[PE Now]"Time To Pay A Minority Shareholder Premium"...PEFs Struggle With Tender Offers

Bain Capital and Hahn & Company Struggle with Tender Offers

Minority Shareholders Unmoved Even at the Same Price as the Controlling Shareholder

Comprehensive Share Swaps an Option, but Public Backlash Risk Is High

PEFs Likely to Turn to Private Companies or Alternative Exit Strategies

Private equity funds (PEFs) are facing difficulties with tender offers aimed at delisting their portfolio companies. Even when they offer the same price as the controlling shareholder, there have been a series of cases where minority shareholders are reluctant to participate. Some in the market are even saying that this is now a phase where investors must consider not a "control premium" for the majority shareholder, but a separate "minority shareholder premium."

According to the investment banking (IB) industry on February 9, Bain Capital is conducting a second tender offer to delist Eco Marketing, which is listed on KOSDAQ. Earlier, Bain Capital carried out a first tender offer at 16,000 won per share, the same price at which it acquired the controlling shareholder’s stake last month, but failed to secure the 95% stake required for a voluntary delisting. Including the largest shareholder’s stake, the shares obtained through the first tender offer, and the employee stock ownership association’s stake, the current stake secured stands at about 81%.

Hahn & Company is also experiencing firsthand how difficult it is to delist a company through a tender offer. In order to take SK D&D private, it conducted two rounds of tender offers starting at the end of last year, but the participation rate was only 40.2% in the first round and 5.0% in the second round. When the activist fund manager Align Partners carried out a tender offer for A+ Asset Advisors, even though it was not for the purpose of acquiring management control, the participation rate remained at 35.9%.

An official at a PEF said, "There are increasing cases where minority shareholders refuse to participate even when the same price as the controlling shareholder is offered," adding, "We are now in a situation where we actually have to consider adding a minority shareholder premium."

"Selling now means a loss"...Changed perception among minority shareholders

Industry participants point to a change in minority shareholders’ perception as the main reason behind the recent difficulties in tender offers. In the past, tender offers proceeded relatively smoothly as long as the same price as the controlling shareholder was offered, but recently there have been many cases where this logic no longer works.

Analysts say that among minority shareholders there is a growing perception that, given the possibility of restructuring or asset sales in the process of enhancing corporate value after delisting, "if we sell at the current price, we hand over all the upside from future value appreciation to the PEF." In addition, as shareholder activism platforms have become more active, a collective learning effect has emerged.

The fact that the domestic stock market has shown an unprecedented rally, with the KOSPI surpassing 5,300 for the first time in history, has also been a burden. From the perspective of minority shareholders, this has given them a motive to dream of further gains and to demand a higher premium.

In that respect, VIG Partners is cited as a case where a breakthrough was found quickly through timely preemptive action. In June last year, VIG Partners acquired Viol, a beauty and medical device company, and carried out a tender offer for a voluntary delisting. The stake secured from the controlling shareholder was only 34.76%, and the premium over the closing price at the time of signing the contract was merely 11.6%. Nevertheless, the company succeeded in delisting relatively smoothly by the end of last year.

An IB industry official said, "By preemptively offering the same price to ordinary shareholders as to the controlling shareholder, it showed an approach consistent with the broader trend of protecting minority shareholder rights centered on amendments to the Commercial Act, and this was met with a very positive response," adding, "Both the timing and the method aligned well."

The comprehensive share swap option...but public backlash risk

It is also possible to use a comprehensive share swap to delist a company, but there is a risk of negative public opinion. A comprehensive share swap is a system that unifies the ownership structure by exchanging shares between a parent company and its subsidiary. Typically, the parent company acquires the subsidiary’s shares and, in return, issues new shares of the parent company and grants them. Because it is a matter requiring a special resolution at a shareholders’ meeting, which needs approval from at least two-thirds of the voting rights, it can be implemented as long as a 67% stake is secured. However, since the voices of the remaining shareholders can be drowned out, public backlash may grow in light of the recent trend of amendments to the Commercial Act.

Accordingly, there is a growing view that tender offers will increasingly be perceived as a high-risk card rather than a basic strategy for PEFs. An IB industry official predicted, "As tender offers run into difficulties more frequently, PEFs are likely to focus more on alternative exit methods such as indirect recovery through dividends or recapitalizations (recaps), and on investments centered on unlisted companies."