Nippon Sheet Glass: takeover prompts worries about finances

The Nippon Sheet Glass (NSG) takeover of Pilkington Plc has increased market concerns about the financial health of the Japanese firm now that it has to find large sums to carry out the acquisition.

The Nippon Sheet Glass (NSG) takeover of Pilkington Plc has increased market concerns about the financial health of the Japanese firm now that it has to find large sums to carry out the acquisition. Although Nippon Sheet Glass will achieve its hoped-for expansion, the earnings environment for its glass operations is deteriorating as fuel prices race higher. With goodwill expected to reach JPY 220 billion, it is unclear how the acquisition will contribute to earnings in the medium to long term. If goodwill is amortized over 20 years, write-offs will increase to around JPY 11 billion a year. Nippon Sheet Glass will need JPY 616 billion for the acquisition, which includes Pilkington“s rolled-over loans. This is equivalent to 80% of the firms“ combined annual sales on a simplified basis of JPY 760 billion. Nippon Sheet Glass will be able to find around JPY 89 billion from cash reserves and sales of securities. However, it will borrow approximately JPY 363 billion from UBS AG, Sumitomo Mitsui Banking Corp. and others, while a further JPY 110 billion will be raised by issuing moving strike convertible bonds. Nippon Sheet Glass Vice Chairman Tomoaki Abe claims that because it has a “carefully thought out financing plan, there is little financial risk.” However, the firm“s consolidated shareholders“ equity, which indicates the financial health of a company, is expected to fall from more than 49% as of 31 December 2005 to under 30%. The purchase price “seems slightly overvalued when considering the price-earnings ratio,” says Yuji Matsumoto, a senior analyst at Nomura Securities Co.