Wednesday, May 21, 2008

Unlikely to go critical - on TCI vs. Macquarie

I opened up today's Asahi Shimbun to page 2 and saw, on the left side, a special article promising to explain how foreign investment in power companies poses a threat to the nation, while a much larger foreign ownership stake in the operator of Haneda Airport does not.

Aha! Finally, an explanation of the government's bi-polar reaction to two attempts by foreign funds to buy large stakes in major elements of the nation's vital infrastructure--on the one hand decrying the frenzied attempts to prevent the Australian fund Macquarie Airports from purchasing just over 19% of Haneda Airport's operating company--while at the same time serving The Children's Investment Fund (TCI) with a cease-and-desist order to prevent it from purchasing more than 9.9% of electrical power company J-Power--on the grounds that TCI's holding more than 10% of J-Power would pose a threat to public order.

As if owning the airport closest to the center of Tokyo does not affect national security and public order.

Eagerly, I zipped through the piece. "At last," I thought, "someone will explain the government's schizophrenic behavior so I will not have to try to make sense of it myself.

Here is the Asahi Shimbun's explanation of the difference:

"First there is the procedure involved. In the case of the airports, criticism has come out saying that they are trying to rewrite the rules after the fact, which is leading it to be called 'choosing between Rock, Paper and Scissors after your opponent has shown his hand' (ato dashi janken). On the other hand, in the case of J-Power, the law is already in existence.

It is also said that in the case of power generation, there is a great worry that it will have an impact on the lives of the citizens. J-Power has 67 thermal and hydroelectric facilities and is in the midst of building a nuclear power plant in Aomori Prefecture. Then again, TCI insists that in the case of the nuclear power plant and vital main facilities, it will defer invoking its rights as an owner."
The article then notes that other OECD countries protect their electrical generation and power grid through limits on foreign ownership. The sole example given is America's 1994 Act on Foreign Investment. The article claims the Act, known as "Exon-Florio," is the "strictest law in the world on foreign investment"-- because it requires an confirmation from the President that the acquisition of over 10% of an American company by a foreign entity does not threaten U.S. national security.

That's it. That's The Asahi Shimbun's exoneration of the government's inconsistent responses to the two situations.

A lot of "it is said that"..."there has been criticism saying that" buck passing.

The Asahi Shimbun. The thinking man's and thinking woman's paper. The feisty iconoclast, the voice of liberality. The skeptic's refuge.

I am going to go bang my head on the desk for a while.

* * *

The reason METI did not want to have TCI messing with J-Power obviously has nothing to do with national security. That argument does not hold water in light of the Haneda gyrations.

So what is the reason?

One possibility is that METI has a lot it wants to hide as regards the power market. The research of Paul Scalise of Oxford indicates that if TCI gets the opportunity to examine J-Power's books, it will find out why electricity is so costly yet power companies profits so small--and probably flee in a panic.

TCI would find out that money-making opportunities in power generation evaporate away not because of the incompetence of venal power company managers or an insufficiently competitive power market--but because of "Citizen Bandits and Conformist Revolutionaries."

And if Mr. Scalise could hurry up and finish his thesis, I would have the freedom to explain what I mean by that phrase.

Later - In comments, the mighty Chris checks in with a professional opinion.


Chris ( said...

I think what is being overlooked is that the nature of the investor, and their aims, are very different in the cases of J-Power and Japan Airport Terminal.

Macquarie is a listed, regulated, big balance-sheet Australian bank. TCI are an overtly activist hedge fund. Macquarie are buying infrastructure projects globally and quietly clipping the coupon. TCI are taking large stakes and trying to force change. It's naive to think that this has no bearing on METI's decision. I'd lay money on TCI getting the same treatment if it were taking a stake in JAT, and Macquarie taking a stake in J-power instead. Of course, this is not something that METI would care to see in print, and would probably deny if it were, but that doesn't make it any less true.

While I have more than a small vested interest in activism working in Japan, it also never fails to stagger me what a mess TCI have made of this one, and their seeming failure during their due diligence to notice:

1. the maximum 10% shareholder rule
2. the 29% equity ratio of the company (hardly a cash-rich, bloated balance sheet)
3. the fact that free cash flow is about to go deeply negative as the company builds 2 new plants - a strong argument for not increasing (or maybe even cutting) the dividend

Putting myself in the shoes of management, even I would be lobbying the government hard on this one. Superficially METI's decision to discriminate between the two investments looks capricious. It pains me to say so, but I honestly believe they may in fact be right to do so this time.

The other point that the media has been very quiet on is that TCI are getting a lot of pushback on their activities in CSX in the US. It's not just Japan where they are failing to find favour.

The final point on low profitability is hardly unique to the power generation industry in Japan. You might as well ask why Mitsubishi Heavy Industries, a world leader with a near monopoly in many of its fields, can only achieve an ROE of 4%. The answer lies largely in the tax system. When corporate tax is high, and director/owner bonuses only payable from post-tax income, then there is little incentive to post a profit and every incentive to spend the cashflow in marginal projects with little hope of return. Or by whooping it up in Ginza on the expense account each evening.

MTC said...

chris -

Thank you for your cogent analysis of the differences between the TCI and Macquarie investments. How much better would my morning reading be if you were in charge of The Asahi Shimbun's inner pages rather than the current lot.

I do not mind seemingly hypocritical, inconsistent and self-serving excuses from government officials. What I mind is the nation's leading intellectual newspaper repeating those excuses as an explanation of the seeming hypocritical inconsistency.

My impulse upon reading the special article was to scream, "What was the point of this exercise? You have not explained anything! A person reading your special explainer article comes away with exactly the same information found in your regular reporting on the subject. Reiterating the government's problematic public position does not explain it. Or did you think I would not notice?"

Where I fault the government in this matter is in screwing up its priorities. In seeking to avoid a show of bias towards a particular kind of foreign investor, the government has talked itself into a position that makes it seem as though it does not know its own mind.

Chris ( said...

All of which begs the question, why is no one in government or at the Asahi Shinbun making this point explicitly? We're talking about a government whose finance minister publicly branded hedge funds as "piranhas" only last year, so it's not as if they are too careful about tiptoeing through the tulips on these matters. Surely it would be the easiest thing in the world to make the distinction between big bank quiet investor=good, big hedge fund shaking things up=bad.

Maybe a sign that a new, foreign investment friendly policy is in the works? There were rumours earlier in the week..