The controversy surrounding the $2bn management buy-out of World Co, a Japanese clothes manufacturer, has deepened after the company more than doubled its net profit forecast three weeks after management acquired the group, having downgraded it ahead of the sale.

World said it now expected to report a net profit of Y3.3bn ($29.42m) for the six months ending September 30, up 136 per cent from its earlier forecast of Y1.4bn. The earlier forecast was a downgrade from prior guidance.

The World deal is Japan's largest MBO and is being watched closely in Tokyo, where more companies are expressing interest in using the tool to fend off potential hostile interest, according to bankers.

The World buy-out was approved by shareholders at the beginning of this month. Harbor Holdings Alpha, controlled by Hidezo Tera, World's president and brother-in-law of one of the company's founding family members, offered shareholders Y4,700 a share. World will be delisted next month.

Some of the shareholders who owned about a quarter of the company before the buy-out argued that the deal set a bad precedent, saying it appeared to have undervalued the company and enriched the management at investors' expense. The shareholders said World's management seemed to have front-leaded the cost of the transaction into its results, playing down strong sales figures and downgrading its earnings guidance. They added last week's decision to double the net profit forecast underlined their concerns that the company's performance in the run-up to the MBO was better than management had indicated.

Foreign shareholders included Merrill Lynch Investment Management, Schroders and several hedge fund investors. People close to the deal said their fair price assessment of World's share price was as high as Y5,300. One of the shareholders calculated that World's management can expect an internal rate of return from the MBO of 248.9 per cent.

The company was unavailable to comment but has said previously that the deal would let the group pursue a long-term strategy free from the short-term interests of shareholders.

The aggrieved foreign shareholders were forced to agree to the terms of the MBO as they were unable to generate sufficient support from other shareholders to question it. This is now spurring a debate over Japan's relatively low approval limit for takeovers of 66.7 per cent, compared with 90 per cent in the US and 80 per cent in Europe.

GCA Co, a Japanese firm, advised on the takeover.

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