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US fund raises doubts about Doutor merger plans

TOKYO - Hedge fund group Harbinger Capital Partners voiced concerns about a planned merger between Doutor Coffee Co. and Nippon Restaurant System Inc., a deal that would create one of the largest players in Japan’s restaurant industry.

Harbinger, Doutor’s second-largest shareholder with a 9.84 percent stake, said the coffee chain has the potential to grow significantly on its own and expressed doubts whether the expected synergies outweighed the risks associated with the deal.

In a statement, the fund also said it was concerned about the terms of the deal, which will give Doutor and Nippon Restaurant System (NRS) shareholders an equal stake in the holding company despite Doutor being a much larger company.

‘Harbinger believes that other Doutor shareholders are also concerned about the proposed business combination with NRS and the valuation of Doutor set by the share exchange ratios,’ Harbinger said in a news release.

The combination of Doutor, which has about 1,500 coffee shops nationwide, and Nippon Restaurant, which runs cafes and a spaghetti chain, would create one of the industry’s biggest firms with about 100 billion yen ($821.9 million) in annual sales.

Japan’s restaurant industry contracted to 24 trillion yen in 2005 from a peak of 29 trillion yen in 1997 and is expected to continue shrinking as the population declines. Analysts see a wave of consolidation and a weeding out of weaker players.

In a statement, Doutor defended its decision to merge with Nippon Restaurant and noted that the swap ratio was calculated based on the input of independent advisors and by looking at the assets, finances and earnings potential of both firms.

‘The decision to merge with Nippon Restaurant was made in light of the severe operating environment. The market is shrinking, competition is fierce and consumer tastes are diversifying,’ Doutor said in a statement.

‘The two firms are very complementary and it is imperative that we leverage our strengths to create a group able to compete in the future.’

Doutor and Nippon Restaurant both compete with Starbucks Corp.’s local unit, Starbucks Coffee Japan Ltd., for the nation’s coffee lovers. Nippon Restaurant runs a chain of cafes called Mozart.

Under the proposed deal, one share in Doutor would be exchanged for one share in a holding company to be established in October. Each Nippon Restaurant share will be swapped for 1.687 shares in the holding firm.

Shares of Doutor closed up 1.2 percent at 2,545 yen, while Nippon Restaurant fell 1.5 percent to 3,950 yen, about 8 percent below its theoretical price based on the swap ratio and Doutor’s current stock price.

The benchmark Nikkei average closed up 0.5 percent.