Carlyle writes off $330m Japanese mobile investment

The Carlyle Group has written off its investment in Japanese mobile phone company Willcom, which filed for bankruptcy protection with the Tokyo District Court on Thursday. The firm, which owned 60 percent of the telecoms company, has lost around $330 million in equity, a source close to the firm confirmed.

Carlyle declined to comment on the details of the bankruptcy.

The firm partnered with Japanese electronics company Kyocera Corp in 2004 to purchase Willcom, then named DDI Pocket, for ¥220 billion (at the time equivalent to $2.03 billion) from telephone company KDDI Corp. Following the transaction Carlyle held 60 percent of the equity, while Kyocera and KDDI held 30 percent and 10 percent respectively.

Although under Carlyle’s management Willcom has seen its subscriber numbers grow, the country’s fourth largest telecoms operator has struggled to match the pace of developments in wireless technology and the aggressive price-cuts offered by its three much larger competitors, a source told PEI Asia.

According to telecoms industry figures cited in an AFP report, Willcom’s subscriber base stood at 4.24 million at the end of January this year – a 3.7 percent share of the country’s mobile phone market, which is dominated by larger rivals NTT DoCoMo, KDDI Corp and Softbank.

“Willcom as the smallest of Japan’s four largest telco suppliers had difficulty applying the same sort of pricing without the benefits of economy of scale,” the source said.

Plans to upgrade the company’s wireless technology, which had also been outpaced by that of its rivals, coincided with the arrival of the economic downturn, meaning the firm was unable to secure further financing from its creditors, despite Carlyle’s willingness to inject further equity into the company last year, the source added.

Willcom applied for Alternative Dispute Resolution in September, a process by which a company can negotiate with creditors outside of the court. However, it not only failed to reach an agreement with lenders, but also saw its business decline further, Yukio Kubota said at a press conference after the bankruptcy filing on Thursday, according to Reuters.

“After it became known that we had applied for ADR, it was difficult for us to attract new users and that made it hard for us to keep to our plan to turn the business around to make debt repayments,” he was reported to have said.

In a separate quote in the AFR report he was alleged to have stated: “We will have our shareholders take their responsibility by reducing capital by 100 percent.”

With existing shareholders completely removed from the picture, Willcom plans to restructure under the bankruptcy protection, which is similar to that offered by the US’ Chapter 11 process. According to several media reports, the company has debts of around $2.3 billion.

In the past couple of months, media speculation has centred on the prospect of Willcom joining recently bankrupt Japan Airlines in receiving a capital injection from Japanese government-backed turnaround fund Enterprise Turnaround Initiative Corporation (ETIC). A report in Japan’s Nikkei newspaper today said it was likely the firm would receive a $110 million credit line from the fund.

The ETIC was launched in October 2009 with a mandate to deploy up to $17.5 billion in the next five years into “mid-sized companies, SMEs and other businesses, including large corporations, which have revitalization potential but are carrying excessive debt”.

Telecoms rival Softbank and private equity firm Advantage Partners have also been linked to the turnaround plan as providers of fresh equity, although neither firm was available to confirm this at the time of going to press.

Carlyle invested in Willcom from three funds, its first Carlyle Japan Partners fund, Carlyle Asia Partners and Carlyle Partners III.

Dorothy Lee, Carlyle’s head of communications for Asia, said that in spite of everything Carlyle Japan Partners, which was launched in 2001 and raised ¥50 billion, is still “one of the best-performing funds” at the firm.

She added that Carlyle’s Tokyo-based Japan buyout team, co-headed by Tamotsu Adachi and Masao Hirano, has invested more than $1 billion of equity in more than 12 companies in Japan thus far. The team is currently investing from its second fund, Carlyle Japan Partners II, which was launched in 2006 and raised ¥215.6 billion.