Financial Times Europe - 09.10.2019

Wednesday9 October 2019 ★ FINANCIAL TIMES 15

COMPANIES

L E O L E W I S— TOKYO

When recent presidents ofHitachi eldh
town-hall meetings for staff, they often
brought a chart showing howthe future
of one of Japan’s mostrenowned names
wasthrownintodoubt.
Itisunusualforacompanytodwellon
past disasters, but Hitachi as madeh a
powerful virtue of its bruising financial
loss duringtheglobalfinancialcrisis.
The $8bn lossit suffered in 2008 gal-
vanisedanunwieldy,ill-disciplinedcon-
glomerate — with businesses spanning
rice cookers to nuclear power stations —
and provided Japan with what some
havecometoseeasamodelofhowmore
robust corporate governance and a
sharper focus can protect a company
from failure. To foreign and domestic
investors who had largely written
Hitachi off as the cautionary symbol of
Japan’s corporate intransigence and
decline, it was an important glimmer of
hope.
“Many companies want to change,
but every company needs a moment
that makes it happen. We had that
moment after the collapse of Lehman
Brothers,” said Masano Sato, a veteran
of the investor relations division at
Hitachi. The big challenge now, he adds,
is convincing the market that after a
decade of agonising restructuring,
Hitachi canpush into fast-growing
fields. These include the “internet of
things”,oraddingconnectivitytoindus-
trialapplications.
Hitachi’sportfolio of businesses was,
to many observers, the epitome of why
Japan so badly needed a governance
overhaul. It had hundreds of subsidiar-
ies, many with only a slim business
rationale, but whose effect was to create
invisible hierarchies that too often
steeredthecompanythewrongway.
In 2011, Hitachi was controlled by a
13-member board of which just four
members were notionally independent;
today an 11-member board is domi-
nated by eight genuinely independent
directors. In 2008, the company had 22
subsidiaries listed on the Tokyo Stock
Exchange, by the end of 2018 it had just
four and may soon have even fewer as
other carve-out plans evolve. Over the
sameperiod,itstotalnumberofconsoli-
dated subsidiaries in Japan dropped 05
percentto202inaflurryofsell-offsand
restructuring.
Pressure for better governance in
Japan was crystallised by the 2015 gov-
ernance code but investors’ deep dissat-
isfaction with the likes of Hitachi pre-
dated that. One of the most consistent
complaints of investorshas been the
prevalenceintheTokyostockmarketof
listed subsidiaries of larger companies.
Therearestillroughly247listedcompa-
nies whose capital structure involves
substantial stakes held by the parent,
which often means that minority share-
holders are abusedwhile management
complacencyiswidespread.
The clear-out by Hitachi sawKKR
acquire a chipmaking business in late
2017, while French car -arts makerFau-
recia ought the Japanese group’s carb
navigationbusinessfor€1.1bnlastyear.
ShareholdershaverewardedHitachifor
corporate governance reforms, that
while pioneering in Japan, have long
been the convention in other developed
markets. Hitachi shares have more than
doubledsincethestartof2009whilethe
benchmark Topix index has climbed
justover80percent.
Success in maintaining
momentum, say inves-
tors who own Hitachi
shares, will depend
on leadership. To
many analysts, the
defining change at
Hitachi may
have been less
the crisis men-
tality forged in
the wake of the

global financial crisis,and more the

arrival in 2010 ofHiroaki Nakanishi sa

president.

Despitehis40yearsasaHitachiloyal-

ist, his message waspainfully simple:

survival would depend on tightly reim-

agining Hitachi as an IT and infrastruc-

turespecialist,agroup-widerecognition

that there were no more sacred cows,

and that governance shortcomings were

asystemiccrisiswithincorporateJapan.

Mr Nakanishi’s success, particularly

in promoting the rapid-fire sale of listed

subsidiaries, was eye-catching — most

especially to the ranks of large private

equity groups that have now taken up

position in Japan as theywait for other

conglomerates to follow Hitachi’s lead

and jettison assets. Earlier this year,

KKR co-founder George Roberts

described Japan as his company’s high-

estprioritymarketoutsidetheUS.

In 2018, Mr Nakanishi (by then exec-

utive chairman of Hitachi) became

head of the Keidanren business federa-

tion — a powerful, conservative organi-

sation whose character he had begun to

reshape before suffering ill health in

Maythisyearandpartiallywithdrawing

frompublicappearances.

But his influence at Hitachi — com-

bined with the pressures created by

Japan’s first stewardship and corporate

governance codes in 2014 and 2015

respectively —is hard to dispute.

According to oldman Sachs, the moveG

by Japanese companies

to focus on core

businesses has

accelerated

since 2014. Last

year a record 206

announced the

partial sale or

transfer ofbusi-

nesses.

His successor as

Hitachi chief executive since 2016,

Toshiaki Higashihara, appears to have

doubled-down by making it known that

thefourremaininglistedsubsidiariesdo

not enjoy any magical protection from

divestmentorconsolidation.

Although the company has made no

formal decision, Hitachi isrunning a

saleofitschemicaldivision—aunitlong

regarded as so central to the business

that its sale would represent evidence of

thescaleofchangeatHitachi.

Offshore,thecompanyhasexpanded,

scrambling to globalise the group as

Japan’s population-shrinking demo-

graphics hobble future domestic

growth.The company last December

embarked on its biggestoverseas acqui-

sition—a$6.4bngrabforthelion’sshare

ofABB’selectricitygridassets.

A pincer-movement of governance

pressures from Japan’s government

pension investment fund (GPIF) — the

world’s largest pension fund — and from

activists with increasingly sophisticated

tacticsis beginning to push the parents

to make big calls on their subsidiaries.

But even before that, Hitachi was under

pressure to shed its subsidiary flab. It

now, spectacularly for a Japanese com-

pany, admits it should have heeded

thosewarningssooner.

“There was a realisation that what the

institutional investors had been saying

about Hitachi before Lehman — what it

needed to do, and what businesses it

should sell — had been basically right,”

saidMrSato.

The challenge of preparing the com-

pany for its growth phase, say Hitachi

executives, will be to continue refining

the concept of what is “core”: the focus

on IT and infrastructure operating tech-

nology may work strategically for now,

butitmayhavetoevolve.

A medium-term plan will see the

company focus resources on what it

Hitachi’s governance turnround

points way for Japan Inc reforms

FT Series limmed-down conglomerate displays benefits of robust oversight and sharper focusS

Hitachiis

pushing into the

‘internet of

things’ after

being

transformed

into an IT and

infrastructure

specialist under

Hiroaki

Nakanishi,

below— Fotogramma/

Mega

‘Many

companies

want to

change, but

every

company

needs a

moment

that makes

it happen’

calls the social innovation business — a

pushtoputHitachiatthecentreofother

companies’effortstodigitise.

Akira Kiyota, the president ofJPX

(the company that owns the Tokyo

StockExchange)saidHitachinowstood

out as a company “totally transformed”

by its decision to make governance a

muchbiggerpriority.

“In a sense, Hitachi has become a

company with governance which can be

the best model for major companies in

Japan. Other major Japanese companies

arenowfollowingsuit,”saidMrKiyota.

The success Hitachi has had in over-

hauling its governance will keep the

companyinthespotlight.

N E I L H U M E

NATURAL RESOURCES EDITOR

BHP ays it must forge a new pact withs

society to ensure the sustainability of

its business and secure access to

resources, markets and capital.

Geoff Healy, chief external affairs

officer, said ahead of an investor brief-

ing in Londonyesterday that the Anglo-

Australian group was adding a social

value assessment to the business plans

of all its assets to “hardwire” local inter-

estsintoitsdecision-makingprocesses.

“In order to deliver financial value,

youhavetodeliversocialvalue.Thetwo

are completely intertwined,” he said.

“Thisisjustgood,sensiblebusiness.”

BHP’s move coincides with growing

debate about the purpose of business

andthevalueitbringstosociety.

America’s Business Roundtable,

which represents 181 of the most influ-

ential companies, last month dropped

the shareholder-first mantra, urging

groupstoconsidertheenvironmentand

workersalongsideprofits.

These concerns are particularly acute

for mining, which needs the support of

host nations and local communities to

secureaccesstocommodities.

In BHP’s case this means steelmaking

ingredient iron ore, copper, coking coal

andoil.

In the past, miners thought generat-

ing jobs and tax receipts was enough to

secure a so-calledlicence to operate but

industry figures say more needs to be

done, not least after the Brumadinho

dam disaster that claimed 231 lives in

Brazilthisyear.

Mark Cutifani, chief executive of

Anglo American, said last week that the

status quo was “unsustainable” and

miners needed to move beyond “what

we previously thought of as the way

miningaddsvalue”.

Mr Healy said BHP wanted managers

of mines and oilfields to think harder

about the local community and not just

focusoncost,volumeandsafety.

“It’s going to be a significant change

for us,” said Mr Healy, citing BHP’s iron

ore business in Western Australia which

was polling local people on land use,

automationandprocurement.

Daniel Litvin, managing director of

Critical Resource, which helps compa-

nies assess social, political and environ-

mental risks, said BHP’s move was not

revolutionary but showed it was alert to

therisksarounditslicencetooperate.

“It’s no longer an unusual occurrence

for a mining project to face opposition

from a local community. It’s the norm,”

he said. “That leads to projects been

delayed,abandonedandwrittenoff.”

Mr Litvin added: “But it is very hard

todothiswell.Noonehasfoundamagic

bullet for making this [community rela-

tions]easier.”

Mining

BHP pledges

to make local

needs count

in decisions

N I C F I L D E S— DUSSELDORF
SA R A H P R OVA N— LONDON

Cellnex Telecomis to buyArqiva’s tele-
coms unit for £2bn in a deal the Span-
ish company said would make it the
largest independent tower company in
the UK.

The sale, the latest in a series of tower
deals as telecoms companies look to
offload their masts to infrastructure
funds and specialist companies, is likely
toheraldfurthertowerconsolidation.
Vodafone nda O2 ave appointedh
banks to formallylaunch the sale aof

stake inCornerstone, their jointly

ownedBritishmastcompany,according

to a person with direct knowledge of the

situation. UBS is advising Vodafone

while Goldman Sachs is advising O2’s

ownerTelefónica. Talks with potential

investors and trade buyers have taken

place. Cornerstone, with 16,500 masts,

is the UK’s leading mast company with

aboutathirdofthemarket.

The Arqiva deal adds about 8,000 UK

sites to Cellnex’s portfolio, taking its

total to 53,000 across Europe. This year

itboughtBT’srooftopmasts.

Cellnex, which has launched a €2.5bn

rights issue, plans to fund the acquisi-

tion through a £2bn syndicated loan

facility and available cash reserves, the

companysaidyesterday.Adjustedearn-

ings before interest, tax, depreciation

and amortisation are expected to be

about£170mnextyear.

Towers have become a sought-after

asset in recent years, attracting much

higher valuations than the operating

armsoftelecomscompanies.

Cellnex, which has been one of the

most acquisitive companies in the

region, said it was still evaluating €7bn

worthofopportunities.

The Arqiva telecoms masts were

acquired at a lower valuation than simi-

lar recent transactions. Citi calculated

that Cellnex had paid €240,000 per site

compared with €316,000 when it

acquired masts fromIliad. Megabuyte,

the research company, said it was “per-

plexing” that the deal was struck at

barely half Cellnex’s own trading valua-

tion.

Arqiva, which traces its roots back to

its role running the BBC’s transmitters,

will retain its large broadcast towers

business.The sale comes two years after

Arqiva’sownerspulledplanstolist.

Telecoms

Spain’s Cellnex to buy Arqiva mobile masts business for £2bn

The Company

of the Future

Find previous

articles in this

series on the

trade-offs

businesses must

make to survive

into an uncertain

future at:

ft.com/future-

company

Hitachi looks to growth after years of restructuring

Number of consolidated companies

Sources: company; Refinitiv













  

Japan

Overseas



Earnings (bn)

-

-

-

-







     

Stock performance: share price and index (rebased)















      

Hitachi

Topix



Legal Notices

OCTOBER 9 2019 Section:Companies Time: 10/20198/ - 18:00 User:timothy.digby Page Name:CONEWS4, Part,Page,Edition:USA , 15, 1