KKR tipped to buy Korean waste treatment firms for $713 mn

KKR & Co. has been named as preferred buyer of two South Korean companies providing industrial and medical waste treatment services in a deal worth around 850 billion won ($713 million), according to investment banking sources on June 9.

The private equity giant competed closely with New York-based Stonepeak Infrastructure Partners to take full ownership of ESG Co. Ltd. and 77.8% of its affiliate ESG Cheongwon Co. Ltd., held by Anchor Equity Partners. The two firms run six subsidiaries across the country, with ESG Co. holding the remaining 22.2% of the latter.

The prospective acquisition will become KKR’s first buyout deal in South Korea in two years, following the $1.3 billion KKR Global Impact Fund launch in February.

The Impact Fund focuses on sectors providing commercial solutions to environmental or social problems, including waste management.

Stonepeak Infrastructure, with over $15 billion of assets under management, joined the bid around the time it reportedly collected $6.2 billion in the first close of its fourth fund that targets $10 billion in the final close.

It was Stonepeak’s first participation in a South Korean M&A market.

Both KKR and Stonepeak had also weighed bids for another Korean waste management firms - Korea Environment Technology Co. Ltd. (Koentec) and Saehan Environment Co. Ltd. - sold by Macquarie Korea Opportunities Management Ltd. But they dropped out of the race in the final round for unknown reasons.

From the divestment, Hong Kong-based Anchor Equity is set to secure a return of more than four times its original investment. It had spent a combined 180 billion won in buying the Korean waste management companies that form ESG Group since it bought ESG Cheongwon in 2016.

HIGHER VALUATION

The selling price represents 13 times projected 2020 EBITDA of the two companies up for sale and 24 times trailing EBITDA.

That is higher than the estimated price of South Korea’s largest wastewater management firm EMC Holdings Co Ltd. for which Singapore’s Keppel Infrastructure and MBK Partners submitted non-binding bids last week.

Macquarie’s two Korean waste management firms were sold for over 10 times EBITDA to a South Korean consortium last week.

In the waste management services market, the medical waste treatment segment, in particular, appears to have strong growth potential driven by the senior care market growth.

With the construction and operations of waste treatment plants heavily regulated because of environmental issues, the medical waste treatment price per ton has nearly doubled since 2010 in South Korea.

ESG owns four of South Korea’s 13 medical disposal facilities.

To fund the acquisition, KKR will borrow 300 billion won in senior debt at a yield of between 4.5% and 5.0%, and mezzanine debt of 70 billion won at a yield of between 6.5% and 7.0%, according to sources with knowledge of the matter.

Last year, KKR earned 900 billion won in proceeds by selling the country’s biggest copper foil maker to SKC Ltd. for 1.2 trillion won in one and a half years.

In 2015, KKR teamed up with Anchor Equity to take a majority of TMON Inc. a Korean ecommerce platform, which they have yet to exit.

Write to Chaeyeon Kim at why@hankyung.com