Shareholders demand Olympus explain payments

By Chikafumi Hodo

Shares in the endoscope and camera maker fell for a fifth straight day and a Japanese ratings agency said it might downgrade the company's credit rating as alarmed investors demanded a clearer explanation of $687 million paid to deal advisers.

Chief executive turned whistleblower Michael Woodford told Reuters on Wednesday he had written to Japan's Securities and Exchange Surveillance Commission (SESC) asking them to look into the abnormally high fees involved in Olympus's $2.2 billion acquisition of British medical equipment maker Gyrus in 2008.

Woodford, who was dismissed just two weeks after taking over as CEO and six months after becoming president, took his case to British fraud investigators earlier this week since most of the Gyrus deal was paid for through an Olympus subsidiary in the UK.

The fee, equal to a third of the acquisition price, is stratospheric compared with an industry standard of 1 percent to 2 percent of a deal's value.

Olympus said last Friday it had dismissed Woodford because of management issues, although the Briton said he was fired because he queried the payment to the advisers.

The scandal has kicked up a storm. Olympus has lost close to half its market value in a matter of days, raising speculation it could become a takeover target.

On Thursday, Nippon Life Insurance Co, the largest shareholder in Olympus with a stake of 8.2 percent, called for prompt action from the company to allay investors' worries.

"We have urged Olympus to quickly provide information in order to remove concerns," said Akira Tsuzuki, a Nippon Life official.

A spokesman for Nikko Asset Management Co Ltd, which holds 1.05 million shares, according to Reuters data, said Olympus needed to provide information.

"This is a general comment, but when there is a situation that has a large impact on a firm's value, that is exactly the time when a company should provide prompt and transparent disclosure and top-quality investor relations," a spokeswoman said.

Olympus revealed for the first time on Wednesday the hefty size of the fee paid to the advisers as part of the Gyrus takeover. But it declined to identify them and said it no longer knew of their whereabouts.

Woodford, a 51-year-old who spent three decades at Olympus, is now back in Britain. He identified the advisory firms as New York-based AXES America LLC and Axam Investments Ltd in the Cayman Islands.

The Briton is staying away from Japan because he has been advised that his personal safety could be at risk, he said in a September-dated letter to Olympus chairman Tsuyoshi Kikukawa.

An SESC official declined to confirm whether it had received Woodford's correspondence, saying it does not comment on individual cases.

Any probe by the SESC could take months. If a breach of the Financial Instruments and Exchange Act is found, it could lead to a fine. In the case of a serious offence, the prosecutors' office could launch a criminal investigation.


Olympus's market value has slumped close to $4 billion since the company announced it had fired Woodford, who as recently as October 1 had been praised in a company press release for his performance. Olympus is now worth around $4.9 billion.

Shares of Olympus fell 4.9 percent on Thursday, the fifth session of losses.

"Olympus could be an attractive acquisition target if the share price drops enough and it clears up the uncertainties about potential legal challenges. Olympus has decent free cash flow," said CLSA analysts in a note.

"Olympus dominates the global flexible endoscope market, and there are many companies that would like to enter the lucrative medical-equipment business."

Woodford has called on Olympus's shareholders to demand the removal of the board and a detailed examination of all the company's acquisitions over the past decade.

Under the spotlight is 73.4 billion yen ($956 million) paid by Olympus for acquiring three small Japanese firms-- News Chef Co Ltd, which makes microwaveable cookware, Altis Co Ltd, which recycles medical waste, and on-line cosmetics firm Humalabo Co Ltd.

Olympus wrote down 75 percent of the value of the firms, which are all based in the same Tokyo building and employ a total of about 130 people, in the fiscal year it had bought them.

The deals alongside the Gyrus takeover have resulted in $1.3 billion destruction of shareholder value, Woodford says.

Japanese ratings agency R&I on Thursday said it had put Olympus's credit rating on watch for a possible downgrade because of the management turmoil and deteriorating earnings.

R&I has an "A"-rating on Olympus, suggesting high creditworthiness. It had affirmed the rating on August 29 but with a negative outlook.

Olympus is highly geared, with net debt-to-equity ratio running at almost 300 percent, CLSA analysts said.

Outstanding debt is $4.9 billion, most of which is made up by loans, Thomson Reuters Credit Views showed.

All of the company's bonds are privately placed and so do not trade very often.

A structural credit risk model from Thomson Reuters Starmine that assigns a credit rating based in part on equity market volatility and the Olympus's market value as of October 19 applied a "BB"-rating to the company, implying a ranking below investment grade, or junk.

That rating was also the lowest among the company's competitors on Starmine.

Olympus is set to unveil its July-September earnings on November 8 and Chairman Kikukawa, who Woodford said runs the company "like a total emperor system," is set to speak on global social responsibility on October 25 at a forum sponsored by the Nikkei newspaper.

($1=76.78 yen)

(Reporting by Hideyuki Sano, Lisa Twaronite, James Topham, Noriyuki Hirata and Kevin Plumberg. Writing by Tim Kelly and Isabel Reynolds; Editing by Miyoung Kim and Neil Fullick)