Private equity firm MBK Partners is on the verge of sealing its largest deal yet -- the purchase of Tesco’s Korean discount retail chain.
MBK and its partner Korea’s National Pension Service are leading the field of bidders vying for Tesco's Homeplus, the second-largest chain of stores in Korea after E-Mart, according to a person involved in the auction.
Other suitors include a consortium of KKR and Affinity Equity Partners; and Carlyle which had teamed up with Sinagapore's GIC.
Britain’s Tesco has been shopping Homeplus for about $6 billion. MBK would secure leverage and only pay a fraction of that with equity; still a hefty cheque to write for a firm founded as recently as 2005.
“They [MBK] are ahead,” the person involved in the deal said on Wednesday.
The purchase of Homeplus marks a significant step up in terms of deal size for the Korean firm founded by the eponymous Michael ByungJu Kim.
The 51-year-old Korean American has overseen growth at the North Asia-focused buyout firm, cultivating a team of 35 investment professionals working out of offices in Seoul, Hong Kong, Shanghai and Tokyo. It now has over $8.2 billion in capital under management.
Track record
MBK's next largest deals in terms of price tag would be the purchase of ING Life Insurance Korea for $1.65 billion in 2013 followed by a deal for 60% of Taiwan’s China Network Systems Co for $1.5 billion in 2006 and Japan’s USJ in 2009 for $1.38 billion, according to Dealogic.
MBK’s rise to prominence among Asian buyout firms has not been uninterrupted. In Korea it has struggled with several portfolio companies such as its 2013 investment in clothing firm Nepa as well as cable TV company C&M.
It has also missed out on deals that turned out to be very lucrative, such as KKR and Affinity's buyout of Oriental Brewery in 2009. This week it may have turned the table on those two rivals.
To be sure, it had a successful exit of Yayoi last year for $417.9 million at 1.58 times its money and 6.5% IRR. That was despite widespread jibes among its peers that it had paid far to high an entry multiple.
Home minus
MBK faces another challenge with Homeplus. The firm’s made a loss of 302 billion won last year, partly because the Korean government has curbed opening hours over the weekend in an effort to protect small grocers. Homeplus campaigned strongly against the policy but lost; to prop up sales it adopted a low-price high-volume strategy.
It has also had disputes with its union and in February was indicted on charges of illegally selling the personal data of 24 million customers to insurance firms for a total of 23 billion won.
Competition from its rival private equity peers pushed up the price even as local retailers stepped away in the early stages of the auction. Goldman Sachs dropped out of the consortium with MBK.
Private equity firms, which have raised billions of dollars for Asian deals in recent years, are struggling to put their money to work. MBK raised $2.7 billion for its third fund which closed in 2013.
Korea is one of the few markets in Asia where sizeable deals regularly hit the market and leverage is plentiful. Last year the value of private equity investments in Korea climbed to $8.72 billion from $6.68 billion in 2013 according to data provider Dealogic. Most sales have been sold via auctions at steep earnings multiples as private equity firms have outbid each other to win deals.
Carlyle acquired Tyco International’s Korean security system unit at an eye-popping 30 times free cash flow after tax and capital expenditure.
HSBC is advising Tesco on the sale. The British bank is Tesco’s corporate broker in the UK.
The seller was offering staple financing to potential bidders but one loans banker said it was not as aggressive in pricing as the other packages on offer, adding he did “not know of any buyer who has spent time on the staple”.
