By Daniel Leussink
TOKYO (Reuters) -Toyota and two affiliates will divest at least 8% of supplier Denso, the companies said on Wednesday, a $4 billion deal that sparked investor hopes the world's top-selling automaker will shed more of its numerous cross-shareholdings.
The share sale, which was first reported by Reuters on Tuesday, will be Japan's second biggest this year and the largest in the global auto industry in more than a decade, according to LSEG data.
Denso, the world's second-largest maker of automotive components and a pillar of the Toyota (NYSE:TM) group, will buy back some of its own shares in the open market to lessen the impact of the sale.
For investors, the deal has reinforced expectations that Japan's most influential company could accelerate sales of shareholdings in affiliates and partners, a practice known as cross-shareholding. Investors, particularly foreign ones, say it hinders governance and hampers returns.
Companies have been slowly unwinding the holdings for years, but the trend gained momentum after the Tokyo Stock Exchange in March urged companies to make better use of their capital.
"We know it's going to free up some of the capital being locked within the Toyota balance sheet. What's important is how they're going to utilise this freed-up capital going forward," said James Hong, the head of mobility research at Macquarie.
Denso said Toyota and two group companies, Toyota Industries (OTC:TYIDF) and Aisin, would sell their shares in the company to investors. They intend to sell some 256 million shares, worth 589.1 billion yen ($4 billion) at Wednesday's closing share price, representing some 8% of Denso.
That does not include an option known as an overallotment, which would allow the sale of additional shares to take the stake to more than 9%.
If all of those shares are sold, Toyota would remain Denso's biggest shareholder even as its stake in its supplier would go down to 20% from about 24%. Toyota views a stake with a size of 20% as a guideline for its group affiliate holdings, a Toyota executive told reporters in an online briefing.
Denso's no. 2 shareholder Toyota Industries would see its stake in the supplier decrease to around 6% from just over 10% currently while that of Aisin would be reduced completely.
Separately, Denso said it would buy back some 125 million shares on the open market, as it looks to offset the market impact of the sale. Denso shares closed up 0.9% on Wednesday, having lost 4.9% a day earlier after Reuters first reported the news.
($1 = 147.2400 yen)