Business | NATIONAL SPOTLIGHT

Much riding on giant Japan Post Group IPO

by Atsushi Kodera

Staff Writer

Three state-affiliated companies in the Japan Post Group are set to go public on the Tokyo Stock Exchange on Nov. 4 in the nation’s biggest initial offering — with the government seeking to raise ¥1.4 trillion in the first phase of the sale.

The three giants are expected to have a combined market capitalization of over ¥12 trillion when listed.

The listing of Japan Post Holdings Co., the holding company for the group, and of financial subsidiaries Japan Post Bank Co. and Japan Post, is significant in a number of ways, with much at stake.

First, the government is planning to spend ¥4 trillion of the proceeds from the entire sale to help fund reconstruction in areas devastated by the March 11, 2011, earthquake and tsunami. It also hopes the IPO will lure more investment-shy individuals into the stock market to help reinflate the economy.

Furthermore, it marks the start of the final phase of the postal privatization drive initiated by former Prime Minister Junichiro Koizumi in 2005 as part of austerity reforms that he said would leave “no sanctuaries.”

“(The IPO) is part of Abenomics in that a large percentage of the shares are intended for purchase by individuals,” said Hideki Ide, professor of economics at Keio University, referring to Prime Minister Shinzo Abe’s economic policy. “The idea being, if the general public profits from the shares, that would prompt more spending . . . so if you look at it as a part of Abenomics, it is a policy that cannot be allowed to fail.”

In the first batch of the phased IPO, the shares of all three companies will go on the block. But shares in Japan Post, the mail and parcel delivery behemoth, will remain 100 percent owned by the holding company and will not be offered for sale.

The plan is for the holding company to sell about half of the stock of the bank and insurance units by fiscal 2022. One-third of the holding firm will remain in government hands.

The IPO process has entered the book building phase, the price discovery process whereby underwriters, or the brokerages handling the sale, set an arbitrary price range for a select group of investors, such as fund managers, to gauge demand.

Based upon the response, the brokerages determine how to price the IPO. If demand exceeds the supply, a lottery will be held.

The price ranges were set at ¥1,100 to ¥1,400 for the parent, ¥1,250 to ¥1,450 for the bank and ¥1,900 to ¥2,200 for the insurer.

The listing of the companies is huge, given they employ a combined 220,000 people, rivaling telecom giant Nippon Telegraph and Telephone Corp. They logged consolidated sales of some ¥15 trillion in the year ending March 2014, second only to Toyota Motor Corp.

The services of the two financial subsidiaries are offered via the nationwide network of outlets run by the Japan Post Group, which totaled 24,464 at the end of September. This is far bigger than the 18,099 stores run by Seven-Eleven Japan Co., the nation’s biggest convenience store chain. The group’s total consolidated assets amounted to ¥295.8 trillion at the end of March, surpassing the ¥264.1 trillion of Mitsubishi UFJ Financial Group Inc., the nation’s biggest private financial group, at the end of September 2014.

Observers liken the listing to that of NTT in 1987, which until then was entirely owned by the government, just like the postal group.

The public offering of the telecoms giant, whose market capitalization was set at ¥18.7 trillion at the time, attracted intense interest and had a major role in stimulating public investment.

Listed on Feb. 9, 1987, with an initial offering price of about ¥1.2 million, NTT shares rose to ¥1.6 million by the second day of trading and jumped nearly three-fold to ¥3.18 million in just two months.

Naturally, the biggest question for the Japan Post Group is whether that success can be repeated.

The precedent set by NTT also had a negative side.

Listed at the height of the asset-inflated bubble economy, NTT’s stock slumped as the bubble imploded and never returned to its lofty initial heights. That made it difficult for the government to sell subsequent batches of its NTT holdings at more favorable prices.

In fact, NTT is the only stock with a share price below the initial quotation among all government holdings offered to the public, including the JR Group and Japan Tobacco Inc.

Reflecting the view that state-held shares are the property of all citizens, the government intends to release the group’s shares on a wide scale so they will be available to individual investors, rather than institutional investors.

To make the IPO more attractive to individuals, underwriters are highlighting their dividend potential rather than their growth potential.

According to the prospectus for Japan Post Holdings as well as Japan Post Bank, the dividend target will be 50 percent or more of net profit divided by all outstanding shares, until the end of March 2012. The target for Japan Post Insurance is set at 30 to 50 percent for the same period.

Professor Ide, of Keio University, acknowledged to a certain extent that these attractive dividends may prove popular with individuals, who may seek comfort in the expected price resiliency of the shares, but he said the companies need to do more.

“In many countries, postal services are a maturing industry, or maybe even a declining one, and it’s a challenge for any country to find ways to revitalize it,” Ide said. “The situation is the same in Japan. I don’t think people will buy the shares unless the companies show strategies to grow, and viable visions for the future.”

In May, Japan Post Co. acquired 100 percent ownership in Toll Holdings Ltd., a major logistics company based in Australia, giving the postal group a foothold for its global expansion plans.

In July, too, the ruling Liberal Democratic Party proposed that the government raise the deposit cap limit at Japan Post Bank to ¥30 million per account from ¥10 million, drawing complaints from private-sector lenders.

But Masayuki Kubota, chief strategist at Rakuten Securities Economic Research Institute, thinks the group needs to make more strategic moves by, for example, “seeking to establish deeper relations with local banks and becoming the center of a large union of local banks.”

“(Japan Post Group) can think of numerous ideas for growth,” he said.

Kubota, a former fund manager who covered government corporations that have privatized, including NTT Corp., sees looming problems with the massive listings.

While the giant has numerous options to further growth, it is likely to draw strong protests from the private sector if it tries to expand its scope while under government influence, which will give it a major advantage.

But government backing also comes with regulatory controls. Currently, the postal group is required to provide universal service across the country, including in depopulated rural areas, and is not allowed to lend to businesses.

So the group’s growth can be affected by the timing of a share sale,” Kubota said.

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