The encyclopedia · Finance & Accounting · Financial decision · 2015
LIXIL bought Grohe for €3bn — and inherited a China unit cooking its books
LIXIL's 2014 Grohe deal carried Joyou AG, a Chinese plumbing maker overstating its accounts since 2008. Joyou went bust in 2015 and cost LIXIL ¥66.2bn.
LIXIL Group Corporation · Joyou AG · 2015-06
What happened
In January 2014, Japan's LIXIL Group completed its €3.06bn acquisition of an 87.5% stake in GROHE, Germany's largest bathroom-fittings maker — billed at the time as the largest overseas purchase ever by a Japanese building-products company. The deal was meant to give LIXIL a global sanitary-ware platform spanning Japan, Europe and the Americas.
GROHE brought with it Joyou AG, a Frankfurt-listed, China-based maker of toilets, sinks and plumbing fixtures in which GROHE held a stake. Within sixteen months of LIXIL taking control, Joyou's accounts unravelled: an internal investigation found substantial deviations in its financial records dating back as far as 2008, and Joyou's Chinese factories had been collateralised several times over through shadow-banking arrangements.
Joyou AG filed for insolvency in 2015, and LIXIL ceded control of it to a court-appointed administrator. On 3 June 2015 LIXIL restated its accounts, booking ¥66.2bn in one-time losses tied to the unit. LIXIL's chairman and CEO, founding-family member Yoichiro Ushioda, later stepped down under pressure from overseas investors over the group's governance.
The acquisition that was meant to globalise LIXIL instead surfaced how little the buyer had understood about a subsidiary buried two layers down the target it had just paid €3bn for.
Why it happened
- LIXIL paid €3.06bn for GROHE without uncovering that a GROHE subsidiary, Joyou AG, had been misstating its accounts since at least 2008.
- Joyou's Chinese factories had been pledged as collateral several times over through shadow-banking loans — a risk sitting inside the target LIXIL was buying.
- The fraud sat two corporate layers down (LIXIL → GROHE → Joyou), where buyer due diligence is thinnest and reliance on the seller's representations is greatest.
- LIXIL controlled GROHE for sixteen months before the irregularities surfaced, suggesting the acquisition review never reached the China unit's books.
The lesson
An acquisition's costliest risk is often two layers down — a subsidiary the seller consolidates and the buyer never audits. LIXIL inherited Joyou's fraud because nobody opened the China unit's books.
Aftermath
LIXIL restated its FY2013 and FY2014 figures and booked the losses across three years. It wrote off its Joyou stake, ceded the unit to insolvency administrators, and refocused on GROHE's core European business. Ushioda's departure became a cited case of overseas shareholders forcing governance change at a Japanese founding-family company.
Sources
- EU-Japan Centre — LIXIL announces losses of ¥33.2 billion due to Joyou AG's insolvency (3 June 2015 restatement; FY2013 ¥23.8bn, FY2014 ¥9.4bn, FY2015 ¥33bn; total ¥66.2bn)
- LIXIL Group — Annual Report 2015 Supplementary Data Book (official disclosure: ¥32,546m loss on impairment of long-lived assets; Joyou special audit; stake held via GROHE)
- NYT DealBook — Lixil of Japan to Buy Grohe for $4.1 Billion (€3.06bn enterprise value; 87.5% stake; LIXIL + Development Bank of Japan)
- Nikkei Asia — Lixil may report over 50 billion yen loss due to write-offs at unit in China (Joyou bankruptcy, ¥50bn+ loss)
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