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Japan Post's Toll Holdings loss could spell trouble for 3.11 disaster recovery budget

With Japan Post Holdings Co. ready to report a major loss from its Australian logistics subsidiary Toll Holdings Ltd., observers are pointing out that the investment was both fraught with risk and overpriced from the start.

In February 2015, then Japan Post President Taizo Nishimuro had lauded the some 620 billion yen acquisition of the Australian firm. "It is a partner that can complement our business," he said.

The pricey deal was a major part of Japan Post's growth plans ahead of its listing on the Tokyo Stock Exchange's first section in November that year -- a crucial step on the firm's long road to privatization.

Japan Post was seeking ways to grow as Japan's aging, shrinking population threatened to cut into its core postal delivery business. The route to growth it chose was accelerated acquisitions of foreign firms, allowing Japan Post "to present a plan to boost earnings potential, which would also lead to a higher stock price," a company executive told the Mainichi Shimbun. However, Toll Holdings' worth was dropping as the worldwide slump in natural resource prices ravaged the company's coal transport and other related businesses.

"If things don't go well, I will respond bravely," commented Nishimuro, the biggest advocate of the Toll acquisition. Ill health forced Nishimuro to resign in March 2016, leaving what one source called "a negative legacy."

In the end, Japan Post paid a 386 billion yen goodwill premium for Toll over and above its actual market valuation. This was based on the Australian firm's "brand power" and expectations of future earnings. The goodwill must be re-evaluated if the valuation of the acquired firm drops significantly, which Toll's did. And so Japan Post decided it had to take a goodwill impairment -- a write-down on the goodwill's value -- of several hundred billion yen based on Toll's worth as of the end of 2016.

The Japanese government still owns 80.49 percent of Japan Post Holdings, and the law to privatize the company allows the government to take that down to one-third of outstanding shares. The government is scheduled to sell off Japan Post stock a bit at a time between now and fiscal 2022, with total proceeds expected to reach around 4 trillion yen, all of it committed to the Great East Japan Earthquake recovery budget.

The government made a quick 1.4 trillion yen from Japan Post share sales when the company went public in November 2015, and a second sell-off is planned for this summer or after depending on the stock's price movement. The fiscal 2017 special account budget already lists an expected windfall of another 1.4 trillion yen from the sale.

"We will make our decision (on the Japan Post stock sale) after observing the pertinent management conditions and the share price," the Finance Ministry has stated. However, with the Toll Holdings loss looming, investors could very well shy away from buying Japan Post shares. That in turn could put the Great East Japan Earthquake recovery budget in peril.

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