TOKYO -- Japanese materials producer Showa Denko will sell its underperforming lead-acid battery operations to investment fund Advantage Partners and financial services company Tokyo Century for 60 billion yen ($540 million), looking to focus on growth areas and put its finances back in order after a costly acquisition, Nikkei has learned.
The business is handled by Showa Denko Materials, formerly known as Hitachi Chemical. Showa Denko reported revenue of about 160 billion yen for its battery operations last year. About 60 billion yen of this was generated by an Italian subsidiary, which will not be included in the sale.
Showa Denko bought Hitachi Chemical last year for 960 billion yen with an eye on its semiconductor materials business. Borrowing for the deal swelled the materials maker's interest-bearing debt to roughly 1 trillion yen at the end of March, more than triple the total a year earlier.
Lead-acid batteries are used in autos and as emergency power supplies in office buildings. The former Hitachi Chemical bought Italian and Thai manufacturers of the energy storage devices in 2017, looking to tap into growing awareness of disaster-related risks after Japan's devastating earthquake and tsunami in 2011.
But with rising lead prices eating into profitability, and fewer synergies emerging from the acquisition than originally anticipated, Showa Denko began weighing a sale of the battery business.
Showa Denko had a 4% share of the global market for lead-acid batteries in 2019, putting it in eighth place, according to research firm Fuji Keizai. By comparison, the market leader, Canadian-owned Clarios, holds a 16% share, with No. 2 GS Yuasa, the top Japanese player, at 8%.
The buyers -- Advantage Partners, a pioneering Japanese investment fund, and leasing company Tokyo Century -- inked a capital tie-up in 2019, and teamed up on the acquisition of health foods maker Q'sai last year. The likely goal of this deal is to turn the battery business around before selling it on to another manufacturer looking to expand.
The materials maker aims to unload 200 billion yen worth of operations to repay debt and reduce its debt-equity ratio. Since January, it has reached agreements for about 110 billion yen in sales. Also on Wednesday, Showa Denko announced plans for the transfer of a ceramics manufacturer within the group.
Adding the battery sale will bring the tally to 170 billion yen, close to the target. Paying down debt will enable Showa Denko to make growth investments in areas of focus including printed circuit board materials and high-purity gases used in semiconductor manufacturing.
Fuji Keizai projects the market for semiconductor materials expanding to $40.5 billion in 2024, up 23% from 2019. Showa Denko aims to lift its annual semiconductor-related sales from around 200 billion yen now to 500 billion yen in 2030, tapping into rising demand for chips for applications such as data centers.
The company is the world's top producer of high-purity gases, while Showa Denko Materials is the leading supplier of abrasive materials for silicon wafers. The group is boosting capacity for gases and circuit board materials in Taiwan and South Korea, using cash from brisk sales of graphite battery electrodes that are now in high demand as global economies recover from the coronavirus pandemic.
Research and development will likely be ramped up as well. While Showa Denko counts the likes of Taiwan Semiconductor Manufacturing Co., the world's top chip foundry, among its customers, there is fierce competition among materials makers to stay on the cutting edge.
"We're constantly chasing what will be the de facto standard two years ahead," an executive said.
By concentrating on high-value-added products, Showa Denko aims to lift its earnings before interest, tax, depreciation and amortization to 20% of sales in 2025, compared with 6% now. Yet even reaching this goal would leave it behind DuPont's roughly 24% and Shin-Etsu Chemical's 36%, indicating that more work is needed to achieve its goal of becoming globally competitive.