MBK consortium to buy Tesco's Homeplus in $6.4b deal

According to AVCJ Research, this is Asia's largest-ever private equity buyout based on enterprise valuation. It surpasses the $6.3 billion that KKR, Deutsche Bank and Varde Partners agreed to pay for GE's Australia and New Zealand consumer lending business earlier this year.

Tesco said in a statement that it will receive GBP4 billion in cash from the divestment, allowing a GBP4.22 billion reduction in its net debt. The UK-based retailer needs to strengthen its balance sheet after announcing an annual net loss of GBP6.4 billion in April and writing down the value of its business by GBP7 billion.

Set up in 1999, Homeplus is one of Korea's largest multi-channel retailers with 1,075 outlets, of which 140 are hypermarkets, 609 are supermarkets and 326 are convenience stores. Over half of its stores are franchised out, although the hypermarkets are all directly owned. The company also operates 139 shopping malls adjacent to its hypermarkets, with over 6,500 tenant leases.

Revenue came to GBP5.36 billion for the year ended February 2015, down from GBP5.45 billion for the previous 12 months. The company swung from a pre-tax profit of GBP459 million to a loss of GBP131 million in 2015, largely due to a one-off property impairment charge. 

Homeplus has struggled with the Distribution Industry Development Act, which obliges large-scale discount stores in Korea to close two Sundays each month so smaller-scale operators aren't squeezed out. Tesco said a reduction in like-for-like sales over the past three years has been counterbalanced to a certain extent by growing store numbers and online sales.

The MBK consortium has committed to maintaining the existing employment conditions of staff and ruled out compulsory redundancies. It will also invest KRW1 trillion in the business over two years to improve competitiveness.

The consortium is said to have overcome competition from The Carlyle Group and a joint bid from Affinity Equity Partners and KKR. It was also reported that Korea's National Pension Service (NPS) would participate in the deal as a co-investor. 

CPPIB is a longstanding backer of MBK, which has $8.2 billion in capital under management and closed its third fund in October 2013 at $2.7 billion. The Canadian pension plan - an investor in that fund - confirmed it would take a 21.5% stake in Homeplus.

"Homeplus is an attractive investment for CPPIB as it provides us with access to one of the largest retail markets in Asia through a well-established business with a strong cash flow profile," Pierre Lavallée, senior managing director and global head of investment partnerships, added in a statement.

CPPIB had $264.6 billion in assets as of March 2015, of which $50.6 billion was deployed in private equity. While the Asian private equity portfolio continues to grow in size - reaching $7.7 billion this year, up from $5.4 billion in 2014 - the pension plan has compromised on co-investment size.

Check sizes in most markets are $50-150 million, but in Asia a $35 million commitment would be considered. CPPIB has made two co-investments in the region over the past 12 months, supporting FountainVest Partners in its acquisition of Key Safety Systems for a reported valuation of $700-800 million and working with TPG Capital on the $461 million take-private of Chindex International.

The Homeplus deal would fall towards the high end of the spectrum in any market and it confirms Korea's growing significance in the Asian buyout space. Over the past three years, the country's share of region-wide buyout activity in US dollar terms has risen from 10% to 18% and then 27%. Homeplus takes the 2015 total past $9 billion, or 34% of the Asia total.

Completion of the deal is subject to various approvals, including those from Tesco shareholders and Korean regulators.

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• Topics
• Buyouts
• North Asia
• Consumer
• MBK Partners
• CPPIB
• buyout
• Consumer
• South Korea
• Temasek Holdings
• National Pension Service (Korea)