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June 2006 Issue
In Brief

Changed Dynamics in S. Korea reflect the country’s earnest search for its future. An insight into the transformed S. Korea Feature
Indian Investors are Assuming a Role in the global private equity divestment scene as they have emerged as willing buyers Analysis
Retail Businesses are Cashing Out as Australian investors aim to extract further value from brand names Buyouts
China’s Public Pension Funds Warms to private equity opportunities Institutional Corner
Two Players Dominate China’s private equity market, with unrivalled records in both investment and divestment Greater China
Asia Netcom Banks on Its Future with a new group of financial investors Greater China – Buyouts
China’s Largest Paper Deal goes to CVC Asia Pacific Greater China – Growth/Expansion
Warburg Pincus & Datang conclude a 24-month partnership Greater China – Divestment
Funds for India Surge Despite Plunge of domestic stock market India Corner – Funds
IPO is the Slogan for Indian Cos. as a long list waits to raise funds from the public India Corner – Divestments
Japanese Investors Venture Abroad, looking at Australia and Greater China Japan Corner
Content

Pan Asia
News
Funds
Buyouts

Opinions

Institutional Corner

Greater China
News
Land of Deals
GSR Ventures Partners with Mayfield to Raise US$72 million
Funds
Buyouts
Growth/Expansion
Technology
Divestments

India Corner
News
Funds
Buyouts
Growth/Expansion
Technology
Divestments

Japan Corner
News
Buyouts
Growth/Expansion

Summary
Index & Exchange Rates

Seoul Searching

It is the most publicised, protracted and pondered divestment in Asian private equity. Lone Star’s sale of its holdings in Korea Exchange Bank (‘KEB’) has attracted unprecedented global press coverage. While Kookmin Bank has pledged its commitment to acquire a 64.62% stake in KEB for 6.33 trillion won (US$6.7 billion), Lone Star will not be able to pocket the monetary gains until the South Korean government has completed its probe of Lone Star. Despite repeated reassurances from the South Korean government that the country continues to welcome foreign investors, the global private equity community is worried by the increasingly inhospitable disposition that Seoul is displaying to foreign investors.

A recent survey conducted by Asia Private Equity Review with a broad spectrum of firms that have participated in either buyout or growth/expansion capital situations in South Korea conveyed a sobering message to Seoul. Together, these firms have committed no less than US$2 billion in the country. Over 88% of the respondents are concerned with the new tax regulation and more than three-quarters of them believed the KEB exit saga could be a repeated affair when the time comes to withdraw capital from the country. Overall, the level of concern over Lone Star’s plight in South Korea is extremely high, at 90%.

The survey agrees with the deal consummation trend in South Korea. Since 2004, the number of deals completed by foreign investors in South Korea has been on the decline, with only two known to have been completed in the first five months of the year. On the macro scene, foreign direct investment has tumbled from US$9.2 billion in 2004 to US$4.3 billion in 2005.

It has been eight years since Indonesia, Thailand and South Korea turned to the International Monetary Fund (‘IMF’) as the saviour for their then crumbling financial fate. Until recently, Indonesia has been plagued by political instability that impeded its ability to implement significant economic reforms. Although Thailand has made remarkable progress in its economy recovery, it is South Korea that has become the role model for the IMF’s rescue mission.

After having implemented extensive change with unfaltering courage and enduring painful structural overhauls, South Korea is ready for a new era. The government is promoting a private equity culture with active participation from the country’s institutional investors. It is also making earnest steps to ensure sound fundamentals in its financial industry in order to compete on the stage. Yet it is a tenuous time for Seoul, as it sheds undesired past memories, and searches to define its future after a period of transformation.

Revolutionary Steps

Following a list of profitable sales by foreign private equity houses, especially the sales of KorAm Bank and Korea First Bank, Seoul woke up to the merits of private equity. The government was eager to have such successes earned by its own financial community.

In October 2004, after more than 15 years of advocating venture capital, South Korea took pragmatic steps to broaden the country’s direct equity investment activities to embrace private equity. It announced a set of rules on private equity funds or...

Analysis

Beyond Taj Mahal

Indian companies are assuming a role on the global private equity divestment scene

For more than half a century, the notion of going global has been an alien subject to Indian corporations. Since 2000, when Tata Group mobilised US$430.4 million to take over the UK-based Tetley, the world’s second largest tea company, Indian establishments have been diligently following Tata Group’s footsteps in making their imprints on the global mergers and acquisitions scene. In the first four months of the year, there were 47 announced overseas acquisitions by Indian companies with an aggregate value of US$2.2 billion. This is 60% of the US$3.7 billion recorded for 2005, and has exceeded that for the entire 2004, which recorded US$1.53 billion (fig.8). Unbeknownst to Indian companies, as they fortify their assets through a global acquisition agenda, they have increasingly assumed a key role on the global private equity market stage, as they have become one of the most willing trade buyers of private equity assets managed by fund management firms outside of India.

The Launch Platform

The first time that an Indian behemoth made its mark in the divestment scene of an Asian private equity portfolio company was in August 2004. India’s number two steel maker, Tata Iron & Steel Company Ltd. (‘Tata Steel’) had identified the Singapore-based NatSteel as its target for its maiden overseas acquisition.

At the time when Tata Steel had its eye on NatSteel, the latter had just completed a new shareholder structure some 18 months previously when 98 Holdings paid S$770 million (US$437.5 million) in taking up 51.23% of the company. 98 Holdings enlisted two private equity investor groups, GEMS Ltd. and Standard Chartered Private Equity (‘consortium’) as its shareholders. It is understood the combined payment made by the consortium in this deal was in the vicinity of US$35 million.

In August 2004, Tata Steel made it known that the acquisition of the core assets of NatSteel would mean a “significant” step in its quest to enter the global playing field. In acquiring NatSteel’s mills, it would add an additional 2 million tonnes to its domestic capacity of 7.5 million tonnes.

To shareholders of NatSteel, Tata Steel’s offer was attractive and came at a time when the new shareholders of NatSteel were unable to lift the company’s profit margin, after having been in the driver’s seat for nearly 18 months. In the first half of 2004, NatSteel’s profit from operations declined by 3% to S$21.8 million.

In a cash payment that amounted to S$486.4 million, Tata Steel took over NatSteel’s principal source of income, the still mills in Singapore, China, Malaysia, Vietnam, the Philippines, Thailand and Australia. Together, these operations accounted for some 82% of NatSteel’s 2003 revenue, 47% of pretax profit and half of the net asset value. NatSteel’s shareholders were left with its non-steel businesses, which included petro-chemicals, engineering and construction products, as well as property and investment businesses.

For private equity investors, the investment in NatSteel has been a rewarding venture. In the first year since taking over the boardroom of NatSteel, the company paid a special dividend of S$0.55 per share. A portion of the net proceeds coming from Tata Steel, after a debt payment of approximately S$20 million, were distributed to NatSteel shareholders.

According to GEMS, it has tripled its invested capital in NatSteel, recording an impressive internal rate of return of 50%. It would be questionable whether such an impressive return could be achieved without Tata Steel’s S$486.4 million cash payment.

Going Global

In the first five months of the year, Indian companies further enhanced their profile in the global private equity scene as they pursued their soaring ambitions, especially in the life sciences sector. In 2004, the aggregate value of international takeovers by Indian pharmaceuticals stood at US$139 million, which then jumped to US$341 million in 2005. But in the first four months of this year, the figure has skyrocketed to US$904 million. In the quest to overcome patent barriers at home, India’s leading pharmaceutical companies are aggressive buyers of assets in some of the largest and promising markets in Europe.

In early March, Dr Reddy’s Laboratories (‘Dr Reddy’s’), an icon in India’s pharmaceutical industry, acquired the German-based betapharm Arzneimittel. This fourth largest generics company in Germany was in fact backed by the UK-based 3i Group, which committed 300 million euros (US$356.2 million) to a management buyout of the drug maker. In the same year, bethapharm Arzneimittel reported a revenue of 161 million euros, a significant jump compared to 50 million euros posted in 1999.

When Dr Reddy’s sealed the deal by paying 489 million euros to assume full control of betapharm Arzneimittel, it was the largest overseas transaction by an Indian pharmaceutical company. It was also the second acquisition by Dr Reddy’s in a matter of six months. Earlier, it committed US$59 million to buying Roche Holding AG’s drug ingredient-making unit in Mexico.

The acquisition of bethapharm Aezneimittel, which has already captured a market share of 3.5%, will give Dr Reddy’s a foothold in Germany, Europe’s biggest generics market.

Interestingly, private equity capital played a prior role in Dr. Reddy’s before it embarked on its global acquisition trail. In March 2005, ICICI Venture Funds Management and Temasek Holdings had jointly injected a total of US$56 million into Dr Reddy’s.

At the time when Dr Reddy’s was consummating its takeover of bethapharm Aezneimittel, another Indian pharmaceutical company, Ranbaxy Laboratories Ltd. (‘Ranbaxy’) was also engaged in the acquisition of a drug making company. The arch rival to Dr Reddy’s, Ranbaxy acquired the Romanian-based Terapia SA, the third largest pharmaceutical company in the country.

Terapia was controlled by private equity interests. In August 2003, the Boston-based Advent International took up a 90.7% equity stake in Terapia for US$44 million in Romania’s first public-to-private leveraged buyout. Ranbaxy paid US$324 million in assuming virtually full control of Terapia. The amount valued Terapia at 11.6 times the company’s earning before income, tax, depreciation and amortization for the period just 12 months prior to the acquisition.

For Ranbaxy, the acquisition of Terapia fits into its pan-Europe charter. Romania is the fastest growing pharmaceutical market in Central and Eastern Europe. Since 2002, it has been enjoying an annual growth of 34%. For Advent International, Terapia is one of its most celebrated investments, thanks to a willing buyer from India.

Like Dr Reddy’s, it was not the first time that Ranbaxy encountered private equity players. In December 2005, Ranbaxy sold its fine chemical and animal health and diagnostic businesses agriculture to ICICI Venture Funds Management for 480 million rupees (US$11 million).

Outside the pharmaceutical area, Indian companies are eagerly prowling for assets that would assist with their overall corporate development.

Suzlon Energy, the world’s sixth largest wind turbine maker, which owed its growth and development to Citigroup Venture Capital International and subsequently ChrysCapital, made its first international acquisition in April this year. The seller was the direct investment arm of Allianz Group, Allianz Capital Partners GmbH.

In May 2004, Allianz Capital Partners acquired the Belgian-based Hansen Transmissions International NV (‘Hansen’) from Invensys for 132 million euros. Suzlon Energy brought Hansen to come under its corporate umbrella, placing an enterprise value of 465 million euros or US$564.23 million on this world’s second largest producer of wind turbine gear boxes. It was the largest undertaking outside of India by a domestic company since Dr Reddy’s acquisition of bethapharm Aezneimittel. Significantly, the payment has handsomely rewarded Allianz Capital Partners for its two years investment efforts, thanks to the Indian buyer.

Most recently, India’s United Breweries Group (‘UB Group’), the world’s third largest spirits producer, came close to being another Indian corporate giant that would acquire assets from private equity investors. In the bid for French champagne Taittinger, UB Group offered US$600 million, a price that stunned private equity titans CVC Capital Partners and Bulter Capital Partners. Last year, Starwood Capital Group LLC took over Group Taittinger and Société du Louvre, in the largest buyout deal in Europe for 2005 with a value of 2.6 billion euros. Although Starwood Capital has chosen to sell Taittinger to Credit Agricole du Nord-East for about 660 million euros, this bid by UB Group is nonetheless an indication of Indian corporations’ readiness to scout for assets, even facing some of the most formidable international financiers.

Observation

During the past fleeting 12 years since India shed its cocoon economy structure, its foreign reserves have reached a healthy US$163 billion, an impressive 77% increase from the US$92.3 billion recorded in September 2003. In the fiscal year ending March 2006, India recorded an economic growth of 8.4%, surpassing the original forecast of 8.1%.

At home, Indian corporations are equally enthusiastic in buying private equity-backed assets. Since 2004, 89 divestments were known to have taken place, with trade sales being the most- favoured exit route. While foreign investors accounted for nearly 60% of the trade buyers, local corporations took up a substantial 33%.

India was once simply the recipient of private equity funds, especially from multilateral organisations. Now the country’s enterprises have fast become the buyers of global private equity assets. No Asian market has been able to embrace private equity in such an encompassing fashion as India.

Greater China News

Land of Deals

The island of Taiwan has emerged as one of direct equity investors’ most favoured destinations, especially for Japanese investors. The Development Bank of Japan is one of the financial institutions known to be planning to deploy capital to Grace T.H.W. Group, a company owned by the son of the chairman of Formosa Plastic. According to market sources, the investment amount would be between US$50 million to US$70 million and Grace T.H.W. Group will be issuing convertible bonds to raise the required capital.

Grace T.H.W. Group is an electronics company and currently has a capital base of US$227 million.

Development Bank of Japan’s movement came only weeks after Shinsei Bank committed NT$12 billion (US$381 million) to Taiwan’s Jih Sun Financial Holdings in taking up a 33.65% equity stake. There were also suggestions that Softbank is planning to acquire shares of High Tech Computer Corp., a leader in designing and manufacturing world-class mobile computing and communication solutions.

GSR Ventures Partners with Mayfield to Raise US$72 million

GSR Ventures, which has formed a strategic alliance with Silicon Valley’s Mayfield, raised US$72 million for its maiden fund. The fund raising achievement is in line with the original expectation that targetted US$50 million to US$75 million.

GSR Ventures, one of the youngest venture capital funds in China, has offices in both Beijing as well as Menlo Park, where Mayfield is located. It will source deals for Mayfield. Mr Kevin Fong of Mayfield serves as an advisor to the firm.

GSR Ventures was formed by a group of aspiring entrepreneurs who have outstanding track records in both internet and telecommunication sectors. According to sources, it has so far invested in eight companies, including Shenzhen State Micro Technology Co. Ltd., a company developing chips for cable television settop boxes, Mobert, a wireless chip company in Shanghai, and Heiyou and Baihe.com, both of which are social network portals.