Pioneer Says Merger Talks with Onkyo Continue; But Equity Partner Appears Sidelined

Pioneer LogoPioneer Corporation released an interesting document on September 12th – while much of the tech media was in Denver for CEDIA – titled Notice with Respect to Basic Agreement for the Integration of Pioneer’s Home AV Business and Onkyo. This curious document, six pages long, gives an update as to the state of the discussions between the parties in the previously announced “basic agreement” between Pioneer, Onkyo, and Baring Private Equity Asia for a “Capital/Business Alliance” related to Pioneer’s Home AV business.

Now, apparently, the deal’s changed…with Baring PE pushed to the sidelines…

This new document announces an adjustment to the alliance that appears to be a material change from the previous press announcements. However, it is difficult to discern the precise details as this document looks to be an English translation of a Japanese original. The translation is at times rough and imprecise, making the details hard to discern.

That being said, it would appear that Baring Private Equity Asia has been either cut out of the entire deal – or at least shoved to the sidelines until a more comprehensive integration plan is developed. We have reached out to various parties for clarification, but please keep this imprecision in mind as you read the rest of this report.

Basic agreement reached…

In the meantime, the document states that Pioneer Corp. and Onkyo Corp. [no mention of Baring at first] – on September 12, 2014 – “executed a basic agreement today to integrate Pioneer’s Home AV business, phone business and headphone-related business, with Onkyo…” The announcement further states that Pioneer will take a stake in Onkyo (14.95%) as part of this agreement, while Onkyo will acquire all outstanding shares of Pioneer Home Electronics Corp. (PHE) – a new entity.

onkyologoThe statement goes on to suggest that the original THREE parties (including Baring) “intensively” discussed the merger, but then “ceased discussions as they decided that the home AV business needs to be considered from a long-term perspective as the business must be developed strategically and flexibly to quickly respond to the continuously changing business environment. The three parties therefore agreed that it would be more efficient for the two strategic parties, Pioneer and Onkyo to directly discuss the Integration without financial sponsor.”

A post-merger look…

The outlines of how the merged entity will look is coming together, but clearly not complete. In general, each party will mutually share their “brand power” and “the-best-of-its-kind-technologies” in the mission of lowering costs and to “maximize synergies” from this merger. The document promises that both brand names will – as expected – stay in the marketplace.

Pioneer will “carve out” its home entertainment businesses from its existing corporate structure, creating the Pioneer Home Electronics Corp. – and then merge it with Onkyo. The surviving entity after the transfer of PHE is Onkyo.

A functional breakdown…

The announcement goes on to note that Pioneer will handle the “back office functions of sales platforms outside Japan” as part of their contribution to this deal. Onkyo will lead the “manufacturing and purchasing functions” of the merged entity. All of the other functions will be “gradually concentrated to maximize the potential merger synergies.”

More details are to be worked out – such as, for example, the price to be paid. And Pioneer took the time to qualify all of this with a significant disclaimer, reserving the right to “review, reschedule or abandon the Integration if it is expected not to be practically completed…”

Remarkably balanced…

The document presents a profile of each of the parties. As you might suspect, Pioneer clearly is the larger overall player – 22,193 employees, revenues of ¥498 billion ($4.6 billion) – as compared to Onkyo – 1,875 employees, revenues of ¥36 billion ($335.8 million). But when Pioneer carves out their home entertainment holdings, the two are remarkably balanced – the pro forma estimate of PHE revenues is ¥40 billion ($372 million).

The parties expect to have completed a definitive merger agreement by October 2014…with the deal set to close in March 2015.

We have reached out to the various parties in an attempt to confirm elements of this story, but did not hear back from them by the time this story was posted. We will report any clarifications should they be forthcoming.

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