planning a meeting in March to present the main pillars of a new medium-term business strategy to investors. The company said it would listen to the voices of Elliott and other shareholders in compiling the strategy.

That process, said other holders of DNP shares, could in theory help refocus the market’s attention on a company with a potentially much greater value given its status as one of Japan’s “hidden treasures”, with outsized market share in niche areas.

These include the metal masks used to make small OLED screens of the type used in Apple and Samsung smartphones. A Nomura Securities report described DNP’s global share as so large “that the market is almost an oligopoly”, with no major competitors.

Similarly, DNP developed over a number of years a technology that produces pouches to contain lithium-ion in electric vehicle batteries. The company now has 70 per cent of the global market, with its end customers including GM, Volkswagen, Renault, Ford and Nissan.

The company, with business interests also ranging from printer ribbons to food packaging and bookshops, has followed a classic pattern of many older Japanese companies. It has amassed an unwieldy portfolio of cross-shareholdings in other listed companies that now represents more than 30 per cent of its total assets.

As well as unnecessarily trapping value, these holdings are widely regarded as a heavy drag on good corporate governance and efficient capital allocation.

A report by Institutional Shareholder Services, published ahead of DNP’s annual shareholder meeting last June, recommended a vote against the reappointment of the company’s 89-year-old chair, Yoshitoshi Kitajima, and his son, Yoshinari, who is president. The two, who were both reelected, hold a stake of less than 1 per cent in the company between them. ISS had claimed the responsibility lay with them for DNP’s alleged capital misallocation.

Although the company had previously said it would address its cross-shareholding issues, ISS found that it had allocated 36.8 per cent of its net assets to stakes in other companies.

Efforts to bolster confidence in the sector draw some foreign investors back to developers’ dollar debt

Bonds issued by China’s highly indebted real estate developers have rebounded sharply over the past two months, in a sign that efforts by Chinese authorities to bolster the hard-hit sector are bearing fruit.

China’s high-yield dollar bond index, which is dominated by the property developers at the heart of a market meltdown over the past two years, has recovered almost 50 per cent from the record low hit in early November. Bonds from higher-quality developers such as Country Garden have also recovered from distressed territory to trade close to their original value.

Foreign investors, who quit the market for developer bonds en masse during a crackdown by Beijing on excessive leverage in the sector, have tentatively begun to return, market participants say.

“Over the last couple of months we’ve seen relaxation [of lending restrictions], supportive policies from the Chinese government towards the real estate sector, the opening up of the Chinese economy, and doing away with zero-Covid,” said a Hong Kong-based debt capital markets banker with a European lender. “All of these combined have changed the [market’s] view on China and also dramatically improved sentiment towards Chinese property names.”

Bankers say that many bond investors remain wary, with much of the buying being done by hedge funds and private banks. And the rebound in confidence is far from universal, as bonds from developers who have already defaulted — such as China Evergrande, which has repeatedly missed restructuring deadlines — have still shown little to no pick-up.

Beijing in recent weeks has backpedalled on its longstanding “three red lines” policy — targets for debt, equity and assets intended to limit leverage in the property sector, which had long served as a warning to banks against lending too freely to developers.

But authorities’ approach to the sector was already changing in the final months of 2022, helping property companies secure new financing. China’s 100 largest property developers raised more than Rmb100bn from new loans, bonds and equity — reflecting a year-on-year jump of more than a third — with the bulk coming from domestic sources.

There are also tentative signs that the freeze in international bond markets may be thawing slightly. Developer Dalian Wanda sold its first dollar bond in over a year earlier this month raising $400mn to help refinance some of its existing debt load.

A banker on the deal said it had drawn more than $1.4bn of orders from investors, but added that even just two or three more similarly sized dollar bond sales from developers this quarter “would be a good outcome . . . because honestly, we don’t think that a lot of them can come [to market]”.

The scale of the problem faced by both Beijing and China’s property groups remains stark. The latest data show housing sales in the fourth quarter of 2022 fell more than 28 per cent year on year, marking the sixth straight quarter of declines.

It remains to be seen whether Beijing’s efforts to jump-start stalled development projects across the country can resolve a crisis of confidence among homebuyers no longer convinced that payment for an under-construction unit guarantees delivery of a finished apartment.

And even if there is a serious rebound in demand, it will take time for international investors’ appetite for developer debt to return in full. China Evergrande, in particular, still faces major hurdles to restructuring, including the recent departure of its auditor PwC over different views on financial statements being investigated by Hong Kong regulators.

“It will be years until [foreign] investors are no longer worried about China’s property sector,” said the head of institutional sales for Asia at one European lender.

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The investment bank is seeking to grow beyond advising on large-scale mergers and acquisitions

The boutique investment bank Lazard is set to advise a greater number of fast-growing start-ups in the US as part of a broader push to expand its private-capital offering.

Lazard is assembling a team of six specialist bankers to be based in Los Angeles and Austin, according to a memo seen by the Financial Times, building out a venture and growth practice that started in Europe in 2015.

The US group will be co-led by managing directors Christopher Britton and Amy Cozamanis. In total, Lazard’s venture and growth banking team totals 25.

The timing of Lazard’s expansion comes against the backdrop of a slowdown in venture markets, as plunging technology valuations and rising interest rates have led venture capitalists to pull back from dealmaking in recent months.

However, the firm’s executives see an opportunity to grow beyond advising on large-scale mergers and acquisitions. In particular, that includes working with firms in the private markets.

Peter Orszag, chief executive of Lazard’s financial advisory business, told the FT: “This is part of an overall strategy which is to make sure that Lazard is not just the mega-cap, buyside M&A work but has a variety of different verticals including a significant private capital effort.”

Boutique investment banks such as Lazard have largely been dependent on lucrative M&A fees that can surpass tens of millions of dollars on a single transaction. The bank is branching out into offering other types of advice to executives. Last year it set up a unit of advisers to counsel corporate leaders on geopolitical risks.

The venture group will focus on sectors such as technology and healthcare “where innovation and dynamism are the strongest”, Orszag added.

“It’s now time to go out and really spend time with the clients and the investors, to be working on that matching function between the two worlds,” he said.

An expansion of the venture banking team comes as the number of VC deals in the US dropped in every quarter last year, according to a report from PitchBook.

Larger deals in particular have dried up. Rounds priced above $100mn fell more than a quarter to 30 deals in the fourth quarter, reaching a three-year low, PitchBook said.

The bank’s venture and growth unit has already racked up some notable deals, raising $3bn over the past year for tech companies.

Lazard advised wealth management platform FNZ, which raised $1.4bn last year at a more than $20bn valuation. The bank has also advised Northern Gritstone, an investor focused on university spinouts based in the north of England, and retirement technology business Smart Pension.

Bonds issued by European Commission trade with higher yields than Germany and France

The EU is paying more to borrow with its joint bonds than the bloc’s leading members, denting the appeal of common issuance and emboldening opponents of fresh debt sales.

During the global bond sell-off of the past year, the EU’s borrowing costs rose more swiftly than those of many member states. A year ago the yields on common debt issued by the European Commission sat between those of Germany — the bloc’s safe haven — and those of France.

Today, they have risen above French borrowing costs, even though the EU’s triple-A credit rating outshines Paris’s double-A status. Ten-year EU bonds currently yield 2.63 per cent, more than France’s 2.54 per cent.

At shorter maturities, Brussels’ yields are even higher than those paid by Spain and Portugal — long considered among the bloc’s riskier debt markets. Italy’s yields, however, remain higher than those on EU bonds.

The relative shift in borrowing costs is small, and investors say it does not reflect concerns about Brussels’ creditworthiness. Even so, its symbolic importance has emboldened opponents of fresh common EU debt. German finance minister Christian Lindner has pointed to the premiums when arguing member states should do their own borrowing. It is also a potential setback to hopes that expanded EU borrowing could provide a shared safe asset for the euro area, deepening the bloc’s capital markets and boosting the international role of the euro.

“The underlying weakness is that these bonds are effectively competing against all the sovereign bond markets in the eurozone,” said Antoine Bouvet, a rates strategist at ING.

The EU is in the midst of an unprecedented wave of common debt sales, triggered by the need to create a common response to the Covid-related economic slump in 2020. Some member states back new sales of European Commission debt as a way of supporting the green transition and countering the competitive disadvantages generated by the US’s $369bn Inflation Reduction Act.

The upward shift in the commission’s yields reflects investors’ perception of the EU as a debt issuer belonging to a group of so-called supranationals — including pan-EU agencies such as the European Investment Bank and the European Stability Mechanism, the region’s bailout fund.

Bonds issued by these bodies are typically less heavily traded than sovereign debt, and do not form part of the government bond indices tracked by many big investors. As such, they tend to underperform government debt in adverse market conditions such as in 2022’s big bond rout.

Brussels’ current borrowing plans put it on course to eclipse all but the largest EU sovereign issuers, and it has adopted many of the trappings of a sovereign issuer such as regular bond auctions run by a network of bond-dealing banks. The commission has hired banks to sell new 30-year debt this week, its first bond issuance of 2023.

Nevertheless, the EU has struggled to shift its supranational tag. Bankers and investors price the debt relative to interest rate swaps — as it is typical for the sector — rather than using German debt as a reference point.

There is currently no sign of Brussels’ bonds supplanting Berlin’s as a benchmark that could eventually become the eurozone’s answer to the vast US Treasury market, which plays a central role in the global financial system.

“As [EU debt is] going to replace sovereign bonds for the foreseeable future it’s just a further segmentation of the market — it actually takes you further away from something that resembles the US Treasury market,” ING’s Bouvet said.

Bouvet added that EU bonds lacked the “domestic preference” — investors and banks that prefer buying debt issued by their own government — which provides a key source of demand for bonds, particularly at shorter maturities. “A conservative German bank Treasury will always favour German debt; the same for a French bank,” he explained. “That really makes this an uphill struggle for these bonds to trade like a true safe asset.”

Traders say the situation will not be easy to resolve. “There’s still this perception with investors that this is a non-permanent presence in bond markets,” said the head of government and supranational bond trading at a major European bank.

Futures contracts linked to German, French and Italian bonds help to improve liquidity and attract a wider range of investors.

But exchange operators might be reluctant to launch something similar for EU debt, given doubts about the scale of issuance after 2026, the trader said. The union insists that the NextGenerationEU programme is a one-off scheme, reducing the prospects for large amounts of issuance in the future.

The commission as of this month uses what it calls a unified funding approach under which it raises money for various priorities under a single EU bond label. It hopes this will help liquidity in the markets.

“These measures will make EU securities more liquid, and improve their pricing and trading in the secondary market,” said a commission spokesperson.

“The difference in pricing does not mean investors are concerned about the EU as an issuer. On the contrary — investors continue to demonstrate a strong interest in and appetite for the EU-Bonds, as reflected in the regularly high oversubscription levels for EU bonds.”