Bankruptcy By Willcom Stings Carlyle

By ALISON TUDOR And PETER LATTMAN

Japanese mobile-phone company Willcom Inc. filed for bankruptcy protection Thursday, dealing a blow to its owner Carlyle Group and highlighting the challenges of private-equity investing in Japan.



In 2004, Carlyle made its largest bet in Japan when it paid about $330 million for a 60% stake in the mobile-phone unit of KDDI Corp. The deal was struck after more than two years of sensitive negotiations with a reluctant Japanese seller—a hard-fought acquisition seen as a symbol of the difficulties U.S. investors faced buying into Japanese firms, yet also a sign of the opportunities in a newly opening Japan.



But the business, renamed Willcom, gradually lost market share in the competitive Japanese wireless market. After failing to reach agreement with creditors, Willcom filed for court protection with roughly $2.3 billion in debt. The move will wipe out the investment of Washington, D.C.-based Carlyle, according to people familiar with the situation. The bankruptcy is the biggest ever for a Japanese telecom company, according to the research firm Teikoku Data Bank.



The filing comes as private-equity firms have begun to make inroads in Japan, a historically closed market. Buyout shops have struggled to find acceptance in the country, where conglomerates are often reluctant to sell units and managers are wary of loading firms with debt. The industry also raised eyebrows in 2004, the same year Carlyle bought Willcom, when Ripplewood Holdings and J. Christopher Flowers made more than $1 billion after buying Shinsei Bank from the Japanese government and taking it public.



Despite the country's skeptical view of private equity, a small group of firms are getting deals done. Bain Capital has been particularly active over the past several months, announcing a roughly $1 billion purchase of Japanese call center Bellsystem24 Inc. from Citigroup Inc. and the acquisition of the Domino's Pizza Inc. franchise in Japan. Still, Japanese buyouts overall equaled only 10% of the volume in the U.S. over the past two years, according to data provider Dealogic.



Carlyle is one of the more active private-equity investors in the country, investing more than $1 billion across 12 companies. Unlike its large U.S. leveraged buyouts, such as Freescale Semiconductor Inc. and Hertz Corp., Carlyle's Japan deals have been more modest in scale. For instance, late last year it led a roughly $200 million takeover of Chimney Co., a Japanese pub chain, according to Dealogic.



The failed Willcom deal is the second bankruptcy filing in 15 months by a Carlyle-backed telecom company. In December 2008, Carlyle's Hawaiian Telcom Communications Inc. filed for Chapter 11. Both Willcom and Hawaiian Telcom were investments led by Carlyle's vaunted telecom team, which includes James Attwood, a former top executive at Verizon and GTE; Daniel Akerson, the ex-CEO of Nextel Communications; and William Kennard, the former chairman of the Federal Communications Commission.



Despite Willcom's failure, Carlyle's flagship Japanese buyout fund is on track to return two times their money to investors, said a person familiar with the matter. The Willcom investment is spread across three different Carlyle funds, limiting damage to any one portfolio.



Carlyle has also had a number of successful telecom investments across its portfolio such as satellite firm Pan Am Sat Corp. and Dutch cable outfit Casema BV.



Carlyle first approached KDDI about selling its wireless business in 2001. Then called DDI Pocket, the unit's technology—an alternative to cellphones called personal handyphone system, or PHS—was already seen as outdated in some quarters and its revenue was falling.



But the bet was that the system, which offered calls at a fraction of more traditional wireless services, would appeal to budget-conscious business users in Japan.



Carlyle managed to convince KDDI to do a deal by bringing in a Japanese co-investor Kyocera Corp., which took a 30% stake, and letting KDDI keep a 10% stake. When the $2 billion sale was signed in June 2004, it was the second biggest private-equity transaction in Japan.



Willcom's subscriber base grew from 2.9 million at the time of the acquisition to 4.6 million in 2007. But then competitors launched cheaper, faster services with more-advanced features. Subscribers fell to 4.3 million as of last month. As Willcom's fortunes deteriorated, Carlyle replaced its chief executive last August.



The company won a license to provide high-speed wireless Internet service in 2007 but needed a substantial new investment to develop the service, according to a person familiar with the situation. As Willcom's fortunes deteriorated, Carlyle tried to find additional investors to shore up the company's balance sheet but talks fell though.



Mobile-phone service provider, Softbank Corp., and a Japanese private-equity firm, Advantage Partners LLP, are in talks to come in as new equity investors in the company's restructuring, according to people familiar with the talks.



—Hiroyuki Kachi

and Mariko Sanchanta

contributed to this article.