Activism not yet a key driver of Korean corporate divestments - AVCJ Forum

There have been several high-profile cases of activism, notably Elliott Management’s unsuccessful proxy fight with Samsung over the merger of two subsidiaries that resulted in a massive corruption scandal and the removal of President Park Geun-hye. For the most part, shareholders are dissatisfied with the dividend payments they receive from listed Korean companies, which are low by global standards.

“Companies have cash and they must use it efficiently or distribute it to shareholders,” Joseph Lee, a partner and CIO at IMM Investment, told the AVCJ Korea Forum. “Shareholders need to raise their voices regarding how to utilize this cash. There used to be a lot of shareholder activism-driven deals in Europe, but it is just beginning in Korea.”

IMM studies the financial statements of the chaebols every year, looking especially at debt-to-EBITDA and interest coverage ratios. These are the traditional indicators of distress that could result in involuntary asset sales, but Lee believes the velocity of deal flow from the leading groups is decreasing. Rather, they are auctioning off non-core businesses for strategic reasons “because they know that to compete in the global market selective concentration is important.”

VIG Partners – previously known as Vogo Investment – used to target assets held by top-tier chaebols but now it sees most activity among the mid-size groups. “If you look at the deals available now, sometimes it is hard to distinguish whether it is non-core or not. Do they really have to sell that? Sometimes it is a corporate structure issue rather than a financial issue that makes them put out those assets,” said Chulmin Lee, a managing partner at VIG.

At the same time, these larger transactions, when they come onto the market, are typically sold through auction processes that attract global and regional private equity players. As intermediaries become more prevalent in chaebol deals, local GPs find that their knowledge and networks are better deployed tracking independent businesses with founders that face financial structuring and succession planning issues.

“Seven or eight years ago Korea was considered one market. Now it is much more fragmented, there are mega buyouts and mid-market buyouts and they are in completely different markets, so you need different approaches,” said Soomin Kim, a partner with Unison Capital. “Just because someone is good in one area that doesn’t mean they will be good in another.”

Unison, a Japanese GP that has branched into Korea, recruiting a local team and raising a country fund, finds that mid-size businesses are usually advised by lawyers and accountants, but that doesn’t necessarily mean they want an auction. Bilateral negotiations are often preferred if a founder wants to keep the valuation private or complete a deal without disruption from the workforce.

In these situations, the sourcing process is time-consuming but lower entry valuations tend to be the reward for those who are patient. Unison has made seven investments in Korea, two of which were bolt-on acquisitions. “It takes 14 months from first meeting with a seller to signing a deal. And there are 50 face-to-face meetings for every successful deal, although that number is decreasing,” Kim added. “Sometimes we make cold calls, but it’s not helpful because we have ‘Capital’ in our name and people just say they don’t need any capital.”

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• Topics
• North Asia
• Buyouts
• South Korea
• IMM Investment
• VIG Partners
• Unison Capital