Deal focus: KKR lays down a marker in Taiwan

As it returns to Taiwan's take-private space – where numerous PE investors have been thwarted by regulatory obstacles and obfuscation – KKR is following a simple mantra: Avoid tightly controlled industries such as financial services, media, and telecom as well as companies that possess sensitive technologies or are perceived as domestic crown jewels.

“We are going to play by the rules – that is a given – but we will also invest in the general direction of where the government wants foreign capital. This is not as limiting as it may seem because most countries in Asia have clearly stated policies as to what they like to see and what they don’t like to see,” says Paul Yang, head of Greater China at KKR. 

It is the view of many industry participants that the Taiwan government doesn’t like PE buyouts. No one has tried a privatization of meaningful size since 2011 when KKR launched a $1.6 billion bid for electronic components manufacturer Yageo Corp. Despite a majority of the company’s minority shareholders accepting the offer, the Investment Commission blocked the deal, citing concerns about shareholder protections, pricing, and information disclosure.

KKR is now trying its hand again with a NT$47.8 billion ($1.56 billion) bid for LCY Chemical Corp, a specialty chemicals producer that is seen as meeting the above criteria. 

While accepting that in the past deals have met all the requirements but still failed due to implicit regulatory opposition, Yang is positive about the response so far. He points to evidence of a changing local environment, with the government recently endorsing hostile takeovers in the financial services industry and the abandonment of a financial prudence test that arbitrarily decided whether the leverage in a buyout was too high or low. 

Indeed, the chairman of the Financial Supervisory Commission has spoken favorably of the deal, noting that LCY could benefit from a restructuring followed by a relisting. 

KKR will acquire a majority stake in LCY, with the company’s employees and founding family also participating. The business, which last year generated NT$45.1 billion in revenue, appealed to the GP because of its diversified customer base and industry exposure. Zhen Ji, a managing director with KKR, also cites LCY’s ability to carve specialist niches in what is largely seen as a commodity market.

Improvements can be made in terms of environmental, social and governance (ESG) standards, with LCY’s reputation still somewhat tainted by a gas explosion in 2014. Beyond that, KKR plans to support various R&D and growth initiatives.

Yang sees LCY as one of many mid-cap listed Taiwanese companies with strong competences in areas such as industrials, environmental services and healthcare that are trading at attractive valuations. “These businesses could be acquisition targets domestically, but they also make for good partners when they want to expand outside of Taiwan,” he adds.   

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• Topics
• Greater China
• Buyouts
• Regulation
• Industrials
• Taiwan (China)
• KKR
• manufacturing