NTT Docomo’s Overseas Deal Flops Undermine Asia Push: Real M&A

Jun 23, 2014 2:37 am ET

(For a Real M&A column news alert: SALT REALMNA <GO>.)

June 23 (Bloomberg) -- Japan’s largest wireless carrier is ready to spend big on overseas deals. If history is any guide, there may be better uses for the money.

NTT Docomo Inc. said last month that it’s willing to put 1 trillion yen ($9.8 billion) into mobile-phone operators in the Asia-Pacific region to help boost revenue amid sluggish growth at home. Previous forays outside Japan resulted in 1.5 trillion yen of writedowns for the Tokyo-based company, which is poised to book another loss soon from its planned exit of a stake in an unprofitable Indian wireless provider.

“Their buying record is awful,” Amir Anvarzadeh, manager of Japanese equity sales at BGC Partners Inc. in Singapore, said in a phone interview. “It’s very difficult to have faith in a company that can’t manage its business domestically being able to pick winners overseas.”

NTT Docomo’s return on equity has diminished in recent years, and Asahi Life Asset Management Co. said the company should focus on improving earnings. It also has scope to return more money to shareholders, according to Macquarie Group Ltd. Even if it sticks to its acquisition plan, finding targets in which to gain a majority share may be difficult, JI Asia Research Ltd. said.

Shares of NTT Docomo fell 1.7 percent, the steepest decline in more than five weeks, to 1,730 yen at the close in Tokyo. The Nikkei 225 Stock Average gained 0.1 percent.

Hiroko Shimoyama, a spokeswoman for NTT Docomo, said the company needs to seek growth opportunities overseas as the domestic mobile-phone market in Japan matures.

“We are increasing global partners step by step through a combination of investments, alliances and acquisitions,” she said in a phone interview.

No Limit

NTT Docomo had 546.5 billion yen in cash and equivalents on March 31. The carrier could pursue a bigger deal than that because it can tap capital markets if necessary, according to Chief Financial Officer Kazuto Tsubouchi.

“If investing 1 trillion yen can bring us a return, we will go ahead,” Tsubouchi said in a May 28 interview at the company’s headquarters. “We don’t set a cap on the investment size, since we have the ability to raise capital.”

NTT Docomo already has a network of minority stakes in phone operators across Asia. They include 5.8 percent of KT Corp. in South Korea, 8.6 percent of Philippine Long Distance Telephone Co. and 4.7 percent of Far EasTone Telecommunications Co. in Taiwan, according to a NTT Docomo factbook last month.

“I’m skeptical of the overseas M&A strategy,” Nathan Ramler, an analyst at Macquarie in Tokyo, said in a phone interview. “There is no obvious target they need to buy.”

Investment Writedowns

Losses from NTT Docomo’s U.S. and European investments underscore the difficulty of entering new markets, he said.

NTT Docomo in 2000 announced deals to buy stakes in AT&T Wireless Group, KPN Mobile NV in the Netherlands and Hutchison 3G UK Holdings Ltd. for more than $15 billion combined to export its home-grown mobile Internet technology, according to data compiled by Bloomberg.

By 2005, the Tokyo-based company had booked losses of 1.5 trillion yen, equivalent to about $13 billion at the time, on the three deals after asset values plummeted. In the U.K., NTT Docomo exited with only 10 percent of its initial investment.

In India, NTT Docomo said in April it plans to sell its 26.5 percent stake in lossmaking Tata Teleservices Ltd., acquired for 266.7 billion yen in 2009 and 2011. Under the conditions of the planned exit, the Japanese company can sell the shares for 50 percent of the acquisition price or a fair market price, whichever is higher. NTT Docomo said in April it couldn’t say what price those shares may fetch.

Flexibility Needed

To profit from overseas acquisitions, a buyer needs to be flexible, willing to make compromises and able to understand the local culture, Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, said by phone.

“Exactly what NTT is not about,” he said.

The company is turning overseas as it loses ground to domestic rivals SoftBank Corp. and KDDI Corp., which are offering promotions to win subscribers. NTT Docomo’s share of the Japanese market shrank to 45 percent in March from more than 60 percent five years ago. In September, the company was the last of the three operators to offer Apple Inc. iPhones.

The company generated a return on equity of 8.4 percent in the year ended March. That compared with 30 percent at SoftBank and 13 percent at KDDI, according to data compiled by Bloomberg.

Few Opportunities

To be sure, NTT Docomo may fail to find anything to buy.

According to Ramler at Macquarie, one potential target might have been Thailand’s True Corp. before China Mobile Ltd. this month agreed to buy an 18 percent stake in the Bangkok- based company. China Mobile is the world’s largest mobile-phone carrier by subscribers.

NTT Docomo will also struggle to convert its minority stakes in regional phone operators into controlling shareholdings because Asian nations are reluctant to sell control of such assets to foreign companies, said Neil Juggins, Hong Kong-based analyst at JI Asia Research.

“Opportunities don’t come up all the time,” he said. “There is a certain degree of wariness.”

NTT Docomo has said it plans to increase revenue from non- traditional businesses such as financial services, retail and digital-content industries to 1 trillion yen by March 2016.

“A good strategy is to earn stable cash flow in Japan,” Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management in Tokyo, said by phone. “It doesn’t have to expand overseas.”

Rather than buy up more assets in other countries, NTT Docomo has room to increase its dividend, said Ramler at Macquarie. The company also announced a 500 billion-yen share buyback in April.

Even with NTT Docomo saying it’s scouting for acquisitions, some still doubt it has the flexibility to pull off a successful deal.

“Docomo is an elephant,” said Merner at Atlantis Investment Research. “And elephants don’t tap dance well.”