TheFaceShop - beautiful returns for investors

The trade sale of TheFaceShop has an equity value of KRW470 billion ($409 million) for 100% of the company. LG Household will buy 90% of the company, including the 70.2% held by Affinity, which originally invested in TheFaceShop in 2005, paying just $69.23 million. As well as the Affinity stake, LG Household will also acquire 19.8% of the company from founder Jung Woon Ho, who will retain a 10% stake in the business for the next two years.

TheFaceShop operates an own-brand retail outlet strategy for its cosmetics range, with some 717 outlets across Korea and internationally, including the US. LG Household is reportedly seeking to move into broader consumer cosmetics markets, including brands that appeal more to younger customers, to complement its present focus on premium cosmetics, as well as improving its competitive position against local market leader Amorepacific, which has around 35% of the Korean cosmetics market, versus LG Household’s 12-13% and TheFaceShop’s 5%. LG Household’s shares rose to a record high in Seoul on the news of the acquisition. JPMorgan advised Affinity on the sale to LG Household.

“It’s a big win:win,” a source told AVCJ. “LG was strong in consumer healthcare, but never had a branded shop cosmetic line. The market recognized it.”

Affinity originally bought TheFaceShop four years ago at a time when the company was Korea’s number two branded cosmetics chain with about 250 shops and took it to the number one position, building its retail chain to over 700 outlets. This rapid expansion was accomplished without TheFaceShop incurring a single won of debt. On the contrary, the cash build-up was so rapid that the company was able to pay its shareholders a special dividend of KRW60 billion ($52 million) in August 2008. LG Household acquired a complete branded network with the deal, rather than facing the execution challenges and financial risk of attempting to build its own.

Affinity reportedly previously came close to making a secondary exit to the Carlyle Group in July 2008, in a round of discussions that also included Bain Capital and Unitas as potential buyers, but this concluded without result (see AVCJ July 22, 2008). At the time, a possible sale price in the KWR450 billion ($388 million) range was cited in Korean media.

Affinity has nonetheless pulled off a striking final exit, despite failing to agree on a deal with Carlyle in 2008. The LG Household trade sale could return Affinity around 3.5x times its original investment net:net, or some $283 million – an even more significant win considering that TheFaceShop was never leveraged throughout the period of Affinity’s ownership, and that the value was built purely through operational improvements, mainly the significant improvement in the profit margin and expansion of the retail network.

“Even in a recession, when many companies are faltering and breaching their covenants, this company continued to increase its profits every year since it was bought,” a source said. “The fact that you can have an exit of this size and quality, in market conditions where financing is hard to source, is a very good harbinger for the future.” And a senior banker with knowledge of the transaction commented that this investment proved that private equity done “right” - the ‘old-fashioned way’ - is still a wonderful business.

 

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• Topics
• Exits
• North Asia
• Consumer
• Affinity Equity Partners
• The Carlyle Group