As the private equity firm struggles to navigate the country’s retail market, MBK Partners is making a partial exit from Homeplus about four years after it bought the South Korean hypermarket chain.
The Asia-focused private equity firm is set to sell part of the assets through the initial public offering of Korea Retail Home Plus Reit I, which was launched on Thursday with a fundraising target of W1.6 trillion to W1.7 trillion ($1.4 billion to $1.5 billion).
MBK Partners plans to retain only a 30% stake in the real estate investment trust, which owns 51 hypermarkets – about one-third of Homeplus' 141 hypermarkets it bought from UK supermarket chain Tesco for $6.4 billion in 2015.
Some equity analysts believe that MBK overpaid for the assets after it paid a premium to fend off rival bidders including KKR-Affinity and Carlyle-GIC. At the time, the private equity firm believed that it could turn around the underachieving retail chain by restructuring the business.
Nearly four years on and clearly MBK has yet to achieve its target.
HEADWINDS
To some extent, MBK's difficulty in turning the business around could be attributed to external rather than internal factors.
Since buying Homeplus, MBK has faced various challenges including rising labour costs and new competition from digital channels, as well as increased financing costs thanks to higher interest rates.
One main backlash was South Korea’s drastic increase in its minimum wage level. This has hit retailers like Homeplus particularly hard.
Since 2015, the country’s minimum hourly wage has risen 35% from W5,580 to W7,530. Seoul plans to raise the minimum wage by another 10.9% to W8,350 this year as it hopes to help low-income earners and boost domestic consumption.
At the same time, brick-and-mortar retailers have been increasingly challenged by online retail platforms which have grown significantly on the back of successful fundraising in recent years.
E-commerce platform Coupang is poised to pose a bigger threat to traditional retailers after it secured a massive $2 billion of funding from Softbank’s Vision Fund in November last year. That was three years after the Japanese tech giant invested $1 billion in the Korean startup in 2015.
SK Telecom’s online shopping platform, 11st, raised $452 million from Korea National Pension Service, Korean Federation of Community Credit Cooperatives and private equity firm H&Q Asia Pacific in June last year.
And all of this is on top of the already fierce competition between local retailers such as E-Mart, Shinsegae and Lotte.
Still, some people familiar with the company believe it is too early to call it a failure since MBK can reinvest the IPO proceeds into the rest of the 90 hypermarkets it owns. As such, the move can be interpreted as a major corporate restructuring to free up some of the fixed assets off Homeplus’ balance sheet.
VALUE PROPOSITION
None of this could necessarily turn potential investors off Korea Retail Home Plus Reit I. In fact, the Reit could be an attractive dividend play given Korea’s lack of compelling fixed-income investment opportunities.
Based on the offer price of W4,530 to W5,000 per investment unit, syndicate analysts estimate that the Reit will yield 6.6% to 7% for the current year and generate a total return of 14.5% to 15.1% for the 2019 financial year after factoring in potential asset revaluation.
That represents a generous pickup of at least 461.5 basis points to South Korea’s 10-year sovereign bond which yielded 1.985% at Wednesday's close.
Most economists believe that the central bank is unlikely to raise the benchmark rate any further this year on the back of slower economic growth and lower oil prices. This suggests that the Reit's value relative to other income-generating instruments is unlikely to deteriorate throughout the year.
It also enjoys a rarity value as it is the largest Reit in the Korean market. E KOCREF CR-Reit, its nearest rival, has a market cap of $270 million. That is only around 13.5% of Homeplus Reit’s implied market cap of $2 billion to $2.2 billion.
The Korea Retail Home Plus Reit I IPO will feature 345.5 million investment units with an 80/20 allocation split between institutional and retail investors.
The management roadshow for what is set to be the biggest Korea IPO since Netmarble’s $2.3 billion deal in 2017, is scheduled to take place until March 14. It is expected to list on March 29.
Joint global coordinators of the IPO are Citigroup and Goldman Sachs. Joint bookrunners are Mirae Asset Daewoo Securities, NH Investment & Securities, Nomura and Daiwa Capital Markets.
