How STIC Investments’ bet on animal fat processor DK O&T paid off

In South Korea, businesses handling livestock by-products have lacked investor appeal. They were usually mom-and-pop businesses and appeared to hold low value, with limited growth potential.

However, STIC Investments Inc. made a bet that Daekyung Oil & Transportation Co. (DK O&T), based in Busan, could be reborn as an eco-friendly, high-end products company. Its bet proved to be correct.

In 2023, the Korean private equity firm sold the company to a consortium led by SK Trading International Co. at about three times its investment of 94.5 billion won ($65 million). The deal size was estimated at 400 billion won.

DK O&T, founded in 1995, processes livestock by-products such as bones and hides into extract oil. It commands a 40% domestic market share, and its customers include feed and ink manufacturers, as well as lubricant producers.

Since being acquired by STIC Investments in 2017, DK O&T has ventured into the biofuels market, which powered its business growth.

Its operating profit soared 13-fold to 81.7 billion won in 2022, with revenue tripling to 632.3 billion won compared with its 2017 results.

The company's earnings before interest, tax, depreciation, and amortization (EBITDA) rose sixfold to 86.4 billion won in 2022 over the same period.

Such stellar results demonstrate that DK O&T's transformation is a success story that has enhanced both its environmental, social and governance (ESG) and financial performances.

 
Initially, DK O&T was not up for grabs. Its founder and then-CEO Kim Chang-yoon ardently rejected STIC’s buyout offer.

It took one and a half years for Kim to finally agree to sell a 70% stake in DK O&T to STIC in 2017. The founder retained the remaining 30% after the deal.

EXPORTS TO EUROPE

DK O&T produces refined oil from animal fat and used cooking oil. These oils are used for biodiesel and hydrotreated vegetable oil (HVO), as well as aviation and vehicle fuels. Low-emission fuels now account for 30% of DK O&T’s sales.

“We anticipated the biofuels market would soon materialize,” said Kang Ilsung, managing director of STIC Investments’ special situations division.

“(DK O&T) boosted sales by expanding the biofuels business, while securing steady revenue from feedstock and chemical raw materials,” he added.

The European Union’s Renewable Transport Fuel Obligation, aimed at reducing carbon emissions, boded well for DK O&T. The company now ships biofuels to European customers, including the Finnish biodiesel company Neste.

Backed by STIC’s financial support, DK O&T received the Renewable Transport Fuel certificate required for biofuel exporters to Europe. STIC also leveraged its bargaining capabilities to explore new European customers for DK O&T.

The company’s exports ballooned almost 30-fold to 58.7 billion won in 2022, compared with 2.5 billion won in 2019.

ECONOMIES OF SCALE

DK O&T has also achieved economies of scale following STIC’s purchases of six small domestic peers, including the waste cooking oil processor Mirae Oil.

In 2021, the investment firm also bought a stake in a Philippine company to diversify DK O&T’s raw materials providers.

Since its acquisition, STIC has standardized DK O&T’s management systems, cost management and accounting procedures across its facilities. In 2020, DK O&T built Korea’s largest rendering facility in North Chungcheong province.

Rendering refers to the process of applying low heat to slaughtered livestock fat to extract oils. DK O&T operates six rendering facilities across the country, in addition to used cooking oil processing plants.

Following its transformation, DK O&T drew the attention of other investment firms.

Goldman Sachs PIA, IMM Investment, Eugene Private Equity, and Mirae Asset Venture were among the shortlisted candidates when it was put on the market in 2023.

SK Trading International (SKTI), a unit of SK Innovation Co., formed a consortium with Korea Development Bank and Eugene Private Equity to buy a 100% stake in DK O&T in December 2023.

SKTI holds a 40% stake in the biofuels maker, while the two financial investors control the remaining 60%.

From the divestment, STIC notched up a multiple of 3.31 on invested capital. The fund that invested in DK O&T achieved an internal rate of return of 22.1%.

Write to Ji-Eun Ha at hazzys@hankyung.com
 

Yeonhee Kim edited this article.