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October 2009 Issue
In Brief

Investors Seek Value for Deals in the face of rising valuation as stock markets in the region rebound Feature
AIG’s Presence Continues in recent assets sold to new owners, after decades of private equity programmes in Asia Institutional Investors
Fund of Funds Houses brace winds of consolidation with restructuring in Allianz Group being the latest Institutional Corner – Analysis
Revival of Buyouts in Australia and Japan with investors displaying caution while banks are ready to finance deals General Section – Analysis
Salvage of a Cosmos Initia entails a labyrinth of plans that shows fiduciary responsibilities of its investors and cultural expectation in Japan’s business community General Section – Investments
Global Investors Leverage on their existing portfolio to access the Asia market in clinching deals General Section – Investments
Wind Energy Wins substantial capital from investors as evidenced by the recent acquisition of BP’s unit in India India Corner– Investments
Marquee Names in Aricent that is a powerful pledge of faith in the software company India Corner– Investments
Content

Institutional Corner
News
Institutional Investors
Analysis

General Section
News
Analysis
Appetite for ‘Control’
Investments
Divestments

India Corner
News
Investments
Divestments

Subscriber Weekly Summary
People on the Move
Summary
Stock Watch
Index & Exchange Rates

Deal Prices

I f there has been a period of low valuation on companies, then it has passed, at least in Asia. A year after the fall of Lehman Brothers, the price earnings ratios on Asia’s major stock markets have all surpassed those recorded a year ago. For the 12 months ending August, those listed on the three bourses in the Greater China region - Hong Kong, Shanghai and Shenzhen - enjoyed a rise of more than 27% , while those on the Bombay Stock Exchange, a 10% rise. Despite little room for private equity investors to manoeuvre in the face of rising valuation, savvy investors are demonstrating their skills as frugal buyers of assets.

A Logical Investment

Allcargo Global Logistics Ltd. (‘Allcargo’) is a multinational company in the logistics sector in India. It claims to be the world’s second largest Less than Container Load consolidator. At home, it is one of the largest multi-transport operation players. In addition, it has a powerful international network that covers more than 5,000 destinations. A year ago, India’s logistics industry was projected to grow at 11% on a compound annual basis until 2013. Significantly, India had set a towering target for exports to reach US$200 billion for its 2009 fiscal year.

As a leader in India’s logistics business, Allcargo has been enjoying impressive growth in its revenue. For the 12 months ending 2007, its net sales stood at 16.1 billion rupees (US$390.1 million), which rose to 22.5 billion rupees in the following year.

In early 2008, Allcargo undertook its most ambitious fund raising attempt when it turned to The Blackstone Group (‘Blackstone’) and secured a 2.4 billion rupee, or an approximate US$56 million commitment. In this elaborate investment structure which included equity shares, compulsorily convertible debentures and warrants, Allcargo was to first receive half of the pledged capital. At this first phase, Blackstone was to pay 934 rupees for all the instruments to be purchased.

For the remaining 1.5 million warrants that were due to mature at the end of September, both Allcargo and Blackstone had stipulated on a different transaction price arrangement. The conversion price for each of the warrants would range between 934 rupees to 1,284 rupees. The applicable price was linked to Allcargo’s 2008 earnings before interest, taxes, depreciation and amortisation (EBITDA). If Allcargo’s 2008 EBITDA fails to reach 1.9 billion rupees, then the 934 rupee conversion price would apply. But when it exceeds 2.1 billion rupees, it would trigger the highest conversion price of 1,284 rupees....

General Section- Analysis

Appetite for ‘Control’

Australia and Japan witness active buyout activities

OThe impeding initial public offering of Myer Holdings Limited (‘Myer’) in Australia and the sale of Bellsystems24, Inc. in Japan all portend the revival of buyout activities in Asia’s buyout hubs, Australia and New Zealand as well as Japan. But a level of caution in committing to deals prevails. Unlike in the past, when acquisition of their target assets would be consummated through a one time transaction investors, particularly those in Australia, investors prefer to choose to advance their equity holdings on staggered deployment schedules.

Significantly, in both markets general partners have also been able to find buyers for some of the largest assets that they had once acquired, indicating bankers are ready to loosen their purse strings to finance large acquisitions.

Cautious Takover Approach

At the end of September Navis Capital Partners (‘Navis’) completed the second phase of its buyout of Peoplebank Australia Ltd (‘Peoplebank’). Partnering with the original founding-managing director of Peoplebank, Navis completed the management buyout of Peoplebank at the end of September for A$16.8 million (US$14.6 million) through a compulsory acquisition after the takeover bid. The private equity firm first secured a 57.5% stake in People’s Bank back in 2008, when it pledged to an A$60 million transaction.

Two domestic mid-market buyout groups, Ironbridge Capital (‘Ironbridge’) and Catalyst Investment Managers Pty Ltd (‘Catalyst’) are also employing a measured buyout approach similar to that used by Navis.

After a lengthy period of pursuit of Bravura Solutions Ltd. (‘Bravura’), Ironbridge has been able to raise its stake in the software company to approximately 33% with options to take it up to 46% from its earlier 0.49% interest. Ironbridge has been keen to become a substantial shareholder of Bravura. It began to anchor its holdings in the target company when Bravura’s ownership became the subject of contention between its creditors and former directors of the company. Following the recent commitment of A$17.9 million, Ironbridge could increase its holdings in Bravura to 46%, as it has been allotted 86.7 million unquoted options that, when exercised, will take the buyout firm close to owning half of Bravura’s shares.

Catalyst is also using a similar staggered investment methodology. Through an initial commitment of A$23.4 million that includes options, Catalyst is to take up a minimum 46% stake in PearlStreet Ltd. (‘PearlStreet’). The buyout firm could increase its holdings in PearlStreet to 63% through further acquisitions of PearlStreet’s shares.

The takeover of the New Zealand arm of Burger King, the fast food chain, was perhaps an exception to this trend. The Sydney-based Anchorage Capital Partners (‘Anchorage’) recently assumed full control of Burger King through a one-time transaction. It will take ownership of 69 company-owned and two-franchised Burger King outlets. While the transaction details were not disclosed, market analysts estimated that its value could range between A$50 million to A$150 million.

Buyout Momentum Returns

In Japan, SBI Capital Co., Ltd. (‘SBI Capital’) is using the same approach employed by Navis for Peoplebank. SBI Capital is now offering to acquire all of Narumiya International Co., Ltd.’s (‘Narumiya’) shares that it does not own. It first invested in Narumiya back in 2007. At that time, the financial investors deployed ¥4.2 billion (US$36.7 million) to take a 55% interest in the children’s wear retailer. In this second and final attempt to assume full control of Narumiya, SBI Capital is to commit an approximate ¥1.8 billion. Following completion of this transaction, Narumiya will be delisted from NASDAQ.

Ant Capital Partners Co., Ltd. was to take over VarioSecure Networks, Inc. (‘VarioSecure’), the information technology company, through a one-time commitment of ¥5.7 billion. After a six-week long tender offer, the private equity firm was pleased to have secured a 97% equity stake in VarioSecure, which is currently listed on the Osaka Securities Exchange’s Hercules market. Following completion of the transaction, VerioSecure will be delisted.

The transaction that will instill a new level of confidence in Japan’s buyout market is Bellsystems24, Inc. Currently, Bain Capital, Permira and CVC Capital Partners are known to be bidding for this call centre operator. When consummated, it will be the first billion dollar deal to be recorded in the Japan since April last year when Next Capital Partners, JAFCO and Nomura Holdings acquired Ashikaga Bank.

Disposals of Large Assets

The sale of two large parcels of assets, one in Australia and the other in Japan, that were previously purchased during the past buyout boom period are by far the most reassuring signs that the appetite for controlled assets has now returned to the market, although not all these sales could recover the original invested capital.

After a three-year investment holding period during which it endured a tumultuous partnership with the Australian Securities Exchange-listed eircom Holdings Limited (‘eircom Holdings’), previously known as Babcock & Brown Capital Limited (‘BBC’), the ownership of eircom Group Limited (‘eircom Group’) is set to change to STT Communications Ltd. (‘STT Communications’), a Singapore state-owned entity. STT Communications is offering A$67.1 million to shareholders of eircom Holdings, which has a 57.1% stake in eircom Group, the telecommunication company that operates the Irish telecommunications systems. On top of the aforementioned consideration from STT Communications, shareholders of eircom Holdings will also receive capital returns totaling A$22.7 million which will be paid out of the eircom Holdings’ net cash reserves.

In 2006, when BBC privatised eircom Group, it then had an enterprise value of A$8 billion. Shareholders of eircom Holdings have received an aggregate of A$235 million in capital returns this year so far.

In Japan, the partial sale of Kracie Holdings Ltd. (‘Kracie Holdings’) is another illustration that banks in the country are now prepared to finance acquisitions. In early 2006, Kracie Holdings, the rights owner of non-cosmetics products of the defunct Kanebo, came under the control of Advantage Partners LLP, MKS Partners and Unison Capital Inc. (‘consortium’). The acquisition of Kracie Holdings was one of the largest mid-market buyout transactions in Japan deal log as it commanded a reported US$500 million price tag.

Kracie Holdings is now to be 60%-owned by Hoayu Co., a Nagoya-based hairdye maker. It is believed that Hoyu has agreed to a ¥25 billion price for this initial 60% stake in Kracie Holdings. The remaining 40% will be transferred from the hands of the consortium over the next period of three years.

Comments

Although the forthcoming initial public offering of Myer, controlled by TPG, is expected to raise over A$2.8 billion that signals economic recovery, some previously acquired controlled assets remain victims of the afflictions caused by the global financial, especially those in Japan.

In September Willcom, Inc., a mobile phone operator, one of the largest commitments made in Japan by The Carlyle Group (‘Carlyle’), had been accepted by the Japanese Association of Turnaround Professionals for its application for the Alternative Dispute Resolution (‘ADR’) process. Willcom is seeking to revise loan repayment terms with its creditors through this ADR process. Willcom is believed to be shouldering a debt burden of as much as ¥100 billion. Carlyle took control of Willcom in 2004 and at that time committed to a ¥220 billion transaction.

There were also reports that suggested Huis Ten Bosch Co., Ltd., a theme park taken over by Nomura Principal Finance Co., Ltd. in 2004, is struggling for survival. At that time, the financial sponsors injected an initial ¥8 billion into the entertainment company.

It would appear that, while buyout investors have completed their assessment of the impact of the financial crisis of their portfolio companies in Australia, more time may be required for those in Japan. But the confidence to consummate deals has already returned to the market.