[PE Portfolio] ① MBK Changes Shoes... Full Effort to Recover Investments

MBK Established in 2005 with 40 Trillion KRW in Assets Under Management in 2024
Over 150 Global Pension Funds Including National Pension Service as Investors

Editor's NoteThis year marks the 20th anniversary of the introduction of the private equity fund (PEF) system in South Korea, and the role of the domestic PEF industry is growing. PEFs generate profits by acquiring management rights of undervalued companies, increasing their value, and then reselling them in the mergers and acquisitions (M&A) market. They also accept companies with high future value but deteriorated financial soundness when they come onto the market, and sometimes attempt hostile M&As on companies with weakened governance such as controlling shareholder risks. As the PEF industry history accumulates, the number of portfolio companies and employees held by Korea's mega PEFs have far surpassed those of major conglomerates. Beyond playing the role of a catalyst to prevent stagnation in the corporate ecosystem, the performance of PEF-owned companies now significantly influences the future of our industry. Asia Economy analyzes the performance and results of portfolio companies held by leading domestic PEFs.

Founded in 2005, MBK Partners is an alternative investment private equity fund that generates profits by investing in or acquiring companies, increasing their value, and then reselling them. It boasts the largest scale not only in South Korea but also in the Northeast Asia region. MBK's investment portfolio includes over 30 companies. The assets under management, which were only $1.1 billion in its founding year, have grown at an average annual rate of 29%, reaching $30 billion (approximately 40 trillion KRW) as of the end of February 2024. The combined revenue of its invested companies amounts to $49 billion (approximately 63 trillion KRW). The number of employees in these companies is 380,000. MBK has received capital contributions from more than 150 global pension funds, including the National Pension Service. Since 2005, it has invested in over 73 companies across three Northeast Asian countries: South Korea, China, and Japan. Over the past decade from 2013 to 2023, it has returned 20 trillion KRW (principal and investment gains) to investors, averaging 2 trillion KRW annually.

Kim Kwang-il, CEO of MBK Partners, changed his shoes when going to work at Homeplus, one of the portfolio companies. He replaced his shoes that made a 'click-clack' sound on the floor with comfortable ones. This was to avoid making employees nervous or uncomfortable with the sound of his footsteps. Kim said, "When walking down the long corridor, I can see every single expression of the employees," and expressed a strong determination, saying, "I will work together with the team to put Homeplus's performance on an upward trajectory."

'Big Deal' Homeplus in Final Stage of Refinancing

In 2015, MBK acquired Homeplus through the largest deal in South Korea's M&A history, worth about 7 trillion KRW. MBK purchased Homeplus from the UK-based large supermarket Tesco for 7.2 trillion KRW, financing 4.3 trillion KRW through acquisition loans. MBK repaid the acquisition loans using funds raised by closing or selling about 20 Homeplus stores, including the Ansan branch in Gyeonggi Province, and then leasing them back. Currently, only about 500 billion KRW remains in acquisition loans.

Homeplus faces loan maturities of 300 billion KRW and 500 billion KRW in June and October of this year, respectively. A Homeplus official stated, "We have completed preparations for refinancing the loans maturing this year, agreeing to refinance short-term loans of 300 billion KRW and 500 billion KRW acquisition loans, and plan to complete the refinancing process within the first half of the year."

Homeplus, a company with a fiscal year ending in February, recorded operating losses of 133.5 billion KRW and 260.2 billion KRW in fiscal years 2021 and 2022, respectively, increasing its deficit. However, it showed signs of recovery starting in 2023. Sales at 24 renovated stores centered around the 'Mega Food Market' featuring fresh food increased by an average of 24.5%. Food sales at these renovated stores in January 2023 rose by more than 30% compared to three years ago. Some stores even recorded sales increases of up to double. The growing preference for Homeplus Food Market among younger consumers is also a positive sign.

Online sales have grown by about 20% annually over the past five years. Since 2021, Homeplus Online has recorded sales exceeding 1 trillion KRW for three consecutive years. In 2023, it surpassed 1 trillion KRW in sales within just three quarters. Homeplus Express, a corporate supermarket (SSM), continues its growth by renewing its store model specialized for urban single-person households. The brand is also strengthening its advertising efforts, having appointed actor Kim Soo-hyun as a model following BLACKPINK's Ros?.

'Lotte Card' Seeking New Owner... bhc Group, a Prime Asset Valued at 3 Trillion KRW

Besides Homeplus, MBK holds a diverse portfolio of companies closely related to daily life. Among them, Lotte Card, Modern House, NEPA, and bhc are mentioned as potential assets for sale.

Lotte Card, acquired by MBK five years ago, has been seeking a new owner since the year before last. The sale has been delayed due to sluggish card industry conditions caused by high interest rates and reduced consumer spending. Lotte Card was put up for sale in 2019 following Lotte Group's transition to a holding company structure and was sold to a consortium of MBK and Woori Bank the same year. At that time, MBK valued Lotte Card at about 1.8 trillion KRW. Although Lotte Card's net profit was only 71.4 billion KRW (consolidated basis) at acquisition, it recorded a record high of 278 billion KRW at the end of 2022. With strong performance, MBK began actively pursuing the sale of Lotte Card in 2022, three years after acquisition. However, the sale failed to attract expected interest. The asking price was reportedly about 3 trillion KRW. Subsequently, MBK shifted to a strategy of selling assets separately. Last year, it sold 100% of the shares of Rokamobility, a transportation card business subsidiary owned by Lotte Card, to Australian private equity firm Macquarie Asset Management for 415 billion KRW. Having slimmed down, Lotte Card is currently preparing for resale. Last year, it lowered its dividend payout ratio compared to the previous year, marking the fourth consecutive year of dividend payout reduction, and has been focusing on strengthening financial stability in preparation for resale. It has also reduced real estate project financing (PF) balances and enhanced internal controls.

bhc Group is also considered a prime asset in MBK's portfolio. MBK is the largest shareholder of Global Gourmet Services, bhc's holding company. MBK started with a convertible bond (CB) investment in 2018 and made a second investment in 2020. This is a minority stake investment, holding less than 50%, not a management acquisition. Speculation about share sales arose in November last year when Chairman Park Hyun-jong was abruptly dismissed and MBK Vice President Cha Young-soo took his place. bhc has faced increased risks over the past decade due to various lawsuits with BBQ. Among MBK's invested companies, bhc has had particularly many controversies. Conflicts arose with franchisee operators running chicken franchises. In 2022, bhc raised the price of sunflower oil, an essential item for chicken franchise stores, by 61% at once, causing conflicts with franchisees and becoming an issue at a National Assembly audit. Last year, bhc raised consumer prices while increasing raw material costs charged to franchisees by an average of 8.8%, sparking controversy. However, from an investment perspective, the company's value is highly regarded. bhc's corporate value soared from 680 billion KRW in 2018 to the 3 trillion KRW range currently. bhc Group surpassed 1 trillion KRW in consolidated sales the year before last. Its sales grew about 13 times in nine years from 80 billion KRW in 2013. The growth of bhc Group was driven by bhc and Outback Steakhouse. bhc was the first in the chicken industry to exceed 500 billion KRW in sales. It is unusual in the chicken industry to record an operating profit margin in the 30% range. bhc has 1,770 franchise stores (according to the 2023 Fair Trade Commission announcement), ranking second after BBQ's 2,002 stores.

Home Living Leader 'Modern House' Valued up to 2 Trillion KRW... NEPA Back on Growth Track

Modern House is also the leading domestic company in the home living sector held by MBK. Industry insiders estimate its sale price to be around 1 trillion KRW, possibly up to 2 trillion KRW. Modern House deals in interior accessories, kitchenware, bedding, furniture, and competes with Shinsegae Group's JAJU and Muji, which entered Korea through collaboration with Lotte. MBK acquired Modern House from E-Land Retail, which was facing a liquidity crisis, for about 686 billion KRW in 2017. At acquisition, Modern House's sales were 336.4 billion KRW in 2018 but it was operating at a loss. According to the latest business report for 2022, sales recovered to 389.7 billion KRW and operating profit to about 31.5 billion KRW. From 2020 to 2023, Modern House's average annual sales growth rate was 6%. Sales, which hovered in the high 300 billion KRW range until 2022, exceeded 410 billion KRW in 2023. Over the past four years since 2020, the compound annual growth rate of gross profit was 8.5%, EBITDA grew by 12.8% annually, and operating profit grew by 32% annually. However, the home living market has recently been sluggish. The real estate market downturn, global raw material supply instability, and increased outdoor activities have reduced demand for home living products. Online sales channels such as Today’s House have increased, intensifying market competition. Efforts to strengthen competitiveness continue steadily. Modern House redesigns all products in the home and living category every three years from scratch. Currently, 74 product planners with an average of 12.5 years of experience are developing new products with various seasonal concepts.

NEPA, an outdoor brand whose major shareholder position MBK has held for 10 years since acquisition in 2013, is also mentioned as a potential asset for sale. MBK acquired 94.2% of NEPA shares for 997 billion KRW, financing 480 billion KRW through acquisition loans and the remainder through its second blind fund established in 2008. At acquisition, NEPA's operating profit was about 100 billion KRW. However, the domestic outdoor market peaked at 7 trillion KRW in 2014 and then declined due to economic downturn and decreased demand. NEPA's performance also deteriorated from 2015, with operating profit dropping to 6.7 billion KRW in 2020. But after the COVID-19 pandemic, demand for outdoor brands increased again, and operating profit grew to 7.8 billion KRW in 2020, 17.6 billion KRW in 2021, and 26.4 billion KRW in 2022. The improvement in NEPA's profitability has opened the door for MBK's exit. NEPA actively conducts advertising campaigns, appointing models such as Lee Junho and Ahn Yujin.