Posted on: Saturday, January 19, 2002

Daiei bailout plan linked to debt crisis

Advertiser Staff and News Services

Kunio Takagi, center, president of Daiei, is surrounded by the media at his news conference yesterday in Tokyo. Daiei, Japan's largest retailer, announced a $3.2 billion bailout plan from its three major lenders. Associated Press

KOBE, Japan — The bailout of Daiei, Japan's biggest retailer, is raising questions about how serious the government is in addressing the bad debt crisis and lifting the nation out of recession.

Daiei, which has $14 billion in debt, disclosed a $3.2 billion bailout from its three major lenders yesterday. In exchange, Daiei adopted a three-year turnaround plan that includes selling 50 of its 321 stores in Japan and more than 50 of its 169 subsidiaries in three years. It also will cut 6,000 jobs, or 17 percent of the Daiei group work force over three years.

No mention was made of the retailer's four Hawai'i stores. Herb Gushikuma, general manager for The Daiei (USA) Inc. in Honolulu, said he had no word yet from the company headquarters on what the recovery plan will mean for Hawai'i.

Earlier this week, Japan's leading economic daily, the Nihon Keizai newspaper, reported that Daiei would sell its four Hawai'i outlets as part of the plan. At the time, a Daiei spokesman said the company was not considering a withdrawal from Hawai'i.

The proposed bailout raises hopes the Kobe-based retailer won't go bankrupt. But the plan also shows Japan's biggest employers may be exempt from Prime Minister Junichiro Koizumi's push to free up financing and revive Japan's economy by making banks dispose of bad loans.

The issue is critical for the future of the world's second-largest economy.

The United States, Japan's most important ally, has repeatedly prodded Tokyo to move quickly to fix the towering bad-debt problem at its banks.

The decision to keep Daiei afloat signals a step backward in that effort, some analysts said.

"What they used to say about companies being 'too big to fail' may be coming back," said Hironari Nozaki, senior analyst at HSBC Securities in Tokyo. "Solving problems in a murky way is not good."

Japan's No. 4 retailer, Mycal Corp., was forced into bankruptcy in September, after banks refused to grant new loans. Daiei's group debt is more than three times that of Mycal. Daiei has 35,000 full-time employees, more than six times the number at Mycal.

Koizumi suggested that Daiei's size made it different from Mycal. "The economic impact of Daiei going bankrupt would not be small," he said at a press conference before the Daiei announcement.

Daiei president Kunio Takagi denied the bailout was misguided.

"We won total understanding" from the banks, Takagi told reporters at a Tokyo hotel. "We want to be reborn as a company that will satisfy our customers so they will tell us, 'Thank you.'"

The bank bailout will include debt forgiveness, swapping debts for equities and other measures, he said.

Daiei owes about $6 billion to UFJ Holdings and $3 billion each to Sumitomo Mitsui Banking Corp. and Mizuho Holdings' Fuji Bank. They are three of Japan's four biggest financial groups.

Koizumi defended the Daiei bailout as a flexible response to a potential crisis.

"In a free-market economy, the efforts of the private sector are fundamental," he said. "It's a question of balance."

Until several years ago, the collapse of big-name companies was extremely rare in Japan because the government protected them. Public fears have been growing over recent high-profile bankruptcies. Unemployment has been rising to record highs, hitting 5.5 percent in November.

Government ministers have argued Daiei's collapse could cause social damage and send ripples of instability through the financial system.

Daiei shares have been rebounding for several weeks on Japanese media reports about the bailout. Daiei shares closed up 30 percent at 165 yen ($1.24) on the Tokyo Stock Exchange today.

Daiei's fortunes have suffered a reversal during the nation's downturn that began more than 10 years ago.

The company was once widely respected here as an innovator introducing competitive pricing and Western-style large-scale stores — a move away from the mom-and-pop stores that used to dominate Japanese retail.

Daiei, based in the western port city of Kobe, was founded in 1957 by Isao Nakauchi, a charismatic businessman who exercised influence on economic policy for years.

The three banks pressured Nakauchi, who retired as chairman in 2000, to take responsibility for Daiei's woes. Takagi said the 79-year-old Nakauchi today agreed to give up his retirement pay, estimated at $15 million by the Nihon Keizai newspaper.

Expanding into discount stores that compromised on quality was a turning point for Daiei, Takagi said.