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US merger and acquisition activity is getting a boost from an unlikely source: the Bank of Japan. Japanese homebuilder Sekisui House on Thursday agreed to buy Denver-based developer MDC for $4.9bn in cash. A shrinking domestic market is forcing Japan Inc to look for growth overseas. Ultra-low interest rates back home have further whetted the appetite for deals.
Sekisui is the latest in the wave of Japanese companies prowling for cross-border transactions. Nippon Steel snapped up US Steel for $14.9bn last month. Astellas Pharma bought eye-treatment specialist Iveric Bio in a $5.9bn deal in May. Mizuho splashed out $550mn for US boutique investment bank Greenhill & Co.
The US has been by far the most popular hunting ground for Japanese chief executives. Despite the weaker yen, which spent much of 2023 stuck at a three-decade low against the greenback, deals for American companies accounted for 57 per cent of total Japanese outbound M&A by value last year, according to LSEG. The $32.9bn spent on US targets was twice the value recorded in 2022 and represented a four-year high.
Access to easy money helps. Even as other major economies moved to aggressively raise borrowing costs over the past two years, benchmark interest rates in Japan have remained stuck at -0.1 per cent.
The flipside is low funding costs tend to encourage companies to overpay. In the case of Sekisui, it is stumping up to buy MDC, the 11th largest US homebuilder based on house closings in 2022. The $63 a share purchase offer represents a 40 per cent premium to MDC’s 90-day weighted average share price. The price is all the richer considering US homebuilders was one of the top performing sectors in 2023.
Low inventory and high prices for previously-owned homes are prompting house-hunters to turn to new build properties, boosting developers’ order books. MDC shares rose 75 per cent last year. It ended its most recent quarter with 1,695 new orders, a 467 per cent increase on the year ago period.
Sekisui, which also owns builders Woodside Homes, Holt Homes and Chesmar Homes, said it would become the fifth-biggest US home builder. The purchase price looks more reasonable on an enterprise value to ebitda basis. The multiple of 5 times is below the 8 times commanded by market leader DR Horton. But DR Horton is also much bigger and boasts better margins.
Japan’s renewed interest in US business hasn’t always met with a warm welcome: Nippon Steel’s deal provoked political angst and calls to block the purchase.
This time, it is certainly the US shareholders that look to be getting the better deal.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
