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Private equity

Mid-sized Korean groups pave way for PEFs' stalled exits

Business groups with adult offspring are emerging as major buyers in S.Korea's M&A market

By Aug 02, 2021 (Gmt+09:00)

Junghung Group, a mid-sized builder, was named the preferred buyer of a 2.1-trillion-won stake in Daewoo Engineering & Construction in July (Courtesy of Junghung)
Junghung Group, a mid-sized builder, was named the preferred buyer of a 2.1-trillion-won stake in Daewoo Engineering & Construction in July (Courtesy of Junghung)

Hoban Group, started as a small residential rental company in Gwangju in 1989, has now emerged as a major player in South Korea's M&A market, in particular, led by private equity firms. 

Earlier this year, the apartment builder had acquired a 54% stake in the country’s Taihan Electric Wire Co. from IMM Private Equity. For the 300 billion won deal, Hoban beat Global Sae-A Co., a Korean apparel maker, which is flexing its muscle in the domestic M&A market as well.

The two medium-sized Korean business groups are also going head to head in competition for Doosan Machine Tools Co., put up for sale by MBK Partners. The recent participation by Hoban and Global Sae-A in the bidding has revived the long-stalled deal for the machine tool maker, which MBK had attempted to exit since 2019.

Both business groups, each with 3 trillion-4 trillion won in annual sales, have at least one thing in common: They have more than two children ready to inherit their fathers' businesses, as well as wealth.

"Some of the group owners with several children are inclined to buy a stable company and hand it down to them, rather than giving apartments in Gangnam," said an M&A official at an accounting company in Seoul. Gangnam is one of the country's richest neighborhoods.

"We look for companies in the businesses not overlapping their existing ones and never going under, despite the top leaders not actively being involved in day-to-day business," he added.

The prolonged period of record-low interest rates and the declining value in the currency are prodding cash-rich, medium-sized groups with stable flagship businesses to hunt for new businesses to hand over to their adult offspring.

Their entrance in the M&A races is paving the way for PEFs to exit their long-held assets. A handful of PEFs have recently withdrawn from the IPO plans for their Korean assets, including MBK's Doosan Machine Tools Co. and Baring Private Equity's Logen Co., a parcel delivery firm. Last month, Logen was sold to medium-sized Korean fashion mall operator Dae Myung Chemical Co. for 340 billion won.

They prefer companies with a steady stream of cash flow over high-growth businesses. In particular, they are zooming in on retail companies with strong brand recognition, catering firms with a stable customer base and materials or components suppliers to semiconductor and rechargeable battery makers.
Hanssem's interior and furniture store
Hanssem's interior and furniture store

At the same time, for PEFs overflowing with a record amount of investor money, heirless medium-sized companies are creating new buying opportunities.

Last month, IMM PE signed a preliminary agreement to buy a controlling stake in Hanssem Co., the country's largest furniture and home furnishing company, from its honorary chairman and related parties for 1.5 trillion won.

FROM SMALL-TOWN BUILDERS TO KEY M&A BUYERS

For the construction-focused Hoban Group, its founder and Chairman Kim Sun-kyu's eldest son Kim Dae-hun is being groomed to take over the leadership role. 

Hoban used to be a regular in South Korea's M&A market in the past few years, but pulled out at the last-minute talks. Now it seems determined to find new businesses to bequeath to Chairman Kim's youngest son Kim Min-sung.

The same goes for Global Sae-A. Chairman Kim Woong-ki, aged 70, appears to prepare the succession plan for his two daughters. 

Another small-sized builder Jungheung Construction Co. came into the spotlight last month. The Gwangju-based company was selected as the preferred buyer of a controlling stake worth 2.1 trillion won in its much larger-sized rival Daewoo Engineering & Construction Co. Daewoo has been under the creditor's protection in 12 years. Gwangju is a city southwest of South Korea.

Another newcomer to the M&A market is small-sized builder Sung Jung Group., with annual sales of only 6 billion won. Last June, it was named the preferred buyer of cash-strapped Eastar Jet Co. If it acquires the low-cost carrier, the construction group's succession plan for the Chairman Hyung Nam-soon's son and daughter will likely take shape.

Lately, SM Group's bid for debt-ridden Ssangyong Motor Co. is understood to be related to the succession plan for the manufacturing- to- shipping-focused group's owner family.
A Twosome Place cafe
A Twosome Place cafe

To make full use of the widening pool of buyers, Anchor Equity Partners is now tapping the market to sell A Twosome Place, after scrapping the IPO plan for the coffeehouse chain

In September last year, IMM PE sold South Korea-based Hollys Coffee to the country’s chemical-to steel-focused KG Group, in its third attempt to exit from the coffee shop chain.

According to investment bankers, other small- to medium-sized business groups, grappling with succession issues and likely to make their appearance on the M&A scene include Halim Group, a chicken processor; Bokwang Group, a financial and leisure service company; and Seah Group, a steel and construction firm. 

Their participation would increase the chances for PEFs to divest their long-held Korean assets.

The PEFs-owned assets likely to be put up for sale include MBK Partners' outdoor clothing brand Neppa Co. and Affinity Equity Partners' Lock & Lock Co., a food container maker. Morgan Stanley PE is also expected to place on the market Nolbu, a Korean restaurant franchise, Jeonju Paper Corp., and Monalisa Co., a manufacturer of cosmetic tissues and toilet paper.

Write to Jun-ho Cha at chacha@hankyung.com

Yeonhee Kim edited this article.

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