Sumitomo 3M Acquisition Will Add To 3M’s Earnings And Increase Presence In Japan

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3M (NYSE:MMM) recently announced that it will acquire Sumitomo Electric Industries’ 25% stake in the joint venture, Sumitomo 3M Ltd. [1] The acquisition, which will cost 3M approximately $885 million, is expected to close by September 1 2014. Sumitomo 3M will be renamed to 3M Japan once the acquisition is complete. The acquisition will have an accretive impact on 3M’s earnings post the third quarter 2014 and will help increase its presence in Japan. Sumitomo Electric will gain around ¥41 billion in net profit due to the impact of the sale to 3M.

Sumitomo 3M, based in Japan, was established in 1961 as a joint venture between 3M, Sumitomo Electric and NEC Corp, with 3M owning 50% stake and the remainder equally divided between the other two venture partners. 3M acquired NEC’s 25% stake in 2003 to bring up its stake to 75%. Sumitomo 3M operates in similar businesses as 3M’s Industrial and Electronics & Energy segments. It manufactures adhesives, abrasives, electric and electrical products, reflective materials, tapes and film products.

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3M’s benefits from the acquisition

Sumitomo 3M, which is largely managed by 3M, is one of 3M’s most successful subsidiaries. Therefore it makes sense for 3M to gain full ownership of the subsidiary, which operates in an industry that 3M knows well. Post acquisition 3M will own 100% stake in Sumitomo 3M, which will enable 3M to gain full control of Sumitomo’s assets and deploy them to generate attractive returns. 3M will benefit from an $0.08 per share addition to its earnings in the 12 months following the completion of Sumitomo 3M’s acquisition.

The strategic acquisition will allow 3M to strengthen its presence in Japan, where it generates more than $2 billion in revenues. [2] After China, Japan is the most important market for 3M in the Asia Pacific region. 3M believes that its addressable opportunity in Japan is worth $800 million. [3] Sumitomo 3M offers products that could cater to around 50% of this addressable market and will therefore play a major role in 3M’s growth in Japan.

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Notes:
  1. 3M, via Sumitomo 3M, to Acquire Sumitomo Electric Industries Ltd.’s Interest in Sumitomo 3M Ltd., July 16 2014, www.3m.com []
  2. 3M’s CEO Hosts 2014 Outlook Meeting Conference (Transcript), December 18 2013, www.seekingalpha.com []
  3. 3M’s International Operations Presentation, December 17 2013, www.3m.com []