Deal focus: Hahn embarks on Korea dairy turnaround

The agreed sale of Korea-based Namyang Dairy Products to local GP Hahn & Company represented the end of an ordeal for the company’s major shareholder and former chairman. For the past eight years, the business has suffered a string of scandals, culminating in a bizarre claim last month that consuming its yogurt drinks lowered the risk of contracting COVID-19.

During this period, sales have fallen by nearly one-third and the stock price has dropped by more than 70%. When it was announced that Hahn & Co. had acquired a 53% stake from Won-sik Hong and his family for KRW310.7 billion ($278.5 million) – valuing the entire business at KRW590 billion – the stock hit a two-year high, reflecting the premium paid to the previous close. Yet the private equity firm believes it has secured a prize asset.

“It is a franchise brand. Everyone in Korea knows it and many Koreans grew up drinking their milk and products,” says Scott Hahn, CEO of Hahn & Co. “We think there is an opportunity, with new ownership, proper governance and professional management, to turn things around. It will take a couple of years, but this is a great brand with great products. The company has been hit by various separate issues that spiraled out of control.”

Namyang was established in the 1964 by Hong’s father and initially made its name as a baby formula producer. It now claims to be one of the country’s largest dairy and beverage producers, offering coffee and fruit-based beverages in addition to formula, milk, yogurt, cheese, cream, and butter. Revenue came to KRW948 billion in 2020, while COVID-19 ended a long streak of annual profit.

The company’s problems began in 2013 with the emergence of an audio clip of a Namyang salesperson being verbally abusive to a distributor who had resisted pressure to buy more products. It sparked consumer boycotts, a public debate about improper business practices, and a marketing blitz from rivals keen to exploit any sign of weakness. Namyang’s sales slumped, seriously eroding its market share in categories such as milk and coffee.

Two years later, the company attracted more unfavorable press – this time for something unrelated to business operations – as Hong’s niece was caught up in an illegal drug scandal. No criminal charge resulted at that time, but in 2019 she was arrested again and ended up with a suspended jail sentence.

Further controversies emerged in 2020, and they haven’t abated. Namyang was subject to a police investigation for allegedly paying professional internet trolls to undermine rival brands; Hong’s eldest son was dismissed from his managing director role for alleged misuse of company funds; and then came the yogurt-COVID-19 debacle, which led the Ministry of Food & Drug Safety to call for a police investigation on grounds of misleading advertising.

Wong resigned as chairman, promised that control of Namyang wouldn’t pass to his children, and apologized for “failing to meet the expectations of consumers.” It wasn’t sufficient to turn the tide of negative public sentiment, so Wong explored exit options. He is said to have probed his networks for information on Hahn & Co, and happy with the feedback, reached out and offered a proprietary deal. The GP spent two months working on the transaction, relatively short by its standards.

The mainstream media and social media response to the deal, though principally aimed at the founding family, underscores the challenge facing Hahn & Co. As things stand, this will play out in the public eye, with the private equity firm yet to decide on whether to pursue a full privatization.

Hahn notes that his team has experience with consumer brands and turnaround situations. He points to K Car, where steps have been taken to overcome longstanding wariness of Korea’s used car market. Before that, Hahn & Co. bought Woongjin Foods out of receivership – collateral damage from the failure of Woongjin Group’s construction business – and revived the beverage maker before selling it to Taiwan food giant Unipresident for KRW260 billion in 2018.

“You have to restore consumer confidence by investing in the brand, promoting the products, and making sure that suppliers are happy to sell the products again because distribution channels might have been damaged,” Hahn says. “It’s tough when a business that has grown consistently over 50-plus years starts losing. The response is often to cut back when perhaps you should venture forward. That is difficult for the same set of eyes to do.”

Other likely initiatives include the pursuit of efficiencies – a common target for PE when acquiring a business from family owners – and the development of digital sales and marketing channels.

Namyang will be Hahn & Co’s third investment in Korea since the outbreak of COVID-19, following carve-outs of SK Chemicals from SK Group and Korean Air’s in-flight catering and duty-free operations. The firm is deploying its third fund, which closed in 2019 at $3.2 billion, comprising a $2.7 billion core fund and a $500 million co-investment fund.

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• Topics
• North Asia
• Consumer
• Buyouts
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• South Korea
• Hahn & Co
• Food
• manufacturing