Blackstone belatedly buys into Abenomics

After focusing mainly on real estate, Blackstone's maiden Japanese acquisition doesn't fit the common country playbook of a corporate carveout. More significantly, Ayumi, which makes arthritic and orthopaedic drugs, has been picked over by Tokio Marine Capital and Unison Capital.

HONG KONG: Blackstone's first Japanese buyout is a third-hand deal. The U.S. investment firm agreed to pay about $1 billion for Ayumi Pharmaceutical, which has previously been owned by two local private equity shops. There often are diminishing returns for companies passed around in such a way, but the government's newly introduced drug-price controls could lead to a fresh and profitable strategy.

The transaction marks Blackstone's belated foray into Japanese LBOs. Although the likes of Advent and TPG have struggled to crack a market wary of foreign capital perceived to be vulture-like, others have spent years successfully laying down roots to establish themselves. A group led by Bain Capital, for example, bought Toshiba's chip unit for $18 billion last year while KKR spent $4.5 billion on Nissan Motor-backed auto-parts maker Calsonic Kansei.

After focusing mainly on real estate, Blackstone's maiden Japanese acquisition doesn't fit the common country playbook of a corporate carveout. More significantly, Ayumi, which makes arthritic and orthopaedic drugs, has been picked over by Tokio Marine Capital and Unison Capital. So-called secondary buyouts on average deliver a 15 per cent lower annualised return than companies taking their first tour through private equity hands, according to one 2013 study from researchers at the University of Amsterdam, University of Lugano and Oxford Said Business School.

There may, however, be a new angle for Blackstone. In a bid to make social security sustainable in an ageing country, Japanese Prime Minister Shinzo Abe's administration last year rolled out rules to curb medical costs including by further capping pharmaceutical prices based on their cost-effectiveness. That is liable to squeeze smaller companies and make consolidation a more tantalising prospect. In addition, the structural reforms being encouraged under Abenomics might inspire chemical and textile companies to offload their drug units.

Industry rollups are a well-worn private equity strategy, and Blackstone is no stranger to them. It also knows a bit about pharmaceuticals, having previously invested in Cardinal Health's drug manufacturing unit and more recently China's YiChang HEC ChangJiang Pharmaceutical. Though Blackstone is a latecomer to both Japan and Ayumi, it may have a suitable prescription.