Japanese WhatsApp rival Line is facing a potential revolt over a deal to create a $30bn technology group with SoftBank-backed Z Holdings by minority shareholders displeased by the low pricing of a tender offer delayed by coronavirus.
Investors say the deal, agreed in November, is one of the sternest tests yet of Japan’s “fair mergers and acquisitions guidelines” aimed at strengthening protection for minority shareholders, and how the issue is handled risks curtailing progress on governance made before the pandemic.
The dispute comes as SoftBank has promised to improve oversight of its subsidiaries and the vast web of companies in which it invests following the crisis at US property group WeWork.
The controversy was deepened in late June by an announcement from Z Holdings, a subsidiary of SoftBank’s telecoms arm formerly known as Yahoo Japan, and Line, which is 73 per cent owned by South Korean internet search group Naver. The pair said they were delaying the October closing date because of coronavirus-related delays in obtaining regulatory approvals.
In separate letters sent to Line’s board this month, several overseas hedge funds questioned both the deal’s valuation and the process by which the tender offer price was reached, according to three people involved in writing the letters. The funds declined to be identified for this story.
These investors argued that Line’s three-member special committee was not independent, as defined by the government guidelines, since two of its members were appointed to the board of Z Holdings last month despite being in charge of evaluating the integration on behalf of minority shareholders.
The M&A guidelines, drawn up by Japan’s Ministry of Economy, Trade and Industry, take aim at transactions that involve separately listed parent companies — such as the Line-Z Holdings deal — given the strong potential for abuse of minority shareholders and conflicts of interest.
At the heart of the disagreement is the tender offer price for Line’s shares. Investors have complained it is too low, especially in light of the coronavirus-driven rally in global internet stocks.
In the eight months since the deal was first reported, shares in Z Holdings have risen 30 per cent while Naver has climbed 66 per cent. But Line has hovered near its tender offer price of ¥5,380 ($50), only briefly rising to ¥5,670 in late June on expectations the pricing could be reviewed.
The original ¥5,380 tender offer price was a 17 per cent premium to the closing price of November 13 before shares surged on media reports of the deal.
Since Line’s minority shareholders are being pushed out at ¥5,380 a share under the tender offer, they argue they have been unable to benefit from the market rise while SoftBank’s mobile unit and Naver are getting better terms under the integration.
Line declined to comment, pointing to its statement last month in which it said “no change is currently anticipated to the tender offer prices”.
Analysts said the chance of the companies reviewing the offer price also depended on whether there was any improvement on second-quarter earnings for lossmaking Line. Minority shareholders could refuse to participate in the tender offer and take their complaint to court.
In a complex structure typical of a SoftBank deal, the merger involves the creation of a 50-50 joint venture between Naver and SoftBank’s telecoms unit, which would hold a 65 per cent stake in the newly merged entity. Line would be taken private along the way via a tender offer.