Carlyle offers $1.7 bn pre-arranged financing to sell ADT Korea

The Carlyle Group has offered 1.9 trillion won ($1.7 billion) in pre-arranged debt financing to potential bidders of its wholly-owned ADT Korea, in a move seen aimed at speeding up the sale of the country’s No. 2 securities service firm.

A number of global private equity firms, including Bain Capital and CVC, are being speculated as potential buyers of ADT Korea in a deal expected to fetch around 3.2 trillion won.

It is likely to be the largest M&A transaction in the country this year, after Unilever acquired Carver Korea, a South Korean skincare business, for 3.06 trillion won from Bain Capital and Goldman Sachs late last year.

Two South Korean financial institutions – Woori Bank and Korea Investment & Securities Co. Ltd. – have agreed to lend 1.55 trillion won in senior loan and 350 billion won in subordinated loan in aggregate to a buyer of ADT Korea, according to investment banking sources on Nov. 15.

The financing values ADT Korea at 3.2 trillion won, applying the typical loan-to-value ratio of 60%. Its estimated enterprise value is similar to the market capitalization of bigger rival S-1 Corporation listed on the Korean stock exchange.

The pre-arranged financing, if used, will be the first billion-dollar seller financing (or stapled financing) provided in South Korea.

In 2015, Tesco PLC attempted to provide debt financing of billions of dollars to sell supermarket chain Home Plus in South Korea through the sale manager HSBC. But Asia-based private equity firm MBK had raised money on its own for the acquisition.

“There are only around 10 banks and brokerage firms in this country which provide M&A financing, but four of them have already been snapped up by strong candidates,” said one of the sources. “The seller financing was pre-arranged to give an opportunity to global PEFs which are unfamiliar with our local financial industry.”

Another source said that a final buyer of ADT Korea is highly likely to use the pre-arranged debt financing, given the terms of the loans.

Carlyle and the sale manager Morgan Stanley had recently sent information memorandum about financial details of ADT Korea and the stapled financing package to potential bidders.

Carlyle bought the securities service company for $1.93 billion in 2014. It is putting ADT Korea up for sale again, after its attempted sale fell through last year.

“The EBITA margin of sector leader S-1 is 19% because of heavy reliance on other Samsung Group units and a big share of real estate management services in sales, but that of ADT is as much as 36%,” a Woori Bank source told the Korean Investors.

“ADT Korea has a stable business model because of a high proportion of retail business, and the domestic securities service market has been growing at an average rate of 5% a year,” he added.

In 2016, ADT Korea posted operating profit of 135.8 billion won, compared with 205.7 billion won of S-1 during the same period. Its 2016 sales were 693.3 billion won, versus S-1’s 1.8 trillion won.

By Donghun Lee and Hugh YH Jeong

hugh@hankyung.com