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Global funds drive Asian retail M&A wave

Global funds drive Asian retail M&A wave
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First Published: Wed, Mar 07 2007. 04 23 PM IST
Updated: Wed, Mar 07 2007. 04 23 PM IST
SEOUL/TOKYO: Global funds are chasing Asian consumer plays -- from food and beer makers to store chains -- looking to capitalise on an expected wave of consolidation in a crowded industry.
Shunned because of lacklustre growth, retailers are in vogue in Asia with high-profile funds such as Kohlberg Kravis Roberts drawn to firms’ strong cash flows, significant non-core assets such as real estate and quick turnaround potential.
Recent market falls make undervalued retail assets even cheaper, with shares in potential targets Nippon Flour Mills and Oroton Group Ltd. both shedding 6 % since 27 February.
Japanese brewer Sapporo Holdings , Australian retailer Coles Group and South Korean tobacco firm KT&G are a few on a long list of firms targeted by private equity or hedge funds, and the market expects more bids.
Top Australian drinks firm Foster’s Group , upmarket retailer David Jones , Nippon Flour and meat processor Itoham Foods could be next on the menu, analysts say.
“Private equity-led retail buyouts will be even more furious this year,” said Sung Bo-kyung, chairman of M&A adviser Frontier Group in Seoul.
“Foreign funds will be racing to snap up retail assets in anticipation they could turn around and resell them with fat returns as retailers turn to acquisitions to fight competition.”
Financial investor-led buyouts accounted for 12 % of the $17 billion retail M&A volume for Asia Pacific in 2006, up from just 3 % in 2005, according to data firm Dealogic.
Retailers in China and India, dominated by small family-owned stores, should also see more M&A activity as foreign firms vie for a slice of fast growth and as competition makes the case for bigger scale.
India’s fragmented $300 billion retail industry is forecast to more than double by 2015, while China’s $500 billion market is seen growing at 10 % a year.
“Valuations will be high given the heightened interest in the sector,” said Unmesh Sharma at Macquarie Research in India. “Any firm with more than 20 stores will make an attractive target.”
In China, foreign funds are expected to zoom in on fast-food and other restaurant chains as well as luxury products makers, betting on rising incomes, according to Tony Tsang at M&A adviser Ernst & Young in Shanghai.
Hot Retail
US investor Warren Lichtenstein’s Steel Partners is an active fund in Asia’s retail sector, forcing KT&G to hike dividends with a $10 billion bid last year and making headlines with its takeover attempts for Sapporo and Japanese noodle maker Myojo Foods Co. Ltd.
Steel Partners has invested $2.5 billion in a stake of more than 5 % in 28 Japanese firms, from noodle maker Nissin Food Products to confectioner Ezaki Glico .
Retailers are also the most favoured targets in Australia, with Coles reviewing bids from three consortia, including one comprising KKR and Carlyle Group .
Analysts say retailers are attractive as they can turn around quickly with a few tricks in merchandising due to fixed operating costs. Lower investment and marketing burdens compared to tech or auto firms mean they can return more cash to shareholders.
In South Korea, U.S. investment fund Lazard Ltd. is trying to influence management of Crown Confectionery after buying a 5.7 % stake in November, while private equity MBK Partners is in talks to buy home shopping firm Nongsusan in a deal that media valued at $900 million.
Goldman Sachs analyst Katsunori Tanaka in Tokyo says strong branding, such as Nissin, makes Japanese food makers attractive.
“Growth should not be the only way to measure the value of companies with solid cash cows,” Tanaka said.
Nissin’s market value may be less than 2 % of Toyota Motor Co. but it produced 235.6 yen per share in 2005/06 post-dividend against a loss per share at Toyota.
With fierce competition in fragmented markets spurring consolidation, funds are also eyeing returns by reselling assets to industry players.
Steel Partners more than doubled its investment in takeover target Myojo Foods when it sold its stake to white knight bidder Nissin. The fund also said it could sell its stake in Sapporo as Japanese media speculated Asahi Breweries or Kirin Brewery may launch white knight bids.
Hostile takeovers face tough regulatory hurdles, but investors look set to win either way, reaping handsome profits from share price gains in target firms.
“Retail firms have sizeable real estate and production assets that are often not fully reflected in stock prices,” said Shin Won-jung, who heads Samsung Securities’ M&A team. “So their shares are bound to shoot up furiously in the event of a bid.”
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First Published: Wed, Mar 07 2007. 04 23 PM IST
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