More Chinese leveraged buyouts are likely to follow Focus Media's successful take-private deal, tallying with the government's desire to trim excess capacity in the economy, private equity professionals said at a conference in Hong Kong on Thursday.
Fang, who is responsible for the firm’s investment and business development activities in mainland China, said radical consolidation in China was just around the corner because many of the country's industries suffered from chronic overcapacity. As an investor in private equity funds – a limited partner or LP – he is therefore eagerly waiting to see which one will seize the opportunity to ride this expected wave by initiating more LBOs.
“The China market looks quite attractive to us for the kind of deals we are looking for – control or buyout transactions or structured minority investments with downside protection,” said David Kim, a Partner and Chief Operating Officer at Asia-focused private equity firm PAG Capital, which has already deployed about half of its recently raised $2.5 billion fund. Seven of its eight deals were in China.
The Focus Media deal has blazed a trail in a number of ways, conference participants said.
“Even with the leverage it was still very strong financially – which gave us comfort to invest,” said LGT Capital’s Fang. LGT Capital manages about $45 billion in assets and makes co-investments alongside private equity firms.
The LBO was followed by $500 million of refinancing less than six months later – one of the fastest refinancings ever seen in Asia.
“The fact that Focus Media could put together such a strong bank syndicate was [the] mark of a quality, cash-generative company,” said Fang.
Focus Media paid a cash dividend on three separate occasions in the first three quarters of 2012, said a person familiar with the matter. The company posted a net profit of $240 million in 2012 and a compound average growth rate (CAGR) of 33% between 2009 and 2012.
The Shanghai-headquartered company – which places screens in lifts, building lobbies, buses and supermarkets – could also be floated in Hong Kong by year-end and raise at least US$1 billion, according to sources familiar with the situation.
Putting the “L” into LBOs
One key positive from the Focus Media deal that will help nurture the development of a Chinese LBO market is the high degree to which Asian banks helped with the funding.
“Banks in Asia are increasingly comfortable with financing structures for these Chinese take-private deals …. Almost all the deals that have been announced have found financing,” said Lindsay Chu, Managing Director and Head of Financial Sponsors Group across Asia-Pacific at HSBC.
China Minsheng Banking took a total of $875 million or half of the LBO financing for Focus Media.
“There is certainly not a lack of liquidity in markets,” Chu said, citing the financing of Carlyle’s $1.93 billion purchase of South Korean security business ADT Korea from Tyco, the largest private equity LBO in South Korea since 2008.
Carlyle secured committed debt financing from Korea Exchange Bank, Kookmin Bank, Industrial Bank of Korea, Korea Investment & Securities and UBS.
Chu said the high amount of leverage secured locally illustrates the healthy state of finance across Asia and the stiff competition between banks for higher-margin business. It also hints at the many LBOs still to come.
“As more successful deals get done and banks get paid back that will give them more confidence to be a bit more aggressive on the next transaction,” said Chu.
The financing for Carlyle’s deal was in the form of about 930 billion Korean won (US$867 million) five-year loan with a bullet repayment, according to people familiar with the matter.
“Banks are stepping outside their traditional comfort zones and coming up with more tailored solutions for LBOs,” said Chu.
Additional competition for Asian LBO finance is coming from bond markets – including US bond markets.
“The US debt markets have been so accommodating in the last few years that more Asian credits are being taken to the US,” Chu said.
But not every company can tap the US bond market so easily. There has to be some name recognition and preferably a US angle, as was the case with Barings-backed Nord Anglia Education’s $165 million US high yield bond last year. In that case, the acquisition target owned schools in the US.
Another area of increased opportunity and risk for banks is share financing.
PAG secured such financing when it made the largest cornerstone investment of about US$300 million into Chinese broker Haitong Securities’ US$1.67 billion IPO in Hong Kong during 2012.
“We knew the company and shareholders particularly well,” said PAG’s Kim. “[The] financing was attractive,” both in terms of the size and provisions.
David Kim Private equity doesn’t typically look to make minority investments in publicly listed companies but there are exceptions where a fund can create value that its own investors cannot. “This was a structure that we could create that our LPs couldn’t replicate,” Kim said.
HSBC has been helping other clients with similar financing requests – if it can get comfortable with the risk involved around the liquidity of the underlying stock. The British-headquartered bank is building out its team globally in this area.
“We’ll see more buyouts but the reality is most deals in Asia will continue to be minority investments – in which case our client may want a bit of leverage to generate the right level of returns,” said Chu.