×

Opposition to Japanese Bourses Tie-Up Mounts

Investors in the Osaka Securities Exchange are challenging management to push for better merger terms from the Tokyo Stock Exchange, in a rare outbreak of shareholder activism in Japan.

Tokyo Exchange
Getty Images
Tokyo Exchange

The move threatens to derail a tie-up that would create the world’s third-biggest exchange group by market capitalisation of listed companies, after NYSE Euronext and Nasdaq OMX.

Japan has come under pressure to consolidate its 11 stock, derivatives and commodity exchanges as other large economies have built up big, “multi-asset” bourses with global reach. In addition Japan, long the undisputed largest and most liquid capital market in Asia, faces a long-term threat from China and its maturing exchanges.

Under the two sides’ agreed merger, announced last November and due to proceed this summer, the unlisted TSE is valued at about 1.7 times the listed OSE. A number of shareholders in the Osaka-based group, predominantly non-Japanese institutions, are now urging chief executive Michio Yoneda to improve terms in the OSE’s favour, according to people familiar with the situation.

If the terms are not revised, investors say they may vote against the re-election of OSE directors at the annual shareholders’ meeting in June — a move that would most likely scuttle the deal.

The OSE’s top shareholders include Fidelity, JO Hambro Capital Management, Northern Trust and State Street, according to Bloomberg data.

Neither the OSE nor the TSE were available to comment.

Forced renegotiations are unusual in Japan. In the most recent example of investor activism, Japan Tobacco raised its dividend and is poised to buy back shares after a challenge from UK-based activist hedge fund The Children’s Investment Fund over inefficient use of capital.

The merger is due to complete in two stages. First, the TSE will make a tender offer for two-thirds of the OSE’s outstanding shares at Y480,000 ($6,182) a share, a 14 per cent premium to the last traded price before the announcement. Then the TSE will effectively inject itself into the listed company by swapping one new share in the OSE for every five shares held in the TSE. OSE, the surviving entity, will be renamed Japan Exchange Group.

A 20 per cent increase in the tender offer price would push the TSE’s implied valuation closer to 1.4 times the OSE and the share-swap ratio to 1:6. Investors say that would be a fairer reflection of the combination of Tokyo’s scale with Osaka’s consistent profitability, thanks largely to OSE’s derivatives business, including its flagship Nikkei 225 index futures contract.

But people on both sides say the deal is unlikely to unravel, given the political momentum for exchange convergence.