Sumisho: regulatory change spurs leasing industry M&A, UFJ Central Leasing, Diamond Lease shot up on merger speculation23 October 2006

A move by Sumitomo Corp and its affiliate Sumisho Lease to merge could add to pressure for further consolidation in the Japanese leasing industry, according to industry analysts.
Japanese leasing companies need consolidation to become competitive because of the prospect for higher interest rates and changes in lease accounting standards in Japan, said Shinichi Iimura, an analyst at Nomura Securities. "I would not rule out the combination between Diamond Lease and UFJ Central Leasing, as well as the link-up among Fuyo General Lease, Tokyo Leasing and IBJ Leasing," said Nomura's Iimura.
Tomokazu Soejima, an analyst at Morgan Stanley Japan, also said: "The outlook for conditions in the lease business is by no means all positive, with concerns over higher interest rates and changes in accounting rules."
"The Japanese leasing industry is huge and highly fragmented. So, naturally, It (the Japanese leading industry) is a kind of the market we should see M&A activities," said Iimura.
Asked whether the latest M&A deals would spur a similar move for UFJ Central Leasing, a spokesperson at UFJ Central declined to comment.
Meanwhile, a spokesperson at Diamond Lease expects competitors, including itself, to respond with similar deals. "There are about 280 leasing companies, a reduction from as many as 370 companies seven or eight years ago. This was a result of M&A activities. So, it is natural to see further collaborations," said Takashi Ohta, a spokesperson at Diamond Lease. Ohta said Japan's leasing companies tend to be fragmented due to their affiliations with certain banks, trading companies and manufacturers. "But we have incorporated various companies with diverse affiliations, such as those affiliated with a bank, a trading company and a manufacturer. In this sense, we are unique, and the trend will continue," added Ohta.
One of the driving forces behind the latest merger agreements is the planned amendment in Japan's lease accounting standards possibly from the year ending March 2008. "With the planned rule change, customers of leasing services must treat their leasing transactions as on-balance accounts, although they are now allowed to keep them off balance," said a spokesperson at the Japan Leasing Association. "So, users are increasingly skeptical about the benefit of leasing services."
Also, the prospect of higher interest rates in Japan has a downside for leasing companies. "Leasing companies have a tendency to have long-term assets and therefore, rely on long-term liabilities. So, it is very had for them if their funding costs rise sharply," said the JLA spokesperson.
Nomura's Iimura, however, sees little synergies in the potential link-up among Fuyo General Lease, Tokyo Leasing and IBJ Leasing. "What benefits do they have? These three companies all draw their client bases from big cities. They also have very similar customer portfolios. In this sense, they are not complementary at all," said Iimura. As for the alliance between Diamond Lease and UFJ Central Leasing, Iimura said: "They operate in different regions. There is no overlap in their customer portfolios."
Sumitomo Corp, the Japanese trading company with a 36.21% stake in Sumisho Lease, announced on 13 October that it is set to launch a tender offer on 31 October to acquire the remaining stake in Sumisho Lease prior to the planned merger of Sumisho Lease with SMBC Leasing.
On the same day, Sumitomo Trust & Banking said it would launch a tender offer on 24 October to make STB Leasing its wholly-owned subsidiary.
Yesterday, Japanese leasing company shares, such as UFJ Central Leasing, Diamond Lease and Tokyo Leasing shares, rose sharply. Especially, UFJ Central Leasing shot up JPY 560 (USD 4.7), while Diamond Lease jumped JPY 320 on a merger speculation, according to a broker at Capital Partners Securities.

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