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Pink whiskey

24 July 2015 By Rob Cox

Lionel Barber, the editor of the Financial Times, might not fancy his pink newspaper for the global elite being compared to Kentucky bourbon. But Nikkei’s super-sized $1.3 billion purchase of the Financial Times is philosophically no different than another major Japanese purchase abroad – booze group Suntory Holdings swallowing Jim Beam for $16 billion.

Outside of Japan, deals like these are hard to fathom, mainly because the finances don’t seem to stack up. That’s what allowed Nikkei in the 11th hour to leapfrog rivals Axel Springer and the mighty Bloomberg LP. A litany of disastrous overseas forays from the 1980s onwards – from movie studios to golf courses to the Rockefeller Center – only heightens the skepticism.

But in Tokyo the calculus looks wholly different. In a shrinking domestic market, without a product that travels well internationally, buying the FT – or Beam and Maker’s Mark for that matter – is about securing the somewhat distant future. Hence a roughly $50 billion blizzard of outbound deals so far this year.

 

Only part of it can be explained by the storied difference between Japanese long-term planning and the short-term thinking that prevails in Anglo-American capital markets. Even accounting for something in between – and coherent with Nikkei’s clumsily worded core value of “long-time policy over free market system” – it is difficult to reconcile the 35 times operating profit the company chaired by Tsuneo Kita is paying for a post-growth British media business.

That is, until the inevitable arc of Japan’s future is factored into the equation. Over the next 40 years, the population of the Land of the Rising Sun is forecast to fall by over 30 percent to about 87 million people, according to the Economist, the weekly paper in which Pearson decided not to sell its 50 percent stake (perhaps saving that trophy for FT losing bidder Mike Bloomberg). What’s worse, without any change in birthrates or immigration, in a century Japan may have just 43 million inhabitants.

Such demographics are particularly worrying to leading Japanese companies with no obvious route to the global marketplace. It’s hard to conjure up a more perfect specimen for this challenge than Nikkei, which turns 140 in December. As the country’s leading financial print publication by a wide margin, it is fully invested in and exposed to this shrinking market.

Nikkei is totally dominant at home, with 3 million print readers daily – or more than three times the U.S. penetration rate of the Wall Street Journal. Things won’t get much better from here while Japan shrinks. As it is, revenue looks flat, at around 300 billion yen last year, about the same as 2011. Operating profit was 16.7 billion yen, down 9 percent from 2013.

This quandary might be surmountable for a company with the wherewithal to manufacture products desired abroad, say Toyota’s automobiles or A Bathing Ape’s hip street-wear. Even Suntory had some beer and knock-off whiskey to sell overseas to a few Japanophiles. No such luck for Nikkei: There is a finite audience for business and financial news about Japan.

This is where the Financial Times comes in. The FT is a recognizable and prestigious brand wherever money matters. Not only is its content of global significance, it comes in the internet’s lingua franca – English. Like Suntory’s new bourbon flavors, the FT gives Nikkei something smooth and palatable to offer the world over.  

True, the price is hallucinatory by any generally accepted investment yardstick. As my colleague Jen Saba points out, the FT’s peers trade at about 12 times adjusted operating income. Even billionaire Jeff Bezos was far less generous when he took control of the Washington Post.

Moreover, there are barely any synergies to soften the blow. Nikkei might help sell a few more FT subscriptions in Tokyo and Osaka. But assuming no change in the FT’s fortunes and a ridiculously low 3 percent cost of borrowing for the whole lot, Nikkei’s interest payments will eat up all of the London-based newspaper’s operating income.

Sums like that could be career-enders for American or European CEOs. Yet among corporations dependent on the Japanese consumer, it’s par for the course. Think Japan Tobacco overpaying for Gallaher and SoftBank riding to the rescue of Sprint Nextel. It’s probably why Meiji Yasuda Life just agreed to pay $5 billion for U.S. insurer StanCorp Financial – a whopping 50 percent premium to its market value.

Like Meiji, Nikkei is private. Its male-dominated, all-Japanese board presumably has only itself and employees to answer to. They decided overspending beat doing nothing. That is not at all surprising when viewed as an existential Japanese dilemma.

(This item has been corrected to refer to Kentucky not Tennessee in the opening paragraph.)

 

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