MBK puts home decor firm Modern House on market

MBK Partners has added South Korea's top home decor company Modern House to the list of assets it plans to exit this year, as domestic retail giants are seeking to expand their footprint in the rapidly growing home furnishing market.

The prospective sale is expected to bring in about 1.5 trillion ($1.2 billion), according to people familiar with the matter on Tuesday.

The estimated price is about twice the 686 billion won MBK paid to buy the company from then-cash-strapped Eland Retail Co. in 2017 and roughly 30 times its projected earnings before interest, taxes, depreciation and amortization (EBITDA) for 2022.

To begin the sale process for Modern House, MBK recently hired Goldman Sachs as its sale manager. It is planning to unload a 100% stake in MHNCO., the operator of Modern House and BUTTER, its sub-brand of miscellaneous goods.

MHNCO. swung to a net profit of 6 billion won in 2021 from a net loss of 39 million won a year earlier on a consolidated basis. Its sales increased by almost 10% to 381.5 billion won over the same period.

Established as an in-house business of the retail-focused Eland Group in 1996, Modern House is the country’s first home decor brand with a market share of over 50%.

It competes with Shinsegae Group’s JAJU and MUJI, a 60:40 joint venture between the Japanese home and fashion accessory brand and South Korea’s Lotte Group.

Starting with fabric-based home decor items like curtains and bed linen, Modern House has diversified its product assortment to 10,000 items ranging from kitchen and furniture accessories to pet supplies.

Since MBK took it over, the home decor firm has actively opened new stores within department stores run by its rival companies -- Lotte, Shinsegae and Hyundai -- as well as in major shopping malls. By year-end, it plans to open an additional 15 stores to bring the number of its outlets to 150 nationwide.

At the same time, its online sales have risen to over 10% of its total revenue from 5% as it sells its products on both established and new online platforms such as Coupang Corp. and the country's largest home interior platform operated by South Korea's Bucketplace Co. 

The increased online presence drove its sales and operating profit higher during the pandemic period.

This year, sales at Modern House are expected to grow 5% on-year to 410 billion won, according to the sources. EBITDA is forecast at 60 billion won in 2022, compared with 31.9 billion won in 2018, the first year after MBK’s acquisition.

SINGLE-PERSON HOUSEHOLDS

The rapid increase in one-person households, 40% of the country's total households, has been driving growth in the home decor market, where Lotte, Shinsegae and Hyundai have yet to establish solid positions. GS Retail Co. and SK Networks Co. are also speculated as possible bidders for Modern House.

South Korea’s home furnishing market is expected to expand to 20 trillion won by 2024 from 13 trillion won in 2015, according to the Statistics Korea. As those in their 20s and 30s make up a bigger portion of the single-person households, demand for affordable home decor items has seen a sharp increase.

“The recent home interior trends are to create a unified look and style with items purchased from customers' favorite brand, rather than buying each item from a different brand to decorate their homes,” said a retail industry official.

“This is why Modern House was able to maintain its market leadership despite competition from big conglomerates.”

As the latest evidence of heating competition in the home furnishing market, Lotte Shopping Co., the country’s top department store operator, acquired a controlling stake in Hanssem Co. South Korea's largest furniture and home furnishing company for 1.45 trillion won, jointly with Seoul-based IMM Private Equity in 2021.

Hyundai Department Store Group has jumped into the home decor market as well by taking over Zinus Inc., a maker of best-selling mattresses in North America, for 894.7 billion won earlier this year.

Shinsegae Group has a domestic furniture brand Casamia Co., which it acquired in 2018.

DOWNSIDE RISK

Modern House boasts competitive prices and a wider assortment of products than its rivals. In 2021, its sales were about three times that of Lotte's MUJI and 40% more than that of Sinsegae’s JAJU.

However, some market watchers cautioned that economic reopening could pose a downside risk to their valuations as the demand for home decor products may weaken on the back of increasing outdoor activities.

Reflecting such concerns, the value of a 27.7% stake in Hanssem, which the Lotte-led consortium bought for 1.45 trillion won in October 2021, has tumbled by about two-thirds to 450 billion won as of Tuesday’s market close.

OTHER EXIT PLANS

Modern House is one of the few Korean portfolio companies that MBK plans to divest this year.

The North Asia-focused private equity firm has embarked on the process to sell its majority stake in South Korea’s Lotte Card Co. for over 3 trillion won.

For the Korean supermarket chain Homeplus, MBK has been sliming down its assets by selling its store buildings. It acquired Homeplus for 7.2 trillion won from British retailer Tesco Plc. in 2015.

For Golfzon Country Co., MBK is preparing to list the country's largest golf course operator by the end of this year.  

Write to Jun-Ho Cha and Si-Eun Park at chacha@hankyung.com
Yeonhee Kim edited this article.