[Funding] Ja-an Acquires 'MP Hangang' with 20 Billion KRW Financing Supported by Eugene Securities

[Asia Economy Reporter Lim Jeong-su] Jaahn, a KOSDAQ company pursuing a transition to a biohealth platform company, successfully raised 20 billion KRW in funding with the support of Eugene Investment & Securities to acquire shares of the cosmetics distribution company MP Hangang. Jaahn plans to change MP Hangang's company name to 'Jaahn Cosmetic' and focus on creating synergy between the two companies. Attention is focused on whether these two deficit companies, both of which recently recorded losses, can turn profitable through synergy.

According to the investment banking (IB) industry on the 29th, Jaahn issued 20 billion KRW worth of private bonds to a special purpose company (SPC) established under the management of Eugene Investment & Securities. The private bonds have a maturity of six months and an interest rate of 6%. The principal is to be repaid in a lump sum at maturity, but early repayment is also possible.

The SPC, after acquiring the private bonds, issued asset-backed short-term commercial paper using the bond principal and interest as underlying assets. Eugene Investment & Securities, the underwriter, provided credit support such as a purchase commitment for the private bonds to the SPC. This means that if Jaahn fails to repay the private bonds and the SPC faces a shortage of funds, liquidity will be provided by purchasing bonds issued by the SPC.

It is analyzed that without the support of Eugene Investment & Securities, it would have been difficult to raise funds for the share acquisition. An IB industry insider evaluated, "Jaahn's financial structure has deteriorated due to a relatively large-scale loss last year and a rapid increase in borrowings recently, making it difficult to raise funds independently."

Jaahn recorded sales of 16.3 billion KRW last year, which is less than half of the 43.8 billion KRW sales in the previous year. Operating profit also turned into a loss of 8.8 billion KRW. After recording a loss of 8 billion KRW in 2018, it briefly turned profitable in 2019 but reverted to a loss again. Borrowings also increased rapidly within a year. Borrowings, which were only 3 billion KRW at the end of 2019, rose to 36.1 billion KRW by the end of last year.

Last year, Jaahn raised 35 billion KRW through a paid-in capital increase to repay borrowings from financial institutions such as Sangsangin Savings Bank and invested in mask and hand sanitizer businesses but failed to achieve significant results. Subsequently, borrowings increased as it issued discount bonds and convertible bonds (CB) consecutively for investment and operating funds.

Liquidity risk is also considered significant. Most of the borrowings are short-term debts that must be repaid within one year amid poor performance. The funds raised this time for the acquisition of MP Hangang are also ultra-short-term private bonds with a six-month maturity.

Jaahn stated that the raised funds will be used for the acquisition of MP Hangang. Jaahn previously signed a contract to acquire 21.39% of MP Hangang shares held by the MP Group for 24 billion KRW. It is known that a deposit of 5 billion KRW was prepaid and the remaining 19 billion KRW was paid to the MP Group on this day.

The acquisition target, MP Hangang, is also experiencing poor performance. MP Hangang recorded operating losses of 1.8 billion KRW in 2019 and 5.1 billion KRW last year. However, it is considered advantageous that while borrowings are only 5.9 billion KRW, cash and cash equivalents amount to 7.1 billion KRW, indicating a net cash position.

Jaahn plans to turn the deficit companies into profitable ones through synergy between the two companies. To this end, it will restructure MP Hangang's sales structure, which has grown mainly through offline distribution, by utilizing the online cosmetics platform 'SelectOn Cosmetic.' Additionally, it will diversify the product portfolio, which is concentrated on low-priced color cosmetics, into various product groups across different price ranges.

An IB industry insider predicted, "If Jaahn succeeds in creating synergy and both companies turn profitable, it could become a successful merger and acquisition (M&A) case."