Trade sales in Southeast Asia: Expansion imperative

The world of Walt Disney-owned Marvel Entertainment is to enter a network of franchises that not only sustain the character arcs of Spider-Man, Iron Man, Hulk, the X-Men and the Fantastic Four, but also thoroughly commercialize them. Hugely popular comics and movies have given birth to toys, clothing lines, home décor and collectibles.

What Marvel does not own the rights to is X-Men shampoo. The X-Men range of male grooming products was launched in 2003 by Vietnam-based ICP and the brand cache is integral to the company's success. Mekong Capital invested $6.25 million in ICP eight years ago and doubled its money on exit in 2011 when Indian consumer products player Marico acquired an 85% interest.

"X-Men is the market leader in men's shampoo in Vietnam and very much part of the value of the business," says Chris Freund, managing partner at Mekong. "Marico has since been rolling the brand out regionally. It is a good case study of successful M&A in Southeast Asia because profits have increased substantially since we sold to them."

Through brands such as Parachute Advansed, Nihar and Saffola, Marico claims to feature in the daily lives of one in every three Indians. Revenue and net profit for the year ended March 2014 were INR47.4 billion and INR4.85 billion, respectively. While India turnover increased by 8%, the international business - which includes South Africa, Egypt, the Middle East and Bangladesh as well as Southeast Asia - generated top-line growth of 16%. ICP continues to be a key factor: revenue jumped from VND390.9 billion in 2010 to VND773.8 billion in 2012.

Indian corporations represent a fraction of the growing strategic interest in Southeast Asia's emerging economies, which serve as both a low-cost manufacturing center and a nascent consumer market. Marico's plans for X-Men - establish a platform with a foothold in multiple markets - are similar to those of countless other multinationals, from top tier to lower tier.

For private equity firms, this situation is a mixed blessing: great if you have desirable assets ready for exit and frustratingly competitive if you have dry powder to burn. There will be countless more trade sale opportunities all along the scale, but in a rapidly-integrating regional market, the onus is on what you buy - and the price you pay - and how you build it. Is it the missing domestic piece in a single, difficult-to-access nation or a ready-made regional vehicle?

"China and India were the flavor of the month for so long and Southeast Asia was relatively overlooked because it involves a number of countries and cultures," says Andrew Thompson, head of private equity at KPMG Singapore. "Circumstances have changed but it is still hard for corporates and newer investors to the region. PE is good at doing things that are hard and selling to corporates with less of an appetite for big challenges, so there is a real opportunity."

Japan rising

M&A activity in Southeast Asia has reached $71.9 billion so far this year, according to Thomson Reuters. This compares to $91.8 billion in 2013 as a whole, which was down from $123.9 billion in 2012. Last year's total was more than double the $39.3 billion posted in 2004, but the annual deal count has changed little over the past decade, with more transactions in 2004 than 2013. Rather, the checks have increased substantially in size.

The data include domestic transactions executed by Southeast Asian nations, which have accounted for at least 60% of investment in recent years. Of those from outside the region, China holds top spot in 2014, with $6.6 billion committed across 38 deals. However, the country is described as "sector-specifically acquisitive," targeting assets that are perceived as bargains or areas where there is domestic policy support. It bets big, but selectively. Buyers from Japan, Europe and the US, meanwhile, are active across multiple sectors.

Japanese M&A in Southeast Asia peaked in 2013 at $9.7 billion and $3.5 billion has been transacted so far this year. The country's annual share of regional M&A has swung between 1.1% and 10.6% over the last 10 years, but generally grown as fast if not faster than the pace of M&A expansion as a whole. And the number of transactions being completed has shot up: from less than 60 per year for 2004-2009 to 96 in 2010 and 157 in 2013.

What does this mean for private equity exits? AVCJ Research's records for Southeast Asia show that trade sales have delivered nearly three times as much in total proceeds as public market exits and twice as many transactions. Trade sales generated more than $3 billion in three out of four years between 2010 and 2013, a feat achieved only once in the six years before that.

As with M&A, big deals move the needle. Malaysian investors have been responsible for most of the largest transactions, with nine of the top 20, although five involved Malaysia-based assets. Japan claims four of the top 20, including Sumitomo Mitsui Banking Corporation's acquisition of a 40% stake in Indonesian lender Bank Tabungan Pensiunan Nasional (BTPN) for $1.52 billion, which was agreed last year. Northstar Group and TPG Capital are exiting the bulk of their holdings through the sale.

It is one of numerous instances of Japanese investors pouring money into financial services in Southeast Asia, and while this sector receives the most attention, it is not the only one in which there is a lot of activity.

"Recently, much of the strategic interest has been financial services-related. However, the big Japanese trading companies have also been acquisitive and I think that is only going to increase, especially in areas like natural resources and industrial products," says Ashish Shastry, managing partner at Northstar. "And I think more Japanese consumer and technology companies have been scouting the region as well."

The consumer angle

Interest also extends into the consumer sector, with several GPs highlighting the potential of combining Japanese - and to a certain extent Korean - product and processes expertise in everything from candy brands to restaurant chains with local partners who offer distribution networks.

Mekong is said to be in the process of exiting its minority stake in Vietnamese restaurant chain Golden Gate, which has expanded from one concept and five outlets to 10 brands across 64 outlets. This includes a Japanese-themed barbecue concept that has been compared to US brand Hooters. The business is now large enough to appeal to regional private equity players, but strategic investors are also keen.

"There is a lot interest in the restaurant space from all over the region, including from Asian restaurant groups from Japan, Hong Kong and Korea," Mekong's Freund notes.

He adds that large Korean companies in particular have made inroads into Vietnam's consumer and retail space, with CJV Group rolling out bakery chain Tous Les Jours to great effect and Lotte Group prominent in hypermarkets. They are following a well-trodden path. Samsung manufacturers a large number of its handsets in Vietnam, while LG Group has also committed substantial sums to expanding its local supply chain. The implication is what works for manufacturers will inspire confidence among companies in other sectors.

Golden Gate is also instructive in that only 40% of the company is expected to be sold. It is as yet unknown which of the interested parties will emerge triumphant from the process, but they must be comfortable operating in a minority position alongside the founders. Japanese and Korean strategic investors have been known to respond positively to such arrangements, with a view to potentially increasing their positions over time. This can also be helpful to PE firms seeking to exit minority stakes.

"It is the long-term view," says Tok-Hong Ling, co-head of M&A and private equity leader for PwC in Southeast Asia. "The Japanese investors have traditionally taken a 20-30 year view when making investments. A minority position allows them to get to know the company and they don't necessarily need active management control. This contrasts with US and European firms, which tend to prefer control because they see themselves as being able to add value to the companies they acquire."

A regional PE fund manager adds that one of his investee companies, a restaurant chain in Indonesia, recently entered into a joint venture with a Japanese group that wants to enter the market but has minimal understanding of how it operates. He sees using Japanese expertise or franchises to penetrate different parts of Southeast Asia as an attractive prospect.

The driving factors behind Japanese interest are well-known: a desire to broaden geographic exposure and tap high-growth emerging markets in the region to compensate for flat-lining growth back home; access to cheap bank financing to support transactions, the effects of which were enhanced for a while by a comparatively undervalued yen; political tensions with Beijing making China a less appetizing prospect; and, in the case of natural resources, a strategic imperative to secure assets required to sustain economic expansion.

Regional agendas

However, there are plenty of other prospective buyers with agendas of their own. Japan has supplanted the US as the biggest-spending external M&A player in Southeast Asia in recent years, but American investors have still deployed an annual average of $3.5 billion since 2010. European companies have committed an average of $3.6 billion over the same period. Anecdotal evidence suggests US and European firms are still active pursuers of PE-owned assets in Southeast Asia, in part because they represent a platform for addressing the region and tend to come with good processes and governance.

"I wouldn't say interest from the US and Europe has diminished, it's just there has been an increase in demand from Japan in particular and to a certain extent Korea, and then from China. It is additive rather than replacing," says Nick Bloy, managing partner of Navis Capital Partners. "The nature of the buyers reflects the nature of the industry. A lot of what you see is the logical consequence of industry definition and out of that come a logical set of buyers."

This much is apparent from the Navis portfolio. Two domestic-oriented businesses in Thailand, the local franchises for Dunkin' Donuts and Au Bon Pain and for the Wall Street Institute English-teaching network, were sold to local buyers in the last two years. But then Thai rubber components manufacturer RPS Technologies went to an Italian buyer, Singapore-based supply chain management specialist Mentor Media was acquired by a Swedish firm, and US multinational Honeywell International picked up safety footwear producer King's Safetywear.

Bloy unwinds strategic interest in Southeast Asia into three threads: those seeking to create platforms from which to enter emerging consumer markets, whether it is financial services, healthcare or retail; those that want exposure to industries in which certain countries are globally competitive; and those looking to take advantage of the region's low-cost manufacturing base in commodity areas.

On the higher-end manufacturing side, the region has benefited from the supply chain clustering in industries such as electronics, auto parts and aerospace components. The role of Japan's auto industry in Thailand, for example, is clear: the country produced 2.45 million autos in 2012, of which 1 million were exported, with Toyota, Isuzu and Honda among the leading domestic manufacturers.

Capital has primarily come in the form of foreign direct investment for greenfield facilities because the local infrastructure didn't exist 20 years ago. Once the ecosystem was put in place, independent, entrepreneur-led domestic players emerged to serve the auto manufacturers. They now have sufficient scale, sophistication and supply networks that they might be attractive acquisition targets for US, European or Asian carmakers or parts suppliers.

This dynamic does not, however, guarantee investments and exits for private equity. Thompson of KPMG notes that M&A is just one way in which strategic investors can access low-cost manufacturers in Southeast Asia, and many opt for outsourcing partnerships and long-term supply arrangements.

"We do see manufacturing as a possible drive for activity but I don't think it generally competes with the overall themes of accessing the rising middle class in Southeast Asia," he says. "The world realizes this is an Asian century and they need to have good positions for their companies in Asia.

The ASEAN effect

If this will sustain strategic interest in Southeast Asia from Western multinationals, competition is likely to intensify as corporates from emerging markets within the region engage in more cross-border M&A. Indonesia and the Philippines, for example, are home to a number of very large companies that, with one or two exceptions, have so far focused on organic expansion with a smattering of domestic M&A. There is now greater cross-border competency within these firms and a clear incentive to start spending.

The Association of Southeast Asian Nations (ASEAN) is driving these economies closer together, forming a more cohesive block of 616 million people and $2.5 trillion in GDP. Comprehensive liberalization of trade in goods and services is scheduled for late 2015, as well as freer flow of labor and capital. It will take time, but ASEAN may follow the path of the European Community, with consolidation in any industry where scale is a competitive advantage. Companies must branch out to survive.

"Indonesia and the Philippines have always been acquisitive within their borders and it looks like in recent months they have become interested in cross-border expansion," says Navis' Bloy. "The same is true of Indonesian and Thai corporates. It is all part of the banner of becoming an economic community and establishing yourself as not just a national champion but a regional champion."

One of the concerns expressed about this strategy is the ease with which companies can take businesses cross-border in Southeast Asia, particularly in the consumer space where - despite the economic commonalities - strong cultural differences remain. As KPMG's Thompson asks, "Are they running regional synergies as opposed to owning different companies in different countries?"

In this context, when Navis considers its exit options for Alliance Cosmetics, a portfolio company since 2010, the list of suitors will make for interesting consumption. The cosmetics manufacturer has achieved the kind of expansion that Merico is seeking with ICP. Building on a dominant position in Malaysia, it established a foothold in Singapore and Brunei before successfully making headway in the crowded Indonesian market. Alliance is now considering the Philippines and Vietnam.

All of Navis' exits to date have been through trade or secondary sales and Alliance is unlikely to stray from the norm. The question is from which of the multiplying constituencies will the buyer emerge? CVC Capital Partners tapped the institutional and retail investor market to great effect in making a partial exit from Indonesia's Matahari Department Store last year, but this appears to be the exception rather than the rule for big assets in Southeast Asia.

"We have listed several companies but we tend to use the listing to create more visibility for the company and ultimately attract a buyer who is strategic is nature," adds Shastry of Northstar. "The best exits are still to strategic players who see synergies or who want a platform for market entry. In some cases, a strategic might buy into a company while we are still shareholders, we work together to improve the company and then we exit at a higher price a few years later."

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• Topics
• Southeast Asia
• Exits
• GPs
• Exit
• Trade sale
• Southeast Asia
• Navis Management
• Northstar Group
• Mekong Capital
• Consumer