Is it all over for Nova?

As ‘eikaiwa’ giant plans school closures amid credit crunch, some fear the worst

The dark clouds that have been hanging heavily over us will be cast aside,” reads the English translation of Nova Corp. CEO Nozomu Sahashi’s memo faxed to staff Friday. “I said previously ‘the darkest time is before the dawn,’ and finally the first light of dawn can be seen.”

Nova is on the rocks, and the rosy forecast from the man at the helm of the Osaka-based “eikaiwa” behemoth may not be enough to reassure members of the 7,000-strong Nova crew ? including some 5,000 foreigners ? that the company isn’t sinking as Japan’s biggest conversation school chain plans to abandon at least 200 of its 900 branches, according to reports.

For the second month in a row, wages were paid late in September. Some teachers ? those in the Osaka and Tokyo areas ? were paid on time on the 14th; others received their wages on the 18th. Titled instructors are anxiously waiting to see if they get paid as promised on Tuesday 25th ? 11 days late. Teachers in Nova-managed accommodation have received eviction warnings over unpaid rent despite the fact the company has been deducting money for this purpose from employees’ salaries.

Nova’s labor-relations and legal woes over the past years have been well documented, but the biggest blow for the firm was the punishment meted out by the Japanese government to the firm for deceiving students about lesson availability: The Ministry of Economy, Trade and Industry (METI) slapped business restrictions on the corporation in June, banning the signup of new students on upfront ? and lucrative ? long-term contracts for a six-month period. The bad publicity generated by the decision has led to increasing numbers of students canceling contracts and demanding refunds from the cash-strapped firm.

“It’s kind of like a financial run on a bank,” said Louis Carlet, deputy secretary general of the National Union of General Workers Tokyo Nambu, which counts hundreds of Nova employees among its members. “That’s why this could be the biggest consumer wipeout in Japanese history, because the customers are depositing all this money as if in a bank, assuming the money will be there, and now . . . Nova students are getting worried that they’re gonna get wiped out, so they’re rushing to cancel the contracts and the more they rush the more Nova can’t pay their bills.”

However, Nova boss Sahashi is upbeat about the future. “I would like to inform you that the prospects look clearer for the refunds of cancellations that have accumulated until now and that a schedule has been established for refunding this money from the end of this month,” he wrote to staff Friday. “With this there will be no concern regarding salaries from next month onwards. I cannot announce further details at the moment but would like you to feel reassured and concentrate on business as usual.”

So what ? if anything ? does Nova have up its sleeve? Nova declined to comment over the phone for this story and e-mails to the corporation’s Tokyo and Osaka offices went unanswered.

The memo failed to impress Ken Worsley, Tokyo-based business consultant and editor of Japan Economy News.

“It is vague and contains no proof or evidence that something legitimate is on the way,” he wrote in an e-mail. “We should remember that in December 2005, a few weeks before eikaiwa operator NCB went bankrupt in January 2006, its management issued a similar notice, telling employees that they were about to receive a ‘capital injection’ from a large investor. It never happened, and on the day before January’s payday, NCB locked its doors forever and failed to pay staff or instructors. I see the same pattern evolving with Nova.”

The closure of some 200 schools, reportedly in the Tokyo area and Osaka, Hyogo and Aichi prefectures, should bring in a bundle of cash from savings on rent and the possible sale/rental of Nova-owned property. Is this the first stage in a process of consolidation that could save Nova from bankruptcy?

“I don’t think that Nova’s reported downsizing is a plan in the sense of being a well-thought-out business strategy so much as it is damage control,” Worsley said. “It has been suggested that they are being evicted from some locations, which would certainly indicate that cash flow problems run truly deep. On the other hand, if Nova has embarked upon a strategic downsizing without making an announcement to its employees and investors, one is forced to wonder to what extent the top management may be trusted.”

With Nova’s share price hovering around the ¥40 mark, down from around ¥100 in June (after hitting a high of ¥1,750 in 1999) and last quarter’s dismal financial report ? Nova posted a ¥4.5 billion operating loss over the April-June period (before the METI order), nearly four times the loss over the whole of the last financial year ? you might expect shareholders to be clamoring for the heads of top management. However, Nova’s top shareholders at least ? Nova Kikaku (the corporation’s holding company) and Sahashi himself ? appear to have faith in the current management. And despite the firm now going for a knock-down price, the fact that the same people who got Nova into this mess are still at the controls may put off potential buyers or partners.

“It would be a brave company that would take over a company in Nova’s situation without a change in management,” said Bob Tench, vice president of the Nova union. “The company has a large infrastructure, which in itself is a valuable asset; it has a lot of experience amongst its employees; and with the share price being so low it would be a good buy for a company ? provided they could insert a new top management to run things properly from now on.”

Travel agency H.I.S. was reported to have been talking with Nova about a tieup in July, and some reports have suggested the stumbling block was Nova management’s insistence on staying put. Sahashi, in an interview following the METI order, also ruled out joining forces with other eikaiwa firms. “I don’t want to tie up with a fellow trader,” he said.

With Nova running out of both money and options, talk is increasingly turning to the possibility of bankruptcy.

“I think that Nova’s chances of pulling through and surviving as a company are slim at best,” Worsley said days after the school closures were reported. “I have predicted before that the company would go under around the beginning of November, and I see no reason to change that statement at this point. Late payment is a huge red flag that a company simply does not have a strong enough cash flow to deal with its operating costs. Given that we have seen two late salary payments in a row, I take this as a sign that Nova is nearing insolvency.”

If Nova files for bankruptcy, one concern ? among many ? for employees would be getting hold of unpaid wages. If teachers have time left on their visas and procedures go smoothly, this wouldn’t be a major problem, according to Carlet.

The prospects for students hoping to get money back that they paid Nova upfront for lessons, however, are bleaker.

“The students are very unlikely . . . to get much of their money back, and in the past ? like with Lado ? other schools have been willing to take the students, sometimes for free or half-price,” Carlet said, referring to an eikaiwa chain that went bankrupt in May. “However Nova, being the Goliath it’s always been in the industry, is not in either of the two industry organizations.”

A nightmare even worse than bankruptcy for Nova staff and students would be if the corporation soldiered on after all hope was lost, said Carlet.

“If they don’t officially go bankrupt that means the teachers won’t be dismissed, they just won’t be paid, and if they resign they’d have to wait three months (for unemployment insurance), and if they don’t resign we have to prove that it’s effectively a bankruptcy, which takes time, so either way they’re in serious trouble if Nova doesn’t officially go bankrupt.”

It’s a scenario that is well within the realms of possibility considering how much is at stake for those at the top of the firm, said Worsley.

“The only incentives are fear and greed. Let’s not forget: Should Nova go down, its top management will be in serious personal financial difficulties and will be unhireable. For top management, it makes sense to keep the company running as long as possible in hopes that someone will buy it out. This happened with NCB and Lado, yet in the end no one bought them out.”

With so much uncertainty surrounding the firm’s future, many teachers are not sticking around to see if Nova can weather the storm. Berlitz alone received some 200 applications over a couple of days last week from Nova teachers seeking jobs, said a company source.

Roy Beaubien, who jumped ship after the late payment of wages this month, advises other Nova employees to do the same.

“I’ve seen a Japanese English conversation school try to avoid going bankrupt first hand before. It was hell. Only many years later did any teachers ? and only a few of them that stuck it out for years through many court hearings and after paying years of union fees ? finally get some of their money from the company through the court system.

“As for me? I was until very recently a Nova employee. I applied for my paid holidays immediately after our pay was 12 hours later than usual. I then handed in my resignation soon after that. I learned my lesson years ago and I vowed never to go through that again. This time I wanted to get out when I was still likely to get what I was owed.”