Korea tender offers: Bidding on winners

IMM Investment's acquisition of a stake in Korea-listed cosmetics maker Able C&C last year featured a seldom-used tool in Korean private equity. In addition to paying KRW188.2 billion ($166 million) for 26% held by founder Young-Pil Seo, the consortium led by the GP launched a tender offer to acquire an additional position of up to 62%, at a premium of 8.8% to the previous closing price.

The use of the tender offer raised eyebrows among IMM's peers, as under Korea's public market regulations owning the single biggest block of shares was enough to give the consortium effective control over the company. Many investors could not see the reason for taking on the additional financial burden and effort to buy out more minority shareholders for little apparent benefit.

"It makes you wonder why they even engaged in a public tender," says one Korean GP. "They took out the controlling shareholder at a huge premium, and then the price they offered the public was also very high compared to the intrinsic value of the company. Why spend more money to buy additional shares at a crazy valuation, when you already had control?"

By contrast, others saw the move as a shrewd ploy to consolidate control – a plan that arguably paid off, with the investors ultimately reaching a total stake of 53% through the offer. 

The rarity of tender offers in South Korea means that their usefulness is not widely understood outside of those that have employed them. Many market participants believe the device has potential, but for it to see more than occasional use, GPs must adjust it to South Korea's unique regulatory circumstances.

First bite

One of Korea's earliest PE-backed tender offers was Hahn & Co.'s acquisition of Cowell E Holdings, a supplier of mobile devices and optical parts, in 2012. The deal was noteworthy in part because, unlike most other PE deals in the country, the transaction was intended to take the target private – a goal almost never pursued in Korea due to a variety of obstacles.

"In other markets I think people see a tender offer as a straight lead-in to privatization," says Joseph Lee, a partner at IMM. "Here we don't have that, because government policy is to respect the control premium, meaning that if you're a controlling shareholder in a public company you should get a bit of a premium as opposed to a minority shareholder."

This means the Korea Exchange (KRX) lacks a mandatory tender offer rule that would require investors pursuing take-privates to offer the same price to all shareholders. In addition, the very high privatization threshold – acquirers must secure the assent of shareholders representing 95% of all existing shares to proceed with a delisting – means that most buyout firms see no reason to pursue a full privatization beyond securing a controlling stake, which can often be acquired from a single investor.

Successful privatization deals involving tender offers are not unknown in Korea: Unison Capital's 2012 acquisition of battery developer Nexcon Technologies is one of the few examples. But for the most part buyout firms – and other investors – have seen this type of transaction as more trouble than it is worth.

"It has not been part of the market in Korea due to lack of need – you don't actually need 100%, or even a majority of the company to have control," says Richard Lee, a senior partner at McKinsey & Company. "For instance, when MBK bought [water purification company] Coway in 2012 they were able to keep effective control as the largest shareholder, even though it's still publicly listed."

However, the limited value of privatization deals in Korea does not mean that tender offers themselves have no usefulness. Several observers cite the Able transaction as a model that investors might consider using in the future.

The first notable aspect of IMM's tender offer was that the firm used the control premium to its advantage by splitting the deal into two transactions. Purchasing the founder's stake gave it a base shareholding, after which it could acquire additional shares from public market investors at a lower premium than it paid to Seo. 

"IMM was actually very smart," says Howard Lee, a managing director in the Seoul office of BDA Partners. "The purpose of the tender offer was not to acquire 100% or to delist, but to dilute the acquisition price by offering a lower premium to the public shareholders." 

Majority rules

Also key to the transaction was the fact that IMM had a clear goal in mind for buying the additional shares: to consolidate a majority holding. While KRX rules considered the GP to have a controlling stake provided it held the largest single block of shares, another investor could theoretically purchase a larger holding and take control of the company from the consortium. By pushing its holding above 50% IMM guaranteed this would not happen and that its value-add plans would not be disrupted.

Since the firm was clear that it would need a majority, the next priority was to ensure that more than 50% could be acquired at the lowest possible price. The lower the price, the more shares IMM could buy, effectively ensuring that its LPs would see upside that would otherwise go to other minority shareholders. Moreover, diluting the acquisition cost through the tender offer enabled the GP to conserve LPs' capital.

IMM's Lee believes tender offers in the service of limited but clearly-defined objectives, like the one for Able, represent their most likely future use case for private equity investors, rather than the take-private role that they play in other markets. This view is echoed by other observers, who hope that a long-neglected tool may find its place in Korea.

"The number of tender offers launched in Korea's stock market in recent years is significantly lower than in other countries," adds BDA's Lee. "I think that more prominent cases of tender offers will be very beneficial, and private equity firms could play a major role in terms of boosting the use of tender offers."  

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• Topics
• North Asia
• Buyouts
• GPs
• Regulation
• South Korea
• IMM Investment