Household products and cosmetics firm LG Household & Health Care, which is part of Korean chaebol the LG Group, will pay W420 billion ($364 million) to buy 90% of TheFaceShop from private equity firm Affinity Equity Partners and the company's chairman.
The outlay for LG Household will be W350 billion as TheFaceShop has around W70 billion of cash on its books. It will finance the deal through the sale of W300 billion of corporate bonds and W50 billion of commercial paper.
Affinity currently owns 70.2% of TheFaceShop through an investment vehicle, Shepherd Detachering. The private equity firm invested in TheFaceShop in 2005, reportedly for a price of W80 billion. Affinity will now make net proceeds, on a cash-free, debt-free basis, of W278.5 billion.
TheFaceShop chairman Woon-Ho Jung owns the remaining 29.8%. He will sell 19.8% of his stake to LG and will receive W71.5 billion. Jung will continue to own a 10% stake, which is valued at W46.7 billion based on the price LG Household is paying. LG Household, which was advised by Goldman Sachs, will buy the residual 10% in two years at a price based on today's valuation plus 6% interest per annum.
TheFaceShop is a cosmetics chain that operates self-owned outlets and shop-in-shops in discount stores and department stores. It started business in 2003. Since 2006 TheFaceShop has earned W250 billion in revenues and achieved a 19% operating profit margin annually.
TheFaceShop is currently the number three player in the domestic cosmetics market with 717 independent outlets. LG Household is number two and the acquisition positions it well to take on the number one player.
LG Household said the acquisition will help it to establish a presence in the expanding mass market segment of cosmetics. LG Household will also broaden its customer base to teens and twenty-year-olds, an age-group in which LG Household is currently under-represented.
Hong Kong-based Affinity is a buyout fund manager which was spun off from UBS Capital Asia-Pacific in March 2004. It focuses on investments in the Asia-Pacific region and manages funds and assets of $4 billion. It is currently investing Affinity Asia Pacific Fund III, a $2.8 billion fund. Affinity tried to sell TheFaceShop last year. Private equity firms Bain Capital, Permira, Carlyle and others were reported to have looked at the asset, but the sale stalled when the credit crisis intensified.
Affinity has announced two investments this year. In the summer it formed a consortium with private equity firm Kohlberg Kravis Roberts and Company (KKR) to bid for Oriental Breweries (OB), which was being put up for sale by Anheuser-Busch InBev. KKR emerged the winner in an auction for OB at a price tag of $1.8 billion in May.
J.P. Morgan worked with Affinity on the sale of TheFaceShop, marking a change from Citi who worked with Affinity on the KKR deal.
Affinity subsequently acquired a 94% stake in Beijing Leader & Harvest Electric Technologies for $200 million in October. Leader & Harvest is a manufacturer of variable frequency drives, a technology that improves the energy efficiency of electric motors and has applications across energy-intensive industries in China, such as oil and gas, power generation, chemicals, cement, metallurgy, and transportation.
