Scandal-hit Olympus Corp <7733.T> came under pressure from its biggest shareholders on Thursday to explain hundreds of millions of dollars in controversial payments publicized this week by its ousted British chief executive Michael Woodford.
Woodford has written to Japan's Securities and Exchange Surveillance Commission (SESC) asking them to look into the abnormally high fees involved in Olympus's $2.2 billion acquisition of British medical equipment maker Gyrus in 2008.
And on Thursday he said he was considering whether to seek police protection in London after passing new information to British fraud investigators.
Shares in the endoscope and camera maker fell for a fifth straight day, and a Japanese ratings agency said it might downgrade the company's credit rating over an unusually high $687 million fee paid to deal advisers.
Woodford, who was dismissed just two weeks after taking over as CEO and six months after becoming president, took his case to British fraud investigators earlier this week because most of the Gyrus deal was paid for through an Olympus subsidiary in the UK.
The fee, equal to a third of the acquisition price, is stratospheric compared with an industry standard of 1 percent to 2 percent of a deal's value.
Olympus said last Friday it had dismissed Woodford because of management issues. The Briton said he was fired because he queried the payment to the advisers.
The scandal has kicked up a storm. Olympus has lost close to half its market value in a matter of days, raising speculation it could become a takeover target.
On Thursday, Nippon Life Insurance Co, the largest shareholder in Olympus with a stake of 8.2 percent, called for prompt action from the company to allay investors' worries.
We have urged Olympus to quickly provide information in order to remove concerns, said Akira Tsuzuki, a Nippon Life official.
Southeastern Asset Management, the second-largest shareholder, also demanded an immediate probe.
The important thing to note is that we have been supportive investors of the company for some time... But post all of these allegations, we have a lot of questions, a lot of serious questions, said Josh Shores, senior analyst and principal at Southeastern, which has written to the company and relevant regulators for an explanation.
Harris Associates, a Chicago-based group which holds 2.5 percent in its Oakmark International Fund, has written a similar letter.
We are particularly concerned about the relationship between Olympus management and the unnamed outside consultants who advised them on these deals, said David Herro, Chief Investment Officer for International Equities.
We want the company to explain in detail who these consultants were, how much they were paid, and what services and value they provided to justify these payments.
Woodford, a 51-year-old who spent three decades at Olympus, is now back in Britain. He identified the advisory firms as New York-based AXES America LLC and Axam Investments Ltd in the Cayman Islands.
The Briton is staying away from Japan because he has been advised that his personal safety could be at risk, he said in a September-dated letter to Olympus chairman Tsuyoshi Kikukawa.
On Thursday he said he was wondering whether he was safe even at home. I will be going to Scotland Yard, he said in a reference to the headquarters of London's Metropolitan Police.
Woodford, who has sent a dossier to Japan's Securities and Exchange Surveillance Commission (SESC) and is calling for the resignation of the Olympus board led by Chairman Tsuyoshi Kikukawa, said he was in touch with top Olympus shareholders.
Any probe by the SESC could take months. If a breach of the Financial Instruments and Exchange Act is found, it could lead to a fine. In the case of a serious offence, the prosecutors' office could launch a criminal investigation.
Under the spotlight is 73.4 billion yen ($956 million) paid by Olympus for acquiring three small Japanese firms-- News Chef Co Ltd, which makes microwaveable cookware, Altis Co Ltd, which recycles medical waste, and on-line cosmetics firm Humalabo Co Ltd.
Olympus wrote down 75 percent of the value of the firms, which are all based in the same Tokyo building and employ a total of about 130 people, in the fiscal year it had bought them.
The deals alongside the Gyrus takeover have resulted in $1.3 billion destruction of shareholder value, Woodford says.
Japanese ratings agency R&I on Thursday said it had put Olympus's credit rating on watch for a possible downgrade because of the management turmoil and deteriorating earnings.
R&I has an A-rating on Olympus, suggesting high creditworthiness. It had affirmed the rating on August 29 but with a negative outlook.
Olympus is highly geared, with net debt-to-equity ratio running at almost 300 percent, CLSA analysts said.
Outstanding debt is $4.9 billion, most of which is made up by loans, Thomson Reuters Credit Views showed.
All of the company's bonds are privately placed and so do not trade very often.
A structural credit risk model from Thomson Reuters Starmine that assigns a credit rating based in part on equity market volatility and the Olympus's market value as of October 19 applied a BB-rating to the company, a junk rating and the lowest among the company's competitors on Starmine.
Olympus is set to unveil its July-September earnings on November 8 and Chairman Kikukawa, who Woodford said runs the company like a total emperor system, is set to speak on global social responsibility on October 25 at a forum sponsored by the Nikkei newspaper.
Olympus's market value has slumped by close to $4 billion to around $4.9 billion since the company announced it had fired Woodford. Shares of Olympus fell 4.9 percent on Thursday, the fifth session of losses, and the words bid target are on the lips of some analyst.
Olympus could be an attractive acquisition target if the share price drops enough and it clears up the uncertainties about potential legal challenges. Olympus has decent free cash flow, said CLSA analysts in a note.
Olympus dominates the global flexible endoscope market, and there are many companies that would like to enter the lucrative medical-equipment business.
(Reporting by Hideyuki Sano, Lisa Twaronite, James Topham, Noriyuki Hirata and Kevin Plumberg. Writing by Tim Kelly and Isabel Reynolds; Editing by Miyoung Kim and Neil Fullick)