TCI steps up pressure on J-Power

The Children’s Investment Fund on Tuesday stepped up pressure on J-Power, urging the Japanese electricity power wholesaler to sell stakes in eight companies that have lost a total of Y6.7bn ($62m) in value this year.

The UK-based activist hedge fund said the value of J-Power’s holdings in the eight companies – which include Nippon Steel and Mitsubishi Heavy Industries – had fallen since the start of the fiscal year in April.

Meanwhile, TCI, which has a 9.9 per cent stake in J-Power, said that the share price fall had left the Japanese group with book losses that are almost one-fifth of its forecast net profits for the year of Y34bn.

TCI on Tuesday told a group of businessmen, financiers and academics: “Management should not use J-Power’s funds to invest in listed stocks.”

It said that cross-shareholdings were not a part of J-Power’s strategy as presented to investors in the company’s prospectus when it was listed in 2004, nor were they mentioned in the group’s management plan for 2007.

This year, shareholders rejected a proposal brought by TCI to force the company to raise its dividend.

The UK fund’s criticism comes as J-Power and its largest shareholder have clashed over the utility’s performance since listing.

But the fund recently wrote to J-Power’s management saying it was deeply concerned by the continuing decline in the Japanese company’s corporate value after privatisation.

TCI has made several proposals aimed at improving shareholder returns, including the nomination of two of the fund’s representatives to the J-Power board, and a commitment to a 10 per cent return on equity and a 4 per cent return on assets.

The Japanese group on Tuesday defended its equity holdings, which it said were made “to seek business synergies, and not specifically to have stable shareholders”.

J-Power said it did not believe it had made a loss on its long-term equity holdings. The company has previously said that it believes TCI’s criticism is one-sided and that J-Power has met its performance targets, including group recurring profits.

“We do not consider ROE to be a management target and [in that respect] our understanding is completely different from (TCI’s),” Kuniharu Takemata, executive managing officer, said last week.

TCI’s call on J-Power to dissolve its cross-shareholdings comes as Japanese companies have increased such holdings in an effort to stave off unsolicited takeovers.

Cross-shareholdings have decreased substantially from nearly 24 per cent in 1991 to 5.9 per cent last year, according to Daiwa Institute of Research.

But the ratio of cross-shareholdings among listed companies as measured by number of shares, crept up from 5.5 per cent in 2005 to 5.9 per cent in the year to March 2007, according to the research group.

Companies that feel particularly threatened by the possibility of an unsolicited bid have been particularly aggressive in seeking cross-shareholdings.

The trend has triggered criticism, which has in part prompted Millea Holdings, Japan’s largest non-life insurance group, to pledge to reduce “strategic holdings” by Y150bn in the 3 years from 2006 to 2008.

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