Japan fund eyes JSR buyout as Tokyo ramps up chip intervention

An acquisition by Japan Investment Corp (JIC), overseen by the powerful trade ministry, would be the latest in a series of increasingly muscular government moves to regain Japan’s lost lead in advanced chip production and maintain its edge as a maker of materials and tools used in their manufacture.

JSR’s market capitalisation was 677 billion yen ($4.73 billion) at Friday’s market close. JIC would spend about 1 trillion yen on the acquisition, the Nikkei newspaper reported, injecting 500 billion yen into a new company to make the purchase and borrowing 400 billion yen from Mizuho Bank.

JSR shares were untraded with a glut of buy orders on Monday after the company said on Saturday it was considering a buyout.

The potential acquisition comes amid deepening tensions between the U.S. and China as President Joe Biden’s administration builds domestic chip manufacturing capacity. Japan and the Netherlands have joined the U.S. in restricting exports of chipmaking tools to China.

JSR is a top supplier of photoresists, which are light-sensitive chemicals used to etch patterns on wafers.

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“Japan has a monopoly, with China and others yet to develop this technology,” said Kazuhiro Sugiyama, consulting director at research firm Omdia. Shares in peer Tokyo Ohka Kogyo surged 10% on the news, while Sumitomo Chemical was up 3% and Shin-Etsu Chemical traded 2% higher.

“The market is speculating that funds will flow to other small and medium-sized materials makers,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management.

JSR approached JIC about potential backing, an industry ministry official said.

The company needs to invest heavily in production capacity as global demand for chips grows as well as the development of materials that will be needed to manufacture advanced chips, said the official, who declined to be named because they are not permitted to speak with media.

While Japan has a long and mixed record of intervening to save floundering industrial players, a move to take private a profitable company that has already undergone restructuring risks criticism for potential overreach.

JIC said last November it had expanded the size of its buyout fund by 4.5 times to 900 billion yen.

“JIC is starting here. It would surprise me quite a bit if that is where they stopped,” Travis Lundy of Quiddity Advisors wrote in a note on Smartkarma.

JSR, which was set up in 1957 as a government-backed producer of synthetic rubber, reported a 20% jump in sales to 408.9 billion yen in the year ended March, while operating profit declined 33% to 29.4 billion yen.

JSR and Shin-Etsu have market share of 39% and 37% respectively in the ArF photoresist market, according to Nomura Securities, with JSR’s clients including Samsung Electronics , Taiwan Semiconductor Manufacturing Co and Micron Techology.

In the advanced extreme ultraviolet (EUV) photoresist market, Tokyo Ohka Kogyo is adding share from top clients in South Korea and Taiwan, Nomura said.

“JSR is falling behind a little in EUV. They will be able to invest in advanced materials,” said Omdia’s Sugiyama of the potential buyout.

Shares in JSR, which unusually for a Japanese company has a foreign-born CEO, have gained 25% year-to-date. Activist investor ValueAct Capital is a major shareholder and has an executive on the board.