AVCJ Awards 2017: Deal of the Year - Mid Cap: Press & Converting

Korea's cross-border cultural appeal – manifested in the form of music, TV dramas and beauty products that have drawn a substantial foreign consumer following, particularly in China – has created a natural opportunity for private equity firms. Indeed, Bain Capital Private Equity and Goldman Sachs have already seen this investment thesis pay off with the sale of cosmetics supplier Carver Korea to Unilever. While most GPs have gone after brands, VIG Partners approached the industry from a different angle. 

"The cosmetics segment was somewhat of a dilemma for us," says Jason Shin, a managing partner at VIG. "While we liked the lifestyle and beauty industry a lot, the valuations of cosmetics brands were very high. Beauty and fashion is also fast-changing. Many brands have come and gone over the years, and we weren't sure the top players would remain the same for the next three to five years."

Furthermore, cosmetics brands have generally traded at EBITDA multiples of 15-20x, putting them beyond the reach of VIG's middle market fund, which typically targets companies with enterprise valuations of about $300 million. Co-investment is always an option for larger deals, but the aforementioned concerns about valuations and brand sustainability meant the risk factor was too great.

As a result, VIG probed deeper into the industry supply chain for skincare products. It found that the facial mask segment was seeing significant growth on the back of the broader "Korean wave" phenomenon, and this was happening regardless of brand.

This led the private equity firm to acquire a 75% stake in domestic facial mask manufacturer Press & Converting (P&C) at an enterprise valuation of KRW146 million ($127 million). It purchased a 33% holding from VC firm HES Capital Partners – which had invested KRW40 million in P&C early 2016 – and 40% from the founder, C.J. Son. Son remains CEO of the company and holds the remaining 25% interest as the second-largest shareholder after VIG.

"We were negotiating the deal terms with the founder at the time when the THAAD [terminal high altitude area defense, a US anti-ballistic missile defense system] had become an issue between China and South Korea. We foresaw that Chinese tourists would shy away from Korean products, but it would be a short-term phenomenon. We took advantage of the situation and negotiated the price at a single-digit EBITDA multiple," adds Shin.

Sticky habits

Sheet masks comprise pre-cut fabrics soaked in serums that contain ingredients intended to treat dry skin and other related conditions. P&C entered the market in 2005 after Son recognized a growing opportunity in supplying sheet masks to manufacturers. The company has developed hundreds of sheet masks fabrics – including non-woven, cotton, and synthetic fiber – and infuses them with a variety of ingredients and materials like charcoal, gold dust and bamboo. The different compositions number in the thousands.

There are approximately 5,000 facial mask brands in Korea. While beauty products conglomerates AmorePacific and LG Household & Healthcare manufacture their facial masks in house, most other skincare brands outsource production to third parties. P&C supplies sheets to more than 350 manufacturers – there are 500 in total in Korea – that account for 70% of the market.

The country's facial mask industry has grown fourfold over the past five years, from $700 million in 2011 to $2.7 billion in 2016. P&C's annual production capacity is about 1.8 billion sheets. The company has posted annual average revenue growth of about 60% over the last two years, with sales reaching KRW92 billion in 2016. Operating income for the year was KWR23.2 billion.

"The founder has managed to grow revenue by $100 million per year. Once a company hits this level, it has to think about running the business like a big operation. The founder, who is only 46 years old, wants to pursue strategic expansion but he realized he can't take care of everything. Since we are a reputable mid-cap PE investor in Korea, he decided to sell a majority stake to us to help the company grow further," says Younggi Han, a director at VIG, who led the P&C transaction.

P&C's revenue is expected to decline around 15% in 2017 – with revenue for the entire industry set to drop 20% to $2.2 billion – as result of falling Chinese demand. Chinese tourists account for about 50% of total inbound visitors to Korea, and they are among the biggest spenders on local cosmetics, but Beijing has imposed a ban on packaged tours to the country. This is the predicted result of tensions over THAAD. Once they abate, Han expects facial mask sales to resume their rapid growth, increasing at an annual average rate of 15% to reach $4 billion by 2021.

China expansion

VIG's immediate efforts post-acquisition focused on improving P&C's systems and processes by bringing a new management team, including a CFO and chief marketing officer. The next step is supporting expansion in China, where the facial mask market is almost three times the size of South Korea's. Revenue came to $4.7 billion last year and it is projected to hit $9 billion by 2021.

There are about 800 beauty products manufactures in mainland China, with the top 10 players accounting for a more than 50% market share. P&C's market entry strategy is two-prolonged: it will supply sheet masks to these leading manufacturers or work with Chinese skincare brands to develop products. In the longer term, the company plans to diversify into other product categories, supplying fabrics for the manufacture of diapers and wet tissues, among others.

"Given Korea's reputation for high-quality beauty products, we can team up with Korean manufacturers and approach Chinese brands directly about developing sheet masks that are specifically targeted at Chinese consumers. Chinese brands want to cooperate with us, because they can utilize Korean manufacturing and R&D capabilities through our network," adds Han. 

Pictured: Chulmin Lee of VIG Partners

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Buyouts
• Consumer
• South Korea
• VIG Partners
• AVCJ Awards