NTT to Take Mobile Unit Docomo Private for $38 Billion

(Bloomberg) — The board of NTT Docomo Inc. is holding a meeting Tuesday to discuss Nippon Telegraph & Telephone Corp.’s plans to turn its wireless carrier unit into a wholly owned subsidiary, a move that may help Prime Minister Yoshihide Suga’s push to lower phone tariffs.

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Pedestrians cross a road in front of an NTT Docomo Inc. store in Tokyo, Japan, on Wednesday, April 24, 2019. Docomo this month cut prices on its mobile phone data plans, some by as much as 40 percent, responding to government pressure to reduce prices that it says are among the world’s highest.

The buyout could be worth as much as 4 trillion yen ($38 billion), based on a 30% premium to Monday’s closing price in Tokyo, the Nikkei newspaper reported earlier. Given that parent NTT already controls 66% of the wireless carrier, any proposal is all but guaranteed to pass. The transaction may be announced as soon as today.

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The proposal to combine the former national companies comes just 15 days after Suga succeeded Shinzo Abe as the nation’s prime minister. With government documents showing data-heavy users in Tokyo pay more than three times for a monthly contract than users in Paris, Suga has made reducing phone bills charged by Docomo and Japan’s other major carriers a priority to score a quick policy win and avoid being seen as a caretaker leader, market watchers have said.

The deal to buy Docomo would be the largest tender offer for a Japanese company in history. When NTT spun out Docomo in 1998, it was also the biggest-ever initial public offering at the time.

“It’s likely that one of the goals here is for NTT to push for lower rates,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. “It’s hard to cut profitability when you have public shareholders, but if it’s done within NTT and there’s a way to make up for any cuts, then it will be easier to do.”

For more on the NTT-Docomo deal:
NTT Buyout Deal for Docomo Seen as Negative for KDDI, SoftBank
NTT’s Record Buyout Deal for Docomo Seen as Negative for Rivals
Docomo Buyout Plan May Signal Deep Japan Mobile Fee Cuts: React
NTT $38 Billion Buyout Plan May Stall Overseas Expansion: React
Docomo Buyout Shows Dumb Pipes No Longer Cut It: Tim Culpan

Docomo shares, which traded without the right to the next dividend, surged as much as 30% on Chi-X Japan. The stock was untraded as of mid-day on the Tokyo stock exchange as buy orders outpaced offers. NTT shares, which are also trading today without the right to the next dividend, declined as much as 3.7%.

“This matter is scheduled to be submitted to a meeting of the board of directors held today,” Docomo said in a statement, adding that it would “make an announcement promptly” once a decision is made.

One key question is how NTT plans to finance the deal. The carrier had 1.09 trillion yen ($10.3 billion) in cash and equivalents at the end of March. Japanese law requires the government to hold at least one third of NTT, which would make it difficult for the company to issue new shares to raise funds.

“We think the funds for the tender offer would all come from cash on hand and borrowings,” Mitsunobu Tsuruo, an analyst at Citi Research, wrote in a report. “The deal would in the short run place a heavy burden on NTT’s finances and likely cap shareholder returns, in particular buybacks.”

Even so, NTT appears to be getting Docomo at a discount, thanks to Suga’s push to lower wireless fees.

In 2018, Suga led a series of attacks against the mobile operators when he was chief cabinet secretary under Abe. While encouraging Rakuten Inc. to enter the market and scrapping fees aimed at discouraging customers from switching carriers, his campaign met with some success but did little to introduce true competition. Since first announcing his intention to take over as prime minister, he has continued to raise the issue.

“In order to solidify his position, he must quickly deliver on some popular economic reforms and has likely already created a battle plan for a few,” John Vail, chief global strategist at Nikko Asset Management, wrote in a report. “Lowering mobile phone costs likely are first on the list, as such will be the most popular with voters. Emphasis on the digitalization of the economy and antiquated government services is also likely popular and, thus, next on the list.”

On Tuesday, Chief Cabinet Secretary Katsunobu Kato declined to comment on NTT’s takeover plan, but reiterated the government’s interest in lowering prices in a “visible way.”

Taking Docomo private will allow NTT to better handle the negative impact of lower mobile bills, the Nikkei said. In a mid-term plan in 2018 amid Suga’s attacks, Docomo had already signaled its profits would drop until fiscal 2023.

(Updates with cabinet secretary’s comments in 13th paragraph)

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