The Nippon (NSG) takeover of Pilkington has increased market concerns about the financial health of the Japanese firm now that it has to find large sums to carry out the acquisition. Although NSG will achieve its hoped-for expansion, earnings environment for its glass operations is deteriorating as fuel prices race higher. With goodwill expected to reach JPY 220BN, it is unclear how the acquisition will contribute to earnings in the medium to long term. If goodwill is amortized over 20 years, write-offs will increase to around JPY 11BN/pa. NSG will need JPY 616BN for the acquisition, which includes Pilkington's rolled-over loans. This is equivalent to 80% of the firms' combined annual sales on a simplified basis of JPY 760BN. NSG will be able to find around JPY 89BN from cash reserves & sales of securities. However, it will borrow around JPY 363BN from UBS AG, Sumitomo Corp.et al. others, while a further JPY 110BN will be raised by issuing moving strike convertible bonds. NSG Vice Chairman Tomoaki Abe claims that because it has a "carefully thought out financing plan, there is little financial risk." However, the firm's consolidated shareholders' equity, which indicates the financial health of a company, is expected to fall from more than 49% as of 31 December 2005 to under 30%.
