METI ORDERS TCI TO CANCEL J-POWER INVESTMENT PLANS

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 001337

SIPDIS

DEPT FOR EAP/J AND EEB/OIA
DEPT PASS USTR FOR CUTLER AND BEEMAN
TREASURY DEPT FOR DAS NOVA DALY, AND IA/CARNES
USDOC FOR 4410/ITA/MAC/OJ
NSC FOR TONG

E.O. 12958: DECL: 05/15/2013
TAGS: EINV ENRG PGOV OECD JA
SUBJECT: METI ORDERS TCI TO CANCEL J-POWER INVESTMENT PLANS

REF: TOKYO 1027 AND PREVIOUS

Classified By: EMIN Robert F. Cekuta, Reason 1.4 (b)


1. (SBU) Summary: The Ministry of Economy, Trade and
Industry (METI) May 13 ordered The Children's Investment
Master Fund (TCI),a U.K. hedge fund, to halt plans to double
its 9.9 percent stake in electricity wholesaler Electric
Power Development Company (J-Power). METI DDG Sasaki visited
the Embassy May 13 to explain the GOJ's decision saying GOJ
concerns center on the potential impact larger TCI
shareholdings might have on J-Power's plans to build a
pluthermal nuclear power plant. TCI continues to urge
J-Power management to improve the company's corporate
governance and financial performance and is taking the fight
directly to fellow shareholders. End Summary.


2. (C) METI Deputy Director General for Trade and Economic
Cooperation Nobuhiko Sasaki came to the Chancery with other
METI officials May 14 to meet with EMIN and discuss the GOJ's
decision. Sasaki said the GOJ had closely and seriously
examined TCI's responses to the government's recommendation
to halt plans to increase its J-Power shareholdings (ref).
However, nothing in TCI's submission removed the government's
concerns that TCI's further acquisition of J-Power shares
posed a potential "risk to public order" -- meaning in this
case the stable supply of electric power and continuation of
projects critical to Japan's nuclear fuel cycle policy. The
GOJ worries TCI's demands for J-Power to set firm targets of
10 percent return-on-equity (ROE) and 4 percent
return-on-assets (ROA) would drain the firm's capital
investment and repair and maintenance budgets and adversely
affect construction of the Ohma pluthermal nuclear power
plant, scheduled to begin operation in 2012. According to
Sasaki, TCI failed to provide adequate assurances it would
not block the plant's construction schedule. The GOJ took
particular note of TCI's action in other cases. He said as a
major shareholder in Deutsche Boerse, TCI had undercut the
Boerse's attempt to buy the London Stock Exchange. He also
pointed to TCI involvement in the sale of ABN Amro Bank. In
both cases, Sasaki said, while still a minority shareholder,
TCI had been able to keep management from proceeding with
strategic acquisitions.


3. (C) Sasaki repeatedly said Japan's policy of welcoming
inward foreign investment, including by investment funds, is
unchanged. This is the first time the GOJ had blocked a
proposed share acquisition under the Foreign Exchange Law.
Nor does the GOJ's decision in this case mean the GOJ opposes
any foreign investment greater than 10 percent in J-Power.
This case is unique, Sasaki stressed. While appreciating
Sasaki's initiative in briefing the Embassy on the decision,
EMIN noted USG officials and international markets have
monitored the TCI/J-Power case closely. This decision
follows the debate earlier in the year over whether to allow
foreigners to invest in Japan's airport operators and the
remarks by METI Vice Minister Kitabata over the role
shareholders should play. Coming on top of the years during
which Japan discouraged inward foreign investment, these
events have added to skepticism regarding GOJ intentions
toward FDI, something Sasaki also knew from the international
press as well as from his discussions with U.S. and other
foreign officials.


4. (SBU) A lawyer for TCI told EconOff May 13 the Fund is
still considering its options, but is likely to challenge the
GOJ's action in court. METI also expects a lawsuit but,
under Japan's Administrative Procedures Act, according to
Sasaki, TCI must first lodge an administrative appeal with
the relevant government agency of the order before TCI can go
to court.

TOKYO 00001337 002 OF 002




5. (SBU) TCI executives have publicly criticized the GOJ for
a lack of transparency in its decision making. They insist
TCI poses no risk to J-Power's financial stability or to
Japan's national security. TCI's lawyer, in fact, told
econoff TCI's demand for a higher dividend would cost the
company only about USD 100 million, less than 10 percent of
J-Power's USD 1 billion in planned capital investment over
the next three years.


6. (SBU) Even without the expanded stake, TCI continues to
pursue aggressively efforts to improve J-Power's financial
fundamentals. On April 26, the Fund submitted five
shareholder proposals for consideration at J-Power's June
annual general meeting. Two proposals call for dividend
hikes, of either 80 yen or 120 yen, up from the current 60
yen per share. TCI recommends the payouts be paid, in part,
by reducing the company's 68 billion yen (USD 660 million) in
cross-shareholdings to no more than 5 billion yen (USD 48
million). TCI also wants the company to use up to 70 billion
yen to buy back its own, undervalued, shares. The final
proposal would require J-Power's board to appoint at least
three new independent directors to its sixteen member board.
J-Power's management opposes all five proposals, setting the
stage for a proxy fight next month. As a compromise,
J-Power's board has asked shareholders to approve a new 70
yen per share dividend.

Comment
--------------


7. (C) While TCI argues there has been a lack of
transparency in the case, METI and the Ministry of Finance
(MOF) together have conducted six separate hearings with TCI
representatives since January and MOF's Advisory Council held
two further hearings. The two sides also met informally on a
number of occasions. In terms of substance, there is an
impression that the two sides have been talking past each
other. TCI seems unwilling to acknowledge the GOJ's strong
interest in the Ohma project and unwilling to provide
assurances it will not seek to derail that project --
something Sasaki told us was a key factor in the GOJ's
decision. The GOJ, however, fails to appreciate that TCI's
corporate governance proposals and ROE/ROA targets likely
would strengthen, not weaken, J-Power's financial position
and the cost of those measures could easily be covered by
better management of J-Power's cash assets and unwinding most
of its non-productive cross-shareholdings. Such steps would
seem largely to eliminate the risk of electricity tariff
hikes or cutbacks in the company's maintenance budget the GOJ
says it fears.
DONOVAN