Tuesday, July 19, 2005

WSJ : How a Japanese Inn, A Favorite of Royalty, Fell to Foreigners

Bad Debts Forced the Sale, But Buyer Goldman Sachs Had to Use All Its Charm


July 19, 2005; Page A1

YAMASHIRO ONSEN, Japan -- For nearly four centuries, Shunjiro Nagai's family jealously guarded the hot-spring water running through this remote spa resort in central Japan. The prized mineral water flowed into the cedar bathtubs in the village's traditional inns, or ryokan, delighting guests coming for a relaxing soak. As the head of the village's spring-water cooperative, the 61-year-old Mr. Nagai had an important mission: To keep the water exclusively in the hands of his family and 10 other families running the village's oldest inns, barring any outsiders.(photo The gate and part of the main building of Shiroganeya, or White Silver Inn.)
Then last year, an indebted neighbor's inn called Shiroganeya, or White Silver Inn, was put on the block, giving a potential outsider access to the sacred water discovered by a high priest in the eighth century. The top bidder was "foreign capital" with a name Mr. Nagai barely recognized: Goldman Sachs Group Inc.
After plotting for months to drive out the foreigner and threatening to sue, Mr. Nagai did something he had never dreamed he would do: For the good of the village, he persuaded his neighbors to accept the outsider's bid for the inn and its mineral water.
"It was a very painful decision," says Mr. Nagai, who sports slicked-back hair and a wispy mustache. "In the end, what mattered was to keep the light burning at Shiroganeya, whether the buyer was an outsider or not." The 380-year-old inn, with its moss garden and teahouse, is a national treasure. A favorite of Japan's imperial family, the inn in recent times has had as a guest Crown Prince Naruhito.
Mr. Nagai's change of heart shows just how far Western-style capitalism has come in Japan. As the nation slowly emerges from more than a decade of economic slump, many of Japan's largest companies are shaping up by adopting unfamiliar business concepts such as takeovers and performance-based pay. Now, economic restructuring is working its way to remote villages, shaking up communities steeped in tradition.
The village of Yamashiro Onsen, population 13,000, was long isolated from such forces. Mr. Nagai ran the renowned Araya inn, which has been in his family for 18 generations. Across the village square was Shiroganeya, owned by Mr. Nagai's childhood friend Kanichi Masaki. Together, the two men attended the village's annual June festival, where villagers threw purple irises into the communal tubs to pray for health and prosperity.
Japan's painful economic downturn in the 1990s took its toll on Yamashiro. Mr. Nagai suffered from plunging sales and debts racked up during boom times in the 1980s. Mr. Masaki was doing even worse. In 2001, Shiroganeya was taken over by a government-backed bad-debt clearing house called Resolution & Collection Corp. Last year, RCC called for investors who could turn the inn around.
The first signs of change appeared last summer, when a dozen potential investors, including two Japanese bankers from Goldman, showed up at the local conference hall. Mr. Nagai, attending as the head of the water cooperative, was startled to read an RCC handout that stated that the buyer of the inn would also be purchasing rights to use the spring water.
Mr. Nagai stood up to argue that the water rights couldn't be sold to people outside the cooperative. "This is the rule generations of our families have stuck to to protect this precious resource," he said.
But RCC ignored his plea and pushed through the auction. Goldman was in the lead with a 300-million-yen ($2.7 million) bid. Mr. Masaki's son, trying to keep the inn in his family, submitted a bid, too, but it was lower. The Masakis couldn't be reached for comment on this article.

Shaken, Mr. Nagai and other innkeepers gathered nightly to plan strategy. They felt threatened that a foreigner could buy the prestigious inn for a relative pittance, at a time when everyone was struggling to repay debts. "Foreigners will run away the minute they pocket enough profit," says Tetsunobu Wada, the 65-year-old owner of an inn next door to Shiroganeya, recalling how he felt. The innkeepers hired a lawyer to see whether they could stop the sale of the rights by suing RCC.
Sensing trouble, Harutaka Kawai, the RCC official overseeing the auction, turned to Yoshiharu Hoshino. Goldman had hired the 45-year-old Mr. Hoshino, a resort-turnaround specialist, as part of its efforts to expand its real-estate business into the hot-spring industry. Mr. Hoshino, who graduated from Cornell and worked at Citibank, understood Western business principles. And since he had grown up in a family of hot-spring hotel owners, he knew how to communicate with the traditional innkeepers.
Mr. Kawai asked Goldman to drop its name from the paperwork and make Mr. Hoshino the point man in the deal. Mr. Kawai also told Goldman bankers to stop showing up in Yamashiro and handing out their business cards. Nearly every day, the fast-talking Mr. Kawai spent an hour driving out to Mr. Nagai's inn to talk about the future of the village and how Mr. Hoshino might help.
In October, Mr. Hoshino made an appearance in Yamashiro. He explained that as the son of an old hot-spring innkeeper himself, he passionately wanted to bring Shiroganeya back to its old glory. "We are just taking the stewardship of this precious property for a little bit so we can pass it on to the next generation in good shape," Mr. Hoshino recalls saying.
The villagers were charmed, but they were split on whether to give Mr. Hoshino access to the water. Mr. Nagai was torn. On the one hand, he felt he should support the Masaki family and push forward with the lawsuit. But he also felt he could trust Mr. Hoshino. After days of soul-searching, he decided that Yamashiro might actually be better off with a new investor. "In the end, it's all about what's best for the community," Mr. Nagai says.
Mr. Nagai then set out to persuade the others to accept Mr. Hoshino. He told the villagers that Goldman was simply a bank that provided financing to Mr. Hoshino, whom everybody already liked. In fact, Goldman was the sole provider of funds, and Mr. Hoshino's role was to manage the property. But "it was much easier to understand if it was explained this way," Mr. Nagai says.
A few months later, the innkeepers finally came around, on one condition. They still couldn't bear the thought of selling the water rights to outsiders. So they offered to "lend" the rights to Mr. Hoshino's company, allowing Shiroganeya to fill its bathtubs. Goldman and Mr. Hoshino finally signed the deal in March, eight months after they first looked at Shiroganeya. The price was ultimately reduced to $2.2 million because water rights were merely leased. The inn is scheduled to reopen under its new ownership next month.
Goldman bankers say they aren't discouraged by the challenges of acquiring Shiroganeya. "Breaking new ground in a traditional sector of Japan takes time and patience," says Shigeki Kiritani, managing director in Goldman's strategic investment group in Tokyo. Over the next few years, the bank hopes to acquire some 50 inns throughout Japan, which Mr. Hoshino's company will manage.
In Yamashiro, Mr. Nagai is watching quietly as Shiroganeya's renovation moves forward. Meanwhile, other signs of Western-style capitalism are cropping up. A new discount hotel offers a package of a room and two meals for $90 per person, about half the price of other inns. The largest inn in town, called Hyakumangoku, recently said it was negotiating a management tie-up with Ramada International, a unit of Cendant Hotel Group of Parsippany, N.J. The deal would make it the first global hotel chain in Yamashiro Onsen.
Write to Yuka Hayashi at yuka.hayashi@wsj.com


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