Oh, Joyou!

Japan's flood of foreign M&A hits Chinese blockage

The financial hit from the collapse of China-focused unit Joyou is manageable for Lixil, the world's biggest maker of taps and toilets. But the murky episode is embarrassing for the $6-billion housing-equipment giant - and for authorities in Germany, where Joyou was listed.

Cheap debt and a shrinking home market have pushed Japanese companies to buy everything from smart meters to Ragu sauce and Jim Beam bourbon. Lixil boss Yoshiaki Fujimori, who honed his deal-making skills at GE, has been among the boldest corporate chieftains.

In 2013 he nabbed Grohe, a German outfitter of swish bathrooms, in a $4-billion deal that Lixil could only afford by roping in Japan's state-backed development bank. An important lure was Chinese growth, via the majority stake in Joyou that Grohe had acquired two years earlier.
 

So much for that. Last month Lixil tightened its grip on both German businesses, buying out the 12.5 per cent of Grohe held by the Cai family who run Joyou. But Joyou now fears that last year's revenue, debt and cash figures were suspect; is writing off a Hong Kong unit entirely; and may sue founder Cai Jianshe and his son. On May 21 Joyou said it was preparing to file for insolvency.

Though the implosion of subsidiary-of-a-subsidiary is not life-threatening for Lixil, the financial impact is significant. Likely losses of 41 billion yen ($337 million) on Joyou shares and debt guarantees almost equal Lixil's total net profit in the financial year ending March 2014. And investors have suffered: since March 31, Lixil shares are down 18 per cent, while the Japanese industrials sector is up 7 per cent.

This is the latest in a string of scandals involving German-listed Chinese firms - earlier tales include Youbisheng Green Paper, Kinghero, and Ultrasonic, which filed for insolvency a few months after the chief executive went missing. Frankfurt's watchdogs, lawyers, accountants and bankers clearly need to look a little harder for signs of funny business involving Chinese entrepreneurs.

And for corporate Japan, this is a reminder that when global empires are built at speed, you can expect some value leakage.