J-Power Seeks Long-Term Investors to Replace TCI

By Shigeru Sato and Yuji Okada

Feb. 20 (Bloomberg) -- The head of J-Power, Japan’s largest electricity wholesaler, wants to attract long-term investors to replace its biggest stakeholder, hedge fund TCI, which exited after seeking his ouster in a feud over corporate management.

“Investors such as pension funds, which seek stable returns in this time of financial turmoil, may be one of our preferred investors, in addition to individuals, who search for vehicles for long-term investment,” Yoshihiko Nakagaki, president of the Tokyo-based utility, officially known as Electric Power Development Co., said in an interview.

TCI lost a proxy battle against J-Power’s board in June seeking a number of changes including doubling dividends. The challenge came as global investors led by Calpers, the biggest U.S. pension fund, demanded Japanese companies raise shareholder returns and make decisions more transparent. TCI sold its 9.9 percent share back to J-Power at a $130-million loss in October after the government blocked a bid to double the stake.

This year, J-Power will carry out one of the reforms to corporate governance sought by the Children’s Investment Fund Management (UK) LLP, as TCI is officially known -- hiring independent directors. Nakagaki, 70, declined to say how many.

“Decent numbers of autonomous board members must be hired in order to make decisive changes to J-Power’s corporate governance,” said Hirofumi Kawachi, a senior energy analyst at Mizuho Investors Securities Co. in Tokyo. “Better governance is a vital area for any public company in Japan.”

Calpers, Hermes

The government is considering making the appointment of outside directors a legal requirement for listed companies as part of efforts to attract foreign investors after the benchmark Nikkei 225 Stock Average posted a record annual drop in 2008 and investors including The California Public Employees’ Retirement System and the U.K.’s Hermes Management issued a white paper calling for reform. A trade ministry panel to discuss the complaints is due to submit a report in June.

The denial of TCI’s bid to increase its stake in J-Power marked the first time Japan has invoked a law to block overseas acquisitions of more than 10 percent in companies within industries deemed vital to national security, including arms makers and utilities.

‘Substantially Lower’ Investment

The World Trade Organization this week cited the decision in a report on foreign investment in Japan, which is less than for other members of the Organization for Economic Cooperation and Development and “substantially lower” than Japanese investment overseas.

“Against this background, Japan has continued to take measures to make itself an attractive investment destination for foreign firms.”

Foreign investors accounted for 37 percent of J-Power’s shareholdings as of Sept. 30, before TCI withdrew and the last time the company counted. Current Bloomberg data also puts foreign holdings at 37 percent.

J-Power has lost 20 percent of its value in the last six months compared with the 40 percent slide in the benchmark Topix index and the 6.9 percent decline in the power and gas utilities subindex in the same period.

Nakagaki is eyeing several power projects in the U.S. with a view to buying them out because of bleak domestic sales growth prospects, he said. J-Power, the sole operator of transmission lines connecting Japan’s four major islands, sells almost all its electricity to the country’s 10 regional utilities, led by Tokyo Electric Power Co.

Waiting for Mr. Right

The company will spend 270 billion yen ($2.9 billion) on overseas acquisitions through March 2013. It signed agreements to buy three natural gas-fired plants in New York and Virginia in December, its seventh buyout deal in the U.S. since 2006.

Nakagaki said J-Power will hold onto the stake it bought from TCI for $653 million “for the time being,” citing disarray in the stock market. He also wants to wait until he can find the right kind of investor, he said.

That investor is not TCI, which repeatedly called on shareholders to block Nakagaki’s reappointment as president if he refused to carry out the reforms it sought.

“The business philosophy of investors like TCI, seeking short-term returns on investment, doesn’t match the nature of our business that requires a long period of time for profit-making from capital spending on power plant assets,” he said.

In the past three years, Nakagaki has had talks twice with Christopher Cooper-Hohn, the head of TCI, most recently in March 2008, on the telephone, he said.

“My impression of Mr. Hohn is that he seems to be a speculator who likes raising a large amount of money, managing funds to seek the maximum return,” Nakagaki said. “I am probably a person on the opposite side.”

To contact the reporter on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net.