Korea’s M&A scene in a standstill as financing rate nears double digits

[Provided by Medit]

The merger and acquisition market in South Korea has entered a wintry season as funds dried up amid rapid rises in borrowing rates.

According to multiple sources from the investment bank industry on Thursday, the consortium of The Carlye Group backed by Korean conglomerate GS Group of Korea has lost the preferential status to buy Medit Corp., leading dental scanner developer, as it failed to narrow difference in the terms with the seller during the exclusive negotiation period,.

The group in October had beat out other global funds by reportedly offering 3 trillion won ($2.2 billion) for whole ownership in the global No. 2 dental scanner maker.

“GS-Carlyle Group has lost the exclusive right as it failed to come to an agreement during the negotiation period, said an unnamed official from the IB industry.

The deal led by Citigroup Global Markets will be discussed with the Carlye consortium while leaving doors from other candidates like Kohlberg Kravis Roberts (KKR) open, according to sources.

The sale of Korean credit card issuer Lotte Card with a value of around 3 trillion won is likely to be pushed back to next year.

Multiple bidders including Hana Financial participated in the preliminary bid in September for the stake offered by MBK Partners. The private equity fund had initially planned to receive final bids before the year end.

The multibillion-dollar M&A market has come to a pause amid liquidity strains due to troubles in the debt market swamped by securities due year-end amid wary sentiment following default declare on a local government-backed debt related to Legoland Korea.

According to Maeil Business Newspaper analysis, M&A deals in the first 9 months of this year amounted to 26.27 trillion won, only 35 percent of 71.5 trillion won for full 2022/

“Offerings are being put off to the second half of next year when interest rates are expected to come down,” said an unnamed official from a large private equity fund.

The sale of smartphone film manufacturer NexFlex went back to square one after a consortium of Well to Sea Investment and Woori Private Equity that was picked as preferred bidder failed to raise acquisition funds.

NexFlex was first in talks with JCGI for the sale but the newborn private equity firm was not able to raise funds on time.

The sale of 4 trillion won worth International Finance Center (IFC) in Yeouido, Seoul, also fell through after Mirae Asset Global Investments could not pool funding for the acquisition. The investment firm had planned to set up a private real estate investment trust (REIT) to raise funds. It proposed another fund raising scheme to Brookfield Asset Management, but the owner rejected the offer. The two are in a dispute settlement suit with the Singapore International Arbitration Center over deposit return.

Global private equity firm Affinity Equity Partners’ sale of Burger King Korea and Japan launched in January has failed to draw buyers. There is also little progress in the sale of KDB Life Insurance and Hanon Systems.

Several candidates are conducting due diligence on MG Non-Life Insurance, but whether they would see through a deal is uncertain.

Major institutional investors such as pension funds and mutual aid associations are keeping their investment conservative to protect their capital during volatile period at a time when financing rates have doubled from the beginning of the year. Their withdrawal has splashed cold waters onto the M&A scene.

The financing rate that was at 5 percent range in the first half of this year has surged to 8 to 9 percent recently.

The cost could go up to double digits as the base rate is set to go higher.

Acquisition financing rate is normally calculated by adding the spread evaluated from the owners’ credit rating to three-month certificate of deposit (CD) yield or bank note yield. The CD rate has reached 3.97 percent as of Nov. 9, the highest level since 2009.

The rates are in fact said to be higher than crisis periods.

The rate charged on the loan to back Vogo Fund purchase of LG Siltron in 2007 was set at 7 percent range. MBK Partners also raised funds to buy C&M at a 7 percent. The rate on the loan levied on global fund KKR for its buyout of Oriental Brewery in 2009 was in 8 percent range.