[PE Portfolio] ② 'Bolt-on Expert' Han&Co, Will It Bear Fruit This Year?

Recent Acquisition of Remaining Shares in Ssangyong C&E... 'Exit Opening'
SK Shipping and Hanon Systems, Which Increased Their Valuation, Also Undergoing Sale Process
Interest in Whether 'Bolt-On Strategy' Will Work for Namyang Dairy Products

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 acquire management rights of undervalued companies, enhance their value, and then sell them in the mergers and acquisitions (M&A) market to generate profits. They sometimes take on companies with high future value but deteriorated financial health, and also attempt hostile M&As on companies with weakened governance due to controlling shareholder risks. As the history of the PEF industry has accumulated, the number of portfolio companies and employees held by Korea's mega PEFs have far surpassed those of many large corporate groups. Beyond acting as 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 2010, Hahn & Company (Hahn & Co.) is a domestic private equity investment firm. Hahn & Co. is a representative PEF operator dedicated to aligning the interests of companies and funds and practicing long-term responsible investment. After acquiring management rights of leading domestic companies, it focuses on actively investing in companies to improve their corporate structure and strengthen their fundamentals. Currently, the total assets of companies operated by Hahn & Co. amount to approximately KRW 34 trillion, with total sales exceeding KRW 20 trillion. The workforce also reaches about 30,000 employees.

Recently, Hahn & Co. successfully completed a tender offer to acquire the remaining shares of Ssangyong C&E. This was a preliminary step toward delisting. The investment banking (IB) industry anticipates that Hahn & Co. will actively pursue an exit (investment recovery) after Ssangyong C&E’s delisting. It is analyzed that M&A will be conducted to recover investment funds following the delisting.

Exit Strategy Focus on Ssangyong C&E Valued at KRW 3.5 Trillion

Hahn & Co. acquired a partial stake in Ssangyong C&E in 2012 and then formed a fund in 2016 to acquire 46.1% of shares and management rights. Subsequently, the shareholding ratio increased to 79.9%, with a total investment of KRW 1.4375 trillion. Including the tender offer, the total investment in Ssangyong C&E amounts to about KRW 1.8 trillion. The shareholding ratio has increased to 93.03%. The total dividends Hahn & Co. has received from Ssangyong C&E to date amount to KRW 1.1686 trillion, recovering more than half of the investment through dividends alone.

Generally, when a PEF raises its shareholding ratio through a tender offer and proceeds with delisting, it is interpreted as a move toward exit. This allows the company to escape shareholder value enhancement and disclosure obligations as a listed company and facilitates easier corporate restructuring. It also frees the company from the government-led 'Corporate Value-Up Program.' In fact, Hahn & Co. is pursuing a similar exit strategy with medical device company Lutronic. After securing 100% of Lutronic’s shares through a tender offer in June last year, it delisted the company and subsequently recovered KRW 145 billion through a capital reduction.

Ssangyong C&E is the industry leader in the domestic cement market with a 25% market share. Last year, its sales reached KRW 1.8694 trillion, with an operating profit of KRW 184.1 billion. Hahn & Co. consolidated its leading position by incorporating existing portfolio companies Daehan Cement, Hannam Cement, and Daehan Slag as subsidiaries of Ssangyong C&E. It also focused on 'value-up' efforts. Non-cement divisions such as Ssangyong Material, Ssangyong Information & Communications, and Ssangyong Enertech, which were affiliates, were decisively divested. In 2021, the company declared itself a 'comprehensive environmental company.' It was the first in the industry to establish an ESG (Environmental, Social, Governance) Management Committee and pledged to invest KRW 800 billion in environmental improvements by 2030, accelerating structural reform.

As of the closing price on the 12th, Ssangyong C&E’s market capitalization was KRW 3.4908 trillion. Considering the market cap, even an immediate sale could yield investment gains exceeding KRW 1 trillion. However, the high 'price tag' is a burden that is difficult for the industry to bear. Researcher Park Sera of Shin Young Securities said, "The sale price of the controlling shareholder’s stake would be a big deal in the KRW 3 trillion range, and there is no suitable buyer. It is highly likely that an exit strategy will be prepared after implementing a 'value-up' strategy through restructuring rather than an immediate share sale after delisting." Researcher Kim Giryong of Mirae Asset Securities said, "The company will focus on enhancing corporate value through scenarios such as company sales and business unit splits."

Focused Investment in Related Industries... 'Bolt-On Strategy'

Hahn & Co.’s portfolio notably includes many 'smokestack industries.' It has solidified its position by focusing investments on manufacturing sectors such as cement, automotive parts, and shipping. This reflects CEO Han Sang-won’s philosophy that manufacturing, the backbone of industrialization, must build strength and possess top-tier technology. A distinctive feature is the use of the 'bolt-on' strategy to increase corporate value. Bolt-on means joining bolt A and B. In the financial investment industry, it refers to acquiring companies in similar industries to enhance synergy and simultaneously increase the industry's value.

In the cement business, Hahn & Co. applied the bolt-on strategy through Ssangyong C&E, and a similar approach was taken in the shipping industry through SK Shipping and H-Line Shipping. H-Line Shipping is a dry bulk shipping company, while SK Shipping operates oil tankers. Hahn & Co. established H-Line Shipping by acquiring dedicated ship businesses from Hanjin Shipping and Hyundai Merchant Marine. In 2014, it acquired the bulk shipping division from Hanjin Shipping, which was facing a liquidity crisis, for about KRW 550 billion, and two years later, in 2016, it acquired Hyundai Merchant Marine’s bulk dedicated ship division for KRW 120 billion. Later, in 2018, it acquired SK Shipping for KRW 1.5 trillion.

The bolt-on strategy was successful. SK Shipping, acquired by Hahn & Co., increased its operating profit more than fivefold in four years, growing from KRW 73.3 billion in 2018 to KRW 372.3 billion last year. During the same period, H-Line Shipping’s operating profit nearly doubled from KRW 187.7 billion to KRW 326.3 billion. However, recent setbacks such as the failed sale of HMM and the shipping industry downturn have made exit challenging. Hahn & Co., which has been pursuing the sale of SK Shipping since last year, is considering options to sell the entire stake or parts of the business. Bloomberg assessed SK Shipping’s value at about KRW 13 trillion, including debt (approximately KRW 6 trillion). Excluding debt, the 'price tag' is around KRW 7 trillion. A successful sale would generate profits worth several trillion won.

Hanon Systems and Namyang Dairy Facing Challenges

Automotive parts company Hanon Systems is also a key portfolio company of Hahn & Co. In 2015, Hahn & Co. acquired a 50.5% stake for KRW 2.75 trillion. Hanon Systems expanded by acquiring the hydraulic control division of Magna, one of the world’s top three automotive parts companies, for KRW 1.4 trillion. However, due to reasons including its previously high valuation nearing KRW 10 trillion, the sale process has not progressed, making the exit difficult. As of the closing price on the 12th (KRW 6,020), the value of Hahn & Co.’s stake in Hanon Systems is KRW 2.249 trillion, about KRW 500 billion less than the acquisition price. However, since acquiring Hanon Systems, Hahn & Co. has received a total of KRW 673.1 billion in dividends, so it is still profitable. The top priority to accelerate the sale process is improving profitability and financial structure. Korea Credit Rating said, "Production of electric vehicles by major customers in Europe and North America has fallen below expectations, leading to fixed costs burden on production facilities and ultimately hindering profitability improvement. From 2024 onward, capital expenditures for North American facilities to mass-produce electric vehicle parts are expected to continue, and due to governance structure, it is difficult to reduce dividend size, so Hanon Systems is unlikely to improve its financial structure in the short term."

Namyang Dairy, newly acquired this year, is also facing challenges. After about three years of legal disputes with the owner family, Hahn & Co. acquired a 52.63% stake and secured management rights. The investment amount at the time of acquisition three years ago was KRW 310.7 billion. Namyang Dairy turned to losses with an operating loss of KRW 76.7 billion in 2020, continuing losses of KRW 77.9 billion in 2021 and KRW 86.8 billion in 2022. Although the loss narrowed last year, it still recorded an operating loss of KRW 54.8 billion. Negative factors such as 'gapjil' controversies and owner risks have accumulated, and the stock price has remained sluggish. As of the 12th, the price was KRW 583,000, still below the pre-COVID low of the 600,000 won range. Namyang Dairy plans to hold a shareholders’ meeting on the 29th to approve the appointment of four new directors from Hahn & Co., including Vice President Lee Dong-chun. Market expectations for Namyang Dairy’s 'value-up' through management normalization are growing. In the past, Hahn & Co. successfully applied the bolt-on strategy by acquiring Woongjin Foods in the same food industry, then acquiring Daeyoung Foods and Dongbu Farm Gaya, expanding Woongjin Foods’ size. It sold the company five years later for KRW 260 billion, more than double the acquisition price of KRW 115 billion.