Deal focus: IMM overcomes distancing disruption

“If one of our guys had got sick, this deal probably wouldn’t have happened,” says Joseph Lee, a partner and CIO at IMM Private Equity. “When we had 20 people in a room doing admin presentations, I was concerned. We all wore masks, we opened the windows, we checked temperatures, we made sure everyone washed their hands, and we always sat at least two meters apart. It’s tough, but you can get deals done if people put their heads to it.”

This is the backstory to the KRW512.5 billion ($413 million) carve-out of Korea Kolmar Holdings’ pharmaceutical contract development and manufacturing organization (CDMO). Seoul wasn’t under lockdown, so the IMM team could conduct on-site due diligence and in-person negotiation but proceeding under social distancing conditions required a high degree of conviction.

Even the LP co-investors were required to step outside their comfort zone. Unable to travel, they interviewed the target company’s management team by Zoom and asked to be sent video footage of the factory sites. “It’s not 100%, but much better than nothing,” Lee adds. “Ultimately, they have seen us in action before, so they trusted our diligence regime.”

IMM’s comfort with Kolmar was born of familiarity. The conglomerate’s core business is cosmetics and IMM had got to know management and the family owners through its own previous investments in that space. Following its acquisition of local drug developer CJ Healthcare for KRW1.3 trillion in 2018, Kolmar was overleveraged and decided to divest some assets. It tested the market before pushing ahead with IMM on what Lee describes as “not a competitive auction process.”

The private equity firm picked up 100% of one portion of the CDMO business and a 62.1% interest in another. Its holding in the latter will increase to 85% on purchasing additional shares from management team members. While Kolmar’s pharmaceutical division produces everything from hand sanitizer to anti-hair loss shampoo, about two-thirds of its revenue comes from manufacturing prescription drugs.

This appealed to IMM because the CDMO business has been growing at an annual rate of 15% for the past three years and EBITDA margins are around 25%, suggesting strong cash flow. Outsourced drug development services are expected to see strong demand as pharmaceutical companies respond to rising labor and land costs by scaling back what they do in-house. Moreover, the Kolmar business specializes in treatments for chronic diseases like heart disease and diabetes, which should sell well regardless of coronavirus-driven downturn.

Lee predicts that more Korean conglomerates will divest non-core assets, though not necessarily through distressed sales because most have ample cash on balance sheet. On the private equity side, the deal diverted from the norm because IMM underwrote the deal to a higher minimum return. It normally aims for money multiples of 2.5-3x and the Kolmar business easily cleared that.

“I think more GPs will take the approach of ‘If the company hasn’t been broken by COVID-19, let’s do the deal but set a higher bar,’” says Lee. “GPs and sellers also must come to terms that don’t make the seller feel like they are being ripped off. We never said we want a 30% discount because of COVID-19. Had there been a COVID-19, we probably wouldn’t have done the deal. But there wasn’t, so the question was how could we get to a fair price.”

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• Topics
• North Asia
• Buyouts
• Healthcare
• South Korea
• Pharmaceuticals
• IMM Private Equity
• coronavirus
• covid-19