Big but modest: Carlyle's ADT Caps $1.3 billion exit

In one of the biggest private equity exits out of Korea, Carlyle is selling the security solutions provider to SK Telecom and Macquarie for a relatively weak return on investment.

Carlyle is successfully exiting its investment in ADT Caps after three years in charge of the South Korean security services provider. The rate of return achieved, though, is relatively underwhelming.

In a joint statement on Tuesday, SK Telecom and Macquarie said they were buying ADT Caps for W1.28 trillion ($1.2 billion).

Beating off competition from rival bidders CVC Capital Partners, Singapore’s GIC, and Canada’s Brookfield Asset Management, South Korea’s largest telecom services provider said it will acquire a 55% stake in ADT Caps for W702 billion. Its Australian partner is buying the remaining 45% interest for W574 billion via the Macquarie Infrastructure and Real Assets fund, the statement read.

The winning offer values the Korean security firm at an enterprise value of $2.8 billion after taking into consideration its outstanding debt of about $1.6 billion, or approximately 11 times ADT Caps’s earnings before interest, taxes, depreciation and amortisation (Ebitda) of $251 million.

ADT Caps, which was acquired from Ireland-based Tyco International for $1.93 billion in February 2014, is one of Carlyle’s two outstanding investments in Korea alongside garment maker Yakjin Trading. It is also the global private equity firm’s single largest investment in the country.

However, the investment was hardly outstanding in other respects, given the low return achieved in comparison to other deals.

Based on ADT Caps’s offer price, Carlyle on paper achieved an annualised return of 13.2% over a three-year period, assuming no change in ADT Caps’s total debt under Carlyle's stewardship. The gross internal rates of return for Carlyle Asia Partners IV and Carlyle Partners VI, the two equity funds employed for the ADT Caps investment, are 31% and 20%, respectively, since their inception in 2012. 

The investment’s return rate is also lower compared with other large Korean private equity exits.

In one of the most successful private equity investments in Korea, Bain Capital last year made an investment return of over 300% in just 15 months from its investment in skincare brand Carver Korea. Together with Goldman Sachs, the private equity firm acquired Carver Korea for about $850 million in July 2016 and subsequently sold it for $2.7 billion in September last year.

In a separate case, MBK Partners struck an annualised return of about 14% for its investment in ING Life Korea over a three-year period.

The Asian private equity firm bought the insurer for W1.8 trillion in December 2013, and was able to sell around 40% of its stake at an implied valuation of W2.7 trillion through an initial public offering in April last year, despite underperformance in the broader insurance sector. 

Carlyle’s last investment exit out of Korea – the sale of Tapex to Hansol Group in 2016 – generated an annualised return of about 20%.

Morgan Stanley and Credit Suisse advised Carlyle on the ADT Caps transaction.

INTERNET OF THINGS

The successful bid by SK Telecom and Macquarie for ADT Caps will generate more strategic value compared to the CVC-led consortium, mainly because of the potential synergies between SK’s telecom offerings and ADT Caps’s home security services.

In line with the Korean government’s push for a more innovative economy, SK Telecom is betting on artificial intelligence (AI) and the internet of things (IoT) being its next big business. The telco said last year that it planned to spend W5 trillion over the next few years to develop an ecosystem around next-generation technologies such as AI, IoT, driverless cars, and 5G networks.

The acquisition of ADT Caps serves as an important part of SK Telecom’s IoT push by enhancing its security offerings. ADT Caps, which offers home security solutions such as alarm systems, sensors and cameras, has about 570,000 household users.

ADT Caps sells them mostly as standalone products at the moment, but they could be packaged as an integrated solution with SK Telecom’s internet services in the future.

Demand for such integrated services are likely to increase under IoT, which connect these products with the internet to allow remote control and data storage.

Apart from home security services, SK Telecom plans to expand its security offerings to unmanned stores and elderly-care facilities, the telco said in the joint statement.

SK’S BUYING SPREE

It is worth noting that SK Group has emerged as the most acquisitive conglomerate as Samsung slows its pace of mergers and acquisitions following the notorious corruption scandal that snared the country's former president Park Geun-hye.

Last year alone, the chaebol invested over $4.5 billion in a series of acquisitions in the technology and logistics sectors.

SK Hynix, the group’s chip manufacturing business, agreed in July last year to invest around $3.6 billion as part of the Bain Capital-led consortium for Toshiba’s memory business. The $18 billion transaction is expected to close by the end of June.

The group made two other investments in the same month – a $333 million purchase for a 12% stake in Chinese warehouse operator e-Shang Redwood and an investment of an undisclosed size in Grab’s $2 billion funding round.

That was after SK Holdings paid $530 million for a 51% stake in silicon wafer manufacturer LG Siltron in January.

In 2016, SK Telecom struck a $865 million deal to acquire Korea’s biggest cable TV operator CJ Hellovision, but the buyout did not materialise after failing to get antitrust approval.

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