Deal focus: KKR hits the gas on Korea auto carve-out

KKR’s latest Korea deal fulfils a longstanding dream: its first collaboration with one of the country’s chaebols.

The deal originated when LS Mtron, a division of the LS Group, decided to focus on its core tractor manufacturing business and carve out its subsidiary LS Automotive, which makes human machine interface (HMI) components such as switches, displays, and lights. KKR had already done extensive research on the automotive component industry for its acquisition of Japan’s Calsonic Kansei Corporation and saw the HMI business as largely future-proof.

“Based on the company’s development pipeline, our view is that there will be advancements in terms of applying different types of technologies, whether that’s voice or touch or other input methods,” says Chung Ho Park, a director at KKR. “But fundamentally your ability to open the window, turn on the wipers – these are all very mission-critical, safety-critical components. We felt there is a lower risk of these products being disrupted in the near and medium term, compared with other segments.”

The deal also includes LS Mtron’s copper foil and copper laminate business, which KKR found enticing for nearly opposite reasons. Whereas LSA is a proven business with nearly 50% market share among Korean automobile manufacturers, the copper foil business plays to the rapidly growing global electric vehicle (EV) market. The hope is that it becomes a leading component supplier for EV batteries.

While carving out the copper foil business posed little difficulty, LSA’s customers wanted reassurance that the new ownership would not disrupt their existing relationships. As such, LSA will be managed as a joint venture between the two owners, with LS holding 53% to KKR’s 47%. The PE firm’s overall investment values the two divisions at KRW1.1 trillion ($940 million).

“The feedback we got was that LS remaining as a meaningful shareholder in the business was important to providing continuity,” Park says. “So we came up with a structure that would address the customers’ needs, address LS Group’s needs in terms of raising capital to invest in their core businesses, and provide an opportunity for KKR to invest a significant amount of capital to become a partner and a meaningful shareholder.”

While KKR sees a full takeover of LSA as an eventual possibility, it is also mindful of the trust required for LS Group to come this far. The firm sees its partnership with the chaebol as an important step forward and a model both for Korea’s private equity community and for its other conglomerates.

“In a lot of carve-outs in the past, it’s typically been forced sellers or distressed sellers, who are selling 100% just to be done with it,” says Park. “For a Korean conglomerate and a global sponsor to form a partnership of this nature is very rare, and we really hope that this will be a great example of how such a partnership can support growth for a non-core asset.” 

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• Topics
• North Asia
• Industrials
• Buyouts
• South Korea
• KKR
• manufacturing
• automobiles