Nippon Columbia Plans Restructuring, Splitting Equipment, Music Recording
May, 10 2001
The Wall Street Journal, 05.10.01
By Phred Dvorak and Peter Landers
TOKYO -- In a deal that could presage the kind of corporate restructuring Japan has long put off, an unprofitable audiovisual company, Nippon Columbia Co., is splitting itself into two firms and remaking both with the help of U.S. investment firm Ripplewood Holdings LLC.
Nippon Columbia currently has two main businesses: manufacturing audiovisual equipment under the Denon brand, and producing and selling recorded music in Japan under the Nippon Columbia label. It will spin off the Denon division into a separate company and sell 98% of it to Ripplewood for just under six billion yen ($49.5 million). Ripplewood will also take a 41.7% stake in the remaining portion of Nippon Columbia for five billion yen and hire Strauss Zelnick, a veteran U.S. recording-industry executive, to revamp its music business.
Nippon Columbia's decision to split the company into tightly focused business units -- with support from foreign capital and expertise -- is the kind of strategy experts are urging on many Japanese companies, which have suffered from bloated payrolls, diffuse business empires and low profits. Nippon Columbia has incurred losses on a group basis for 10 straight years. As of last September, foreign investors accounted for only 0.8% of its shareholders.
"The wind is changing in Japan," said Jeffrey Hendren, a Ripplewood managing director who negotiated the deal. "I think it's the beginning of [the breakup of] the logjam." Ripplewood already made waves in Japan's financial industry last year by buying a failed bank and reopening it under new management.
Mr. Hendren said Hitachi Ltd., the electronics maker that has long been Nippon Columbia's top shareholder, is finally moving to deal with troubled related companies. Hitachi is exchanging four billion yen of debt owed to it by Nippon Columbia for new Nippon Columbia shares. As a result, Hitachi's stake in Nippon Columbia will rise to 27.5% from 14.6%. It will hold 2% of the Denon spinoff. And Hitachi will no longer be involved in day-to-day management of the two businesses.
Hitachi "saw this as a first prototype that might be a solution for the Japanese economic slump," said Mr. Hendren.
Mr. Zelnick said Nippon Columbia was built on the long-outdated notion that music companies should be vertically integrated, making both records and the equipment to play them. "It's been structured like a music company a la RCA in 1927," said Mr. Zelnick, who stepped down at the end of last year as president of BMG Entertainment, a unit of Germany's Bertelsmann AG. He vowed to get out of peripheral businesses such as event planning and focus on finding top music talent.
Nippon Columbia has long been a powerhouse in the Japanese-style ballads, or enka, beloved by older Japanese. It has lived for many years on memories of the famous singer Hibari Misora, who recorded for the label and died in 1989. Asked at a news conference by a Japanese reporter how he will promote enka in the U.S., Mr. Zelnick said that the ballads won't be a top priority.
Mr. Hendren said the Denon hardware business is profitable on an operating basis and can grow faster by putting its equipment in more home-theater systems. Although Ripplewood will own 98% of Denon at first, he said he intends to list Denon on the Tokyo stock market within six to 12 months and gradually whittle down Ripplewood's stake.