Breakingviews - Toyota’s take-private is a costly, messy defence

Toyota Motor is supporting a $33 billion take-private of Toyota Industries led by Toyota Fudosan, a privately held real-estate company, with Akio Toyoda holding a minority stake. Toyota Motor will buy its own shares from Toyota Industries, purchase preference shares in the new holding company, and sell its stake in Toyota Industries as part of the deal. The tender offer for Toyota Industries is at 16,300 yen a share, an 11% discount to the stock’s closing price on June 3, raising concerns about the deal's fairness to Toyota Motor and Toyota Industries' minority shareholders.

Analysis

Toyota Motor is actively participating in a complex $33 billion transaction to take Toyota Industries private, a move involving the divestment of its existing approximately 25% stake in Toyota Industries for about $7 billion, a tender offer to repurchase up to $22.5 billion of its own shares held by Toyota Industries at a discount, and an investment of nearly $5 billion (706 billion yen) for an 8.6% yielding preference share stake in the new holding company that will own Toyota Industries. Despite Toyota Motor's stated goal of transforming into a broader mobility company and unwinding cross-shareholdings, the deal structure is contentious; Toyota Motor contributes 80% of the equity to the new holding company but exchanges its voting shares in a listed entity for a non-voting, subordinate position in an illiquid, opaque structure. Notably, Toyota Motor will retain an indirect interest, as it will continue to own 24% of Toyota Fudosan, the private real-estate entity controlling 99.5% of the newly private Toyota Industries, with founding family member Akio Toyoda holding the remaining 0.5% of the new holding company. The tender offer for Toyota Industries at 16,300 yen per share, an 11% discount to its June 3 closing price of 18,400 yen, further suggests that the transaction disadvantages independent shareholders of both companies, potentially benefiting insiders and reflecting poorly on corporate governance in contrast to Japan's shareholder value enhancement initiatives.

Key Decisions for Investors

• Toyota Motor investors should critically assess the potential for value destruction from exchanging a liquid, voting stake for an illiquid, non-voting preference share, and closely monitor corporate governance practices within the Toyota group.
• Toyota Industries investors face a tender offer at an 11% discount to the prior market price, warranting careful evaluation of their options as this may represent an unfavorable outcome for minority shareholders if the take-private proceeds on these terms.
• Investors in both companies should recognize the heightened governance risk highlighted by this transaction, where group restructuring and potential insider benefits appear to take precedence over independent shareholder interests, potentially impacting future investment theses.