IFLR ASIA M&A FORUM 2014

Transcription

1 Speakers IFLR ASIA M&A FORUM 2014 Korea Session FOCUS: KOREA Sai Ree Yun Tehyok Daniel Yi Jin Kook Lee Managing Partner Yulchon Mergers & Acquisitions / Antitrust / Tax Founding partner, Yulchon Baker & McKenzie, Chicago and New York J.D., Hastings College of Law LL.M., Harvard Law School LL.B., Seoul National University Senior Foreign Counsel Yulchon Mergers & Acquisitions / Finance Orrick, Herrington & Sutcliffe LLP, Tokyo J.D., Harvard Law School B.A., University of California, Los Angeles Partner Yulchon Mergers & Acquisitions / Capital Markets LL.M., Georgetown University Law Center LL.B., Seoul National University February 26, 2014 Yulchon LLC / Gaw Capital Partners / Dominus Investment Co., Ltd. 1 1

2 Speakers Goodwin Gaw DoHyun Tony Chung Recent Trends in Korean M&A Market Founder / Managing Principal Gaw Capital Partners Stanford University, M.S., Construction Management, Wharton School, University of Pennsylvania, B.S., Finance University of Pennsylvania, B.S., Civil Engineering CEO / Founding Managing Director Dominus Investment Co., Ltd. Eugene Asset Management Co., Ltd. - Head of Private Equity Division / Managing Director Lone Star Advisors Korea Inc. Bain & Company Korea Inc. Deutsche Banc Alex. Brown, Inc., New York - M&A and Corporate Restructuring Group, Analyst Harvard University, MPA, International Development, Kennedy Fellow Williams College, B.A., Political Economy with Honors, Summa Cum Laude Seoul Science High School 2 3 2

3 Why invest in Korea? Korea-targeted M&As in : value of deals($bn) : Number of deals Huge market - Population of 50 million and GDP of US$1.2 trillion Open economy - World s 8th largest trading nation; free trade agreements with 45 countries, including ASEAN, EU, US, India and Peru Diversified and technically advanced industries Highly-educated and motivated workforce - Highest among the OECD countries in college graduation rate and labor productivity improvement rate Promotion of foreign investments - Tax incentives, double tax treaties and foreign investment promotion laws 274 deals valued at US$36.1 billion (increase of 22.5% by volume) Source: mergermarket 4 5 3

4 Increasing participation by private equity funds Selected transactions Deal value, in billions Private equity Total Target Buyer Seller Value (USD) $70 $60 $50 $40 $30 $20 $10 $ % of Korea-targeted deals by volume Source: Dealogic The Wall Street Journal ING Life Insurance MBK Partners ING Group 1.7 billion Woongjin Coway MBK Partners Woongjin Group 1 billon Cheil Industries Fashion Business STX Energy Samsung Everland GS Holdings / LG International Cheil Industries Orix 1 billion 600 million NEPA MBK Partners 520 million LIG Nex1 STIC Investment Consortium LIG Group 400 million Woongjin Chemical Toray Woongjin Group 400 million Hanjin Shipping s Bulk Carrier Business Han & Company Hanjin Shipping 400 million 6 7 4

5 Key observations Key observations Abundant supply of acquisition targets Economic conditions pressure mid-sized conglomerates and distressed companies to sell assets - Woongjin, STX and Tong Yang - Preemptive restructuring of Dongbu, Hanjin, Hyundai and LIG Korean government continues to sell stakes for fiscal stability - Woori Finance Holdings: Woori Bank and other financial services companies Emergence of private equity funds Slowing involvement by conglomerates - Liquidity crunch and ongoing restructuring efforts Surging investments from private equity funds, particularly domestic funds - Increasing competition for quality assets Domestic private equity funds Korea-registered private equity funds have USD30 billion in assets under management Diversified investment strategies - large buy-out transactions to investment in mid-sized and distressed assets to mezzanine investments - individually or jointly with strategic or financial investors Increasing foreign investments Foreign investors acquisitions of Korean companies increased from 28 to 41 (46.4% increase) and from 1.77 billion dollars to 1.96 billion dollars (15.8% increase) - Largest investors: Japan (14), EU (11) and US (7) - Strategic transactions IXYS s acquisition of Samsung Electronics microcontroller business Groupon s acquisition of Ticket Monster, a social commerce company 8 9 5

6 Key observations Transaction structures Share deal (37%), merger (27%), joint venture (16%) and asset deal (9%) - Share deal is the most predominant form - Mergers and asset deals used commonly for intra-group consolidations and restructuring Samsung Everland s acquisition of Cheil Industries fashion business CJ Korea Express s merger with CJ GLS Recent Transaction Structures Opportunities Positive outlook: supply of acquisition targets expected to continue - Mid-sized conglomerates, Korean government - Assets held by private equity funds Continued relaxation of regulations considering amendments to: - Capital Markets Act: Korean private equity funds to acquire assets directly - Commercial Code: Reverse triangular mergers

7 Transactions led by private equity funds Equity Financing PEF 1 PEF 2 Common Shares Mezzanine Financing PEF 3 PEF 4 RCPS (Redeemable Convertible Preferred Shares) Recent Regulatory Developments Controlling Stake SPC Loan Lenders Debt Financing Target

8 Tax issues Korean tax authorities view on ultimate beneficiary issues Labor issues Supreme Court s recent decision broadening the scope of ordinary wage Ultimate Investors Foreign Juris. Offshore HoldCo 2 Capital Gains Tax Regular bonus Certain allowances 150% Monthly Wage??? Tax Treaty Korea Loan Onshore HoldCo Repayment Dividend Target OpCo Lenders 1 Corporate Income Tax Korean NTS Ordinary Wage Overtime/ Nighttime Pay Payback Issue (3 yrs) Severance Pay Wage Structure Labor Cost

9 Compliance issues Risk allocation Privacy issues 3 major credit card companies experienced leakage of customers personal information - Resignation or dismissal of key officers - Class action suit for data leakage filed Financial authority requested all financial institutions to report status of their personal information management policies Many financial institutions considering undergoing compliance programs Antitrust issues International merger filings - Foreign and domestic players growing tendency to actively object in merger review by KFTC - KFTC will independently review each case to consider withholding clearance or imposing conditions on M&A Advance planning for international merger filings required Due diligence exercise No longer a routine process substantial focus on due diligence required Integration of analysis from legal, accounting and financial perspectives necessary Quantitative analysis of risks found in due diligence becomes important Purchase agreement negotiation New issues arising from recent changes in courts or government s position or policy may not have been well reflected in typical purchase agreements Quantitative assessment of potential risks need to be reflected More aggressive, but realistic negotiations on indemnification, such as specific indemnification or limitations on indemnification (survival period, threshold, deductible and cap)

10 Gaw Capital Issues in investing in Korea Korean M&A - from the perspective of a foreign private equity fund Attractive opportunity to make investment in Korea Expansion of investment opportunity with Continuous and stable growth in Korea economy - On-going success of Korean major company such as Samsung, Hyundai, and LG etc. and further growth of national economy. - Increasing investment demand of foreign investors from national government, local governments and companies. Dynamic environment and cultural diversity in Korea - Expansion of K-pop and K-entertainment industry would boost up the investment opportunity in diverse sector. Balanced portfolio in Northeast Asia investment between China, Japan and Korea - Korea became one of the important market among the Northeast Asia countries

11 Gaw Capital Issues in investing in Korea Gaw Capital Issues in investing in Korean Real Estate Limitation of Korea Investment Exposed to global economic changes - Difficult to predict FX and Financial market (unstable KRW currency rate etc.) Tax and Labor issues - Uncertainty of tax base for foreign fund and relatively high tax - Rigid labor unions and rigidities in labor market. Comparably High-barrier in financial market - Recent pullout decision of Goldman Sachs investment management, ING Life, and Aviva etc. - Excessive intervention of National Government and profit declined. Attractive opportunity to make investment in Korean RE market Increasing opportunity in Lifestyle type Real Estate assets - Increasing demands in the Real Estate asset with cultural diversity and originality - Hotel: Opportunity in Lifestyle hotel, up-scale hotel and glamorous boutique hotel - Residential: Opportunity in Luxurious high-end housing and Soho-style housing - Office: Opportunity in Creative office Opportunity of Co-investment with Korean investors - Most of Korean institutional investors are conservative and seeking for the stable investment opportunity (Senior and mezzanine loan, Preferred equity etc.) - Increasing investment opportunity of co-investment with high risk-return profile type foreign investors (common equity etc.) - Liquidity in Korean financing market (stable loan financing)

12 Gaw Capital Limitation of Korea RE Investment Attractive opportunity to make investment in Korean RE market Limitation of REITs and REF investment structure - REITs: Limitation of the maximum share holding rate up to 40%, Demanding conditions to establish REITs such as public placement conditions etc. - REF: Excessive regulation by FSS and operating limitation such as minimum holding period of 1 years etc. Korean M&A - from the perspective of a Korean private equity fund Benchmark - Tax incentives for foreign investors and convenient investment structures - Ex. JPUT structure in UK: acquisition and registration tax exemption, Capital gain tax exemption etc. - Ex. Flexibility in operation of private REIT in US

13 Private Equity Market in Korea Korea has a relatively distinct private equity market primarily dominated by local LPs Appetite for Korea LPs in Private Equity Mezzanine-structured Investment Due to a number of LPs asking for downside risk protection in equity investments, some PE funds make mezzanine-structured investments Mezzanine-structured Investment Major LPs in Korea Features of Many Korea LPs Investing in Private Equity Market Mezzanine-structured Investment World s third largest pension fund in terms of AUM AUM: Over USD 424 Billion Global alternative asset allocation: 7~8% of AUM Korea s second largest LP after NPS in terms of AUM AUM: Over USD 108 Billion Supervisory organization for nation s various community credit cooperatives/unions AUM: Over USD 33 Billion State-run institutional investor National Agricultural Cooperative Federation (NACF), Nonghyup Bank, Nonghyup Life Insurance Total Asset: USD 305 Billion 1 2 Mid Risk / Mid Return Majority of local LPs focus on protecting their investment against downside risk, which leads to mid return targets Interim Cash Flows Cash flow based realized profit throughout an investment period is essential for investment decision making process Return/Risk Profile Return Equity Equity with Downside Protection Mezzanine Investment CB/BW Debt Downside Protection Upside Potential Mezzanine-structured investment offers investors downside protection against decline in the issuer s stock price as a debt holder Registered security against collateral strengthens downside protection Downside risk is levied on Strategic Investors and major shareholders in a return of favorable upside profit sharing Having an equity kicker can give an investor a convertible feature to exchange for shares or warrants to purchase shares at a set price at some point in the future Triggering an equity kicker provides upside potential as the issuer s stock price rises Major Insurance Companies Korea s big three life insurance companies Asset Size: - Samsung: USD 186 Billion - Hanwha: USD 78 Billion - Kyobo: USD 70 Billion Other Major Mutual Aids Association and Pension Funds All figures above are based on latest publicly available information from 2013 and 2014 (USD 1 = KRW 1,000) 3 24 Investment Principal loss at an asset level Major LPs face external audit by the government on a regular basis as to whether investment principal recorded a loss at an asset level Risk Mezzanine-structured investment provides diverse options to realize equity return with conversion to shares while securing stable downside protection as a debt holder 25 13

14 Mezzanine-structured Investment Cases by Dominus Dominus Investment, a local private equity firm funded entirely by local LPs, specializes in mezzaninestructured investments Latest Mezzanine-structured Investment by Dominus Investment 1 2 KG Inicis (Mezzanine-structured M&A) Korea s Leading Online Payment Gateway (PG) Service Provider K-Swiss (Mezzanine-structured Cross-border M&A) U.S Sportswear Brand Specialized in Athletic Shoes More About Speakers Dominus has invested as a financial investor in a co-acquisition Dominus has invested as a financial investor in a co-acquisition of Overview of Inicis Inc. with KG Group (strategic investor) Invested Amount : KRW 40 Billion Overview K-Swiss Inc. with E-Land Group (strategic investor) Invested Amount : KRW 113 Billion Notable cross-border outbound M&A deal in 2013 Downside Protection Secured minimum return in a debt-linked structure Registered security against shares held by KG Drag-along right Downside Protection Secured minimum return in a debt-linked structure Registered security against collateral and shares held by E-Land Drag-along right Dominus has significantly increased the value by driving positive changes in business strategy with the SI, which Upside Potential resulted in realizing an IRR of 51.5% Exited at KRW 13,500/share Invested at KRW 7,500/share Upside Potential The acquisition of the U.S sportswear brand will allow E-Land, the No.1 fashion company with over 6,000 stores in China and Korea, to tap deeper into the Asia market and ultimately increase the value of the company in the near future Expecting to realize upside potential in 4 ~ 5 years

15 Yulchon Yulchon - Yulchon is a full-service law firm of 330 professionals - We consistently rank among Korea s top-tier M&A practices - Our strong antitrust, tax and intellectual property practices add considerable value to our M&A practice Corporate & Finance Antitrust Real Estate & Construction Yulchon stands out as one of the most trusted law firms in Korea "Yulchon, a market leader in the development and practice of law in Korea" Dispute Resolution Tax "Top 30 rapidly growing law firm in Asia" Intellectual Property

16 Gaw Capital Partners Dominus Investment Gaw Capital Partners is a Hong Kong based real estate private equity fund management company that focuses on markets in Greater China and other high barrier to entry markets globally. Gaw Capital Partners currently manages four real estate funds targeting the Greater China and Asia Pacific region, while Gaw Capital Partners USA is providing services for separate account direct investment and fund management in the US and UK markets. Gaw Capital Partners has raised equity in excess of $3.6 billion since 2005 and currently commands assets of USD 7.5 billion under management. Goodwin has over 20 years of real estate investment and management experience in Asia and the United States, serving also as Managing Principal of Downtown Properties. Dominus Investment Co., Ltd. is a Korea-based management firm of private equity funds with assets under management totaling KRW637 billion. Its key members possess experience in Korean and overseas investments via various investment structures. Dominus Investment currently manages NV Equity Fund, Dominus-Neostar Strategic Growth Private Equity Fund, Dominus Strategic Growth Private Equity Fund 1, Dominus New Growth Private Equity Fund and Dominus Global 1 Private Equity Fund. Gaw Capital's US associate Downtown Properties was set up in 1991 to manage a privately owned US focused real estate portfolio of 2.5 million square feet of office buildings and hotels of over 1,000 rooms as well as residential and industrial assets in the US. These included the renovation of the iconic Hollywood Roosevelt Hotel in Los Angeles and converting over 456,000 square feet of empty historical buildings into hip residential lofts in downtown Los Angeles including the acclaimed Douglas Building

17 Thank you Yulchon LLC (Korea, Seoul) 518 Teheran-ro, Daechi-dong, Gangnam-gu, Seoul , Korea Tel: Fax: Yulchon LLC (Vietnam, Ho Chi Minh City) Unit 03, 4th Floor, Kumho Asiana Plaza, 39 Le Duan St., Ben Nghe Ward, Dist.1, Ho Chi Minh City, Vietnam Tel: Fax: eyang@yulchon.com Yulchon LLC (Vietnam, Hanoi City) Suite 2502, Keangnam Hanoi Landmark Tower, Pham Hung Street, Tu Liem District, Hanoi, Vietnam Tel: Fax: eyang@yulchon.com Yulchon LLC (China, Beijing) 1209, 12F, South Tower C, Raycom InfoTech Park, No. 2, Ke Xue Yuan Nan Lu, Haidian District, Beijing, , P.R. China Tel: /0768 Fax: Beijing@yulchon.com 17