Late on Friday night, Singapore listed Osim announced that it had entered an agreement to buy Brookstone, a US listed retail chain. The deal was fifteen months in the making and sees Osim get access to a distribution channel of 288 stores in 41 US states.
What makes this deal interesting however is the way that it has been structured so that Osim can mitigate the risks of the acquisition going wrong. Hitherto, Asian acquisitions in the west have foundered over issues such as management control and financial management. Knowing this from the outset, Osim set out to build a deal that would minimize the risks and ensure its long-term success, even if it meant giving up some equity upside in the process.
The deal sees Osim form a special purpose vehicle (SPV) with specialist private equity investor JW Childs and Temasek, which together own 40% of the SPV. Osim owns 55% and the existing management of Brookstone owns the remaining 5%.
This SPV will then merge with the existing listed company and the shareholders of that company will receive cash. The total consideration being paid for the company is S$752 million or $456 million. The shareholders of both Osim and Brookstone will have to vote on the deal, and sources suggest that the majority owner of Osim has already agreed and the major institutional shareholders of Brookstone are likely to agree to the deal.
The consideration is being funded 54% by equity and 46% in debt, which will be raised in the public and private markets. Goldman Sachs has been mandated by the consortium to raise this debt, which will not have any recourse to the shareholders of the SPV.
Osim has been advised from the outset of the deal by Nigel Jones from boutique advisory firm Alpha Advisors. Jones is a fifteen year M&A veteran from Schroders and Morgan Stanley, and set up the boutique 18 months ago.
The structure of this deal is what makes it so interesting. By agreeing to share the equity with both the existing management and specialist investors such as JW Childs, risks can be reduced.
First of all, the management gets to monetize its existing stake in the listed company and then buy into a newly formed private company, which is looking to IPO in three to five years time. This incentive will keep the management working hard for the life of the deal. Importantly the management also has the ability to earn more equity if they meet certain performance hurdles.
By joining up with the private equity investor, Osim can also ensure that the financial management behind the deal is world class. A structure of common and preference shares has been put in place as well to give the different investors the relevant incentives to make the returns they are seeking.
There is a slight concern that with a deal like this, that if the original business plan does not pan out then the divergent wishes of the various shareholding groups could lead to trouble down the line. Osim needs the distribution of Brookstone to sell more of its product. For Brookstone, they want to tap into the sourcing power of Osim in Asia to provide them with better goods to sell. If either of those premises fail to deliver then a highly structured shareholding agreement could become more of a straight jacket than a boost to business.
Nevertheless, this deal shows that with a willing ness to adopt certain deal and financial mechanics, a structure can be found that helps to mitigate many of the risks that have caused the break up of many other deals. The only other deal out of Asia that has been structured like this is the Sony purchase of MGM with a consortium of other private equity investors announced earlier this year.
According to Jones, as Asian companies increasingly look to expand out of the region, a structure like this will provide some comfort that deals can be successful. "Osim has done this deal in partnership with the management that knows the business and [JW Childs] who know how to buy out firms," he says. "As Asia starts to buy out of Asia, lots of other Chinese and south Asian companies are looking at this kind of technique to start investing out of the region." He adds: "[However] it's a very unusual deal and no one has done a deal like this before in Asia."
The deal is likely to be completed by the end of July once shareholder votes have been counted and the US SEC has approved the 13E proxy filing form. Osim's stock closed up 10% in trading yesterday having been suspended on Monday.