The W7.2trn (US$6.12bn) leveraged buyout of South Korean discount retailer Homeplus was Asia’s largest since the 2008 global financial crisis, and the latest illustration of the decisive role that domestic lenders can play in a hotly contested acquisition.
The MBK Partners-led consortium emerged victorious with the help of a W4.3trn all-senior LBO loan that reset the metrics for related South Korean financings.
The Homeplus LBO loan represented a debt-to-Ebitda ratio of 5.69x, based on the company’s adjusted Ebitda of W755.7bn in 2014. That was well above the more typical 3x–4x earnings range on LBO loans in Asia, underlining the depth of the Korean debt market.
It also handed British retailer Tesco an attractive exit price only a year after initiating a strategic review of the businesses to bolster its balance sheet and improve returns.
The LBO came on the back of Carlyle Group’s US$1.93bn buyout of security service provider ADT Korea. That transaction had the backing of a LBO loan of W1.345trn, including W360bn in mezzanine debt, with an overall leverage multiple of 7.47x Ebitda. At W4.3trn, the Homeplus LBO loan represented around 60% of the purchase price and came with much more aggressive terms than a stapled financing that sellside adviser HSBC had proposed.
The staple had offered prospective bidders debt equal to 4.9x earnings at interest margins starting at 375bp. In turning to the domestic market, MBK shaved well over 100bp off that margin.
Like ADT, the strength of the underlying business made Homeplus a prized business with several private-equity firms throwing their hats in the ring. Tesco’s South Korean operations were its largest overseas with more than 400 stores, 500 franchise outlets and more than 6m customers a week.
The hotly contested process saw five PE firms make the shortlist, with each getting strong support from South Korean lenders for the debt financing.
Hana Daetoo Securities, NH Investment & Securities, Shinhan Bank and Woori Bank equally underwrote the loan for the MBK consortium, with six other South Korean banks joining the loan in general syndication. A host of institutional investors lapped up the loan in secondary markets as the initial group of lenders sold down their exposures.
The five-year facility was split into a W2.4trn amortising term loan tranche A at an interest margin of 262.5bp over the five-year benchmark bond rate for Triple A-rated Korean banks, a W700bn tranche B at 222.5bp and a W1.2trn tranche C at 212.5bp. Tranche A has a grace period of 18 months, with repayments in annual instalments. Around W1.3trn of tranche A, and all of tranches B and C carry bullet maturities.
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