(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

HONG KONG  - State-backed Nippon Telegraph and Telephone’s offer to buy out its subsidiary need not be too friendly. It wants to buy the remaining 34% of mobile carrier NTT Docomo it does not own, Nikkei newspaper reported – potentially Japan’s second-largest domestic merger ever. Any offer needs to factor in new Prime Minister Yoshihide Suga, who is eager to drastically force down telecoms tariffs.

The two $85 billion telecoms giants were split in 1992 when Docomo was spun out to improve market competition. It was floated in 1998. The government still holds 32% of NTT, which in turn holds 66% of Docomo.

Official pressure may be at play in this reunion. This month Suga made lowering telephone bills, which could offset the impact of an ill-advised consumption tax hike last year, a priority. In 2018 he suggested 40% cut would be reasonable. Shares in Docomo, as well as rivals KDDI and SoftBank Corp have been under pressure. If NTT reabsorbs Docomo, however, the latter might have greater firepower to lower rates.

The Nikkei report suggested NTT would pay a premium of 30%, or $8.7 billion over the undisturbed price for minorities’ shares. To cover the cost of that premium in isolation would mean finding savings of about $1.3 billion a year, or 3.5% of Docomo’s operating expenses in the financial year to March 2020, according to Breakingviews calculations. That could be manageable.

But it is not clear why NTT would pay so much given the likelihood of imminent downward pressure on revenue at Docomo, and NTT’s stock price fell on the news. Such a rate would certainly set a generous standard which activists could point to when other Japanese conglomerates try to buy back subsidiaries. Perhaps that’s the point; empowering minority shareholders was a priority for Suga’s predecessor Shinzo Abe and he has pledged to carry on the fight.

Activists have long taken issue with Japan Inc’s habit of parent companies floating subsidiaries while keeping tight control. But it’s hard to see how reuniting these two giants would increase competition. And at the mooted premium, NTT’s shareholders might end up worse off.

 

CONTEXT NEWS

- Japanese telecom provider Nippon Telegraph and Telephone said on Sept. 29 that it was considering buying the rest of its mobile operator subsidiary NTT Docomo, following a Nikkei report that it was planning a tender offer expected to be worth about 4 trillion yen, or $38 billion. The value of the 34% stake that NTT does not already own in NTT Docomo was calculated based on “adding the typical 30% premium” to the undisturbed share price, Nikkei reported.

- NTT said nothing had been decided, but that the matter would be discussed at a board meeting on Sept. 29.

- New Japanese Prime Minister Yoshihide Suga has signalled that he wants more competition and lower prices in the wireless sector. The government is NTT’s biggest shareholder, with a 34% stake.

 

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Pete Sweeney and Sharon Lam) ((jennifer.hughes@thomsonreuters.com; Reuters Messaging: jennifer.hughes.thomsonreuters.com@reuters.net))