[M&A Insights] 'Sale Rumors' Classys... The Basis of Its Trillion-Won Valuation

Despite Classys Denial... "Bain Capital Expected to Divest Stake"
About 60% Stake, Sale Price Estimated at 2-3 Trillion Won
Private Equity Firms Continue Interest in Medical Beauty Company M&A

"So that everyone can pursue healthy and natural beauty...." This was the company goal revealed by Baek Seung-han, CEO of Classys, last June. It was said while announcing the plan for the 'Iruda absorption merger.' In the context of 'K-Beauty' becoming a global trend, the news of the merger between two leading companies in the skin beauty medical device market attracted industry attention.

However, according to recent reports from the financial investment (IB) industry, Classys, which completed the merger process last month, is expected to be put up for sale as a merger and acquisition (M&A) asset. The largest shareholder, global private equity firm (PE) Bain Capital, is said to be planning to sell about 60% of Classys' shares, with a valuation rumored to be around 2 to 3 trillion KRW. If the sale is successfully completed at this scale, it will be the largest M&A in K-Beauty history.

On the 2nd, M&A Alssul Sinjab will examine the basis of Classys' valuation and the acquisition battles of major private equity firms for medical and beauty device companies.

Operating profit margin in the 50% range... continuous expansion in overseas markets

Classys was established in January 2007 as a specialized company in 'skin beauty' medical devices and was listed on KOSDAQ at the end of 2017, about 11 years later. Its most famous product is the high-intensity focused ultrasound (HIFU) device 'Shurink,' launched in 2015. It is used in major large hospitals and regional skin beauty specialist clinics. In 2022, they introduced the non-invasive monopolar radiofrequency (RF) device Voluumer.

They have also proven competitiveness overseas. As of last year, the cumulative sales volume of HIFU devices such as Shurink reached about 15,000 units, with overseas sales being twice the domestic sales. In 2018, the domestic and export proportions were equal. Since launching in Brazil in 2018, they have expanded to countries including Thailand, Central Asia, Japan, Hong Kong, Australia, Taiwan, Indonesia, Spain, and Mexico. Voluumer is on the verge of full-scale export following FDA approval in the United States in April.

Noteworthy is the high 'operating profit margin.' Since 2018's 37%, Classys has consistently shown an operating profit margin around 50% over the past five years. This is a record hard to find in the same industry. The secret lies in the high growth of consumables sales due to the cumulative increase in device sales. If Classys' new device sales are '100,' related consumables sales amount to about '30' the following year. This structure leads to steady repurchases thereafter. Researcher Joe Eun-ae from LS Securities said, "Sales increased from 47.5 billion KRW in 2018 to about 180 billion KRW last year, and operating profit rose from 17.5 billion KRW to about 90 billion KRW during this period," adding, "Sales of highly profitable consumables grew rapidly from 15.7 billion KRW (37% of sales) to 80 billion KRW (45% of sales)."

Thanks to its own growth and the recent popularity of K-Beauty, Classys' market capitalization has soared to the 3 trillion KRW range. Bain Capital holds about 60% of Classys' shares through a special purpose company (SPC). They invested 670 billion KRW at the time of acquisition in 2022, but the share value now translates to about 2 trillion KRW based on recent stock prices. The remaining shares are held by founder Jeong Seong-jae at 10% and minority shareholders at 24%.

Despite denial of Classys sale, market expectations rise... Private equity firms "drooling over medical beauty company M&A"

However, the news that the company might be sold within two years caused a negative reaction in the stock market. From the 21st of last month over five trading days, the closing price fell about 20% from 61,452 KRW to 48,200 KRW. Researcher Kim Ji-eun from DB Financial Investment pointed out, "The biggest cause of the short-term decline is Bain Capital's somewhat early sale," adding, "There have been judgments that Classys' growth has reached its peak."

Although Classys has stated that the reports related to the sale are "groundless," many in the industry believe that an actual sale attempt is underway. Researcher Shin Min-su from Kiwoom Securities emphasized, "The M&A wave in the medical device industry has been flowing since last year, and mainly skin beauty-related companies have been mentioned as sale candidates," adding, "In conclusion, there has never been a case where smoke comes out without fire. Even if not a sale, it is highly likely that due diligence for fund execution contracts is underway."

Since last year, cases such as ▲Han & Company’s public tender offer for Lutronic followed by delisting, ▲Classys' investment in Iruda shares, this year ▲Archimedes Group’s public tender offer for J-Systems Medical followed by delisting, ▲CVC Capital’s investment in Pharma Research shares, ▲Dongwha Pharmaceutical and Mirae Asset Venture PE’s acquisition of Hironic, etc., share the commonality that the companies initially denied the M&A news.

Bain Capital is reportedly seeking a price in the 3 trillion KRW range including a control premium. Researcher Kim Ji-eun said, "Bain Capital's reason for sale is understandable," adding, "They quickly achieved a high internal rate of return (IRR), and Classys is leading the growth of the mid-to-low price beauty electronic device (EBD) market. The fact that FDA approval takes two years should also be considered."

Potential bidders include private equity firms interested in the domestic medical device sector or those with experience acquiring skin clinic-related companies in the U.S., overseas companies expanding their business, and domestic large conglomerate affiliates.

Researcher Shin Min-su said, "Ostem Implant, Lutronic, J-Systems Medical, and Hironic are all cases where private equity firms' enthusiasm led to actual results," adding, "Considering Classys' market capitalization, private equity firms likely have both the financial capacity and industry interest." He also added, "Recently, many private equity firms have been acquiring rapidly growing U.S. skin clinic chains. Classys is actively entering the U.S. market, having obtained Voluumer FDA approval faster than expected," and "Private equity firms that acquire local skin clinics to create synergies in equipment supply are also candidates."