Amid the darkening clouds of recession fears hanging over South Korea’s economy, non-core carve-outs and divestments by corporates are expected to shine this year.
Activity is likely to be reminiscent of the spike in valuations of Korean corporate-led disposals in the aftermath of the global financial crisis in 2009, when they ballooned to USD 21.2bn across 365 deals compared with USD 13.6bn from 405 deals in 2008, according to Mergermarket data, and then maintained an upward trajectory in subsequent years.
The advent of the coronavirus (COVID‑19) pandemic brought dealmaking to a shuddering halt, and the deal count declined as M&A activity in the country cooled. Deal values rocketed again in 2021, hitting USD 42bn, the second-highest level in a decade following a high of USD 42.9bn deals in 2014, driven by an array of business spin offs and listings from large corporates: SK Telecom [KRX:017670] (investment unit), DL [KRX: 000210] (construction unit) and F&F[KRX: 00770] (fashion unit).
Non-core divestments by Korean conglomerates have been key drivers of deals over the past two decades, with large-scale and transformational portfolio moves by Chaebol manifesting in landmark changes. Samsung span off its defense and chemicals operations in 2014 and 2015, respectively, while Doosan rocked markets by exiting its cash-cow liquor business in 2006 and 2009 before selling its food segment in 2012, as the group morphed into a heavy industrials giant.
At a time when corporate efforts are being ramped up to boost cash reserves and accelerate portfolio optimization, industry titans that previously devoured smaller businesses as they grew are now looking inward, undertaking in‑depth, granular reviews across divisions, while creating deal opportunities in the process.
New dynamics
Decision-making is increasingly being shaped by an array of new external factors, with technological disruption; environmental, social, and governance (ESG) concerns; and shareholder activism all now influencing corporate strategies.
In addition, a maturing private equity (PE) market offers a wider spectrum of buyers ready to seize upon disposals.
In June 2022, SKC [KRX:011790] spun off and sold its industrial film material business to domestic buyout player Hahn & Company for KRW 1.6trn (USD 1.27bn), marking the largest carve-out deal of the year. SKC pledged to invest the capital in environmentally-friendly businesses such as those involved in electric vehicle (EV) battery materials.
Hahn & Company is a familiar shopper among corporate sellers. The group also landed the inflight meal and duty-free arm of Korean Air [KRX:035720] for KRW 991bn from the beleaguered Hanjin KAL Group back in August 2020 despite the impending pandemic.
Sponsors’ deep pockets, diversified fund sizes, and varying investment approaches mean there is an abundance of capital-raising alternatives at hand.
SK Materials Airplus managed to sell its industrial gas facilities last August to infra-investor Brookfield Asset Management for KRW 1trn, thereby securing long-term investment resources.
Activist challenges, which often resulted in asset break-ups and disposals, are relatively uncommon in South Korea and are generally not viewed as compelling catalysts for dealmaking, but this is changing slowly given a growing number of activist funds and increasing investor attention.
SM Entertainment [KRX:041510] came under fire in late 2022 from local activist Align Partners Capital Management, prompting it to announce earlier this year that it is weighing possible non-core divestitures.
On the block
This news service reported in February that CJ Cheiljedang [KRX:097950] is looking to divest its China-based food sauce business, while also mulling reviving the sale of Brazilian subsidiary CJ Selecta. CJ Cheiljedang previously divested its healthcare unit in 2018 for KRW 1.31trn and sold a partial stake in US subsidiary Schwan’s Company in 2019.
Affiliate media entity CJ ENM [KRX:035760] is also poised for action. The company sold its men’s fashion and lifestyle business in December 2022 for KRW 14.6bn. Management said in February that it is considering non-core and idle asset disposals to cope with a soaring debt-to-equity ratio of 137% as of end-2022.
Chemical giant LG Chem [KRX:051910], which plans to hike capital expenditure this year to KRW 4trn, is not ruling out asset disposals, per an earnings call in January. The company is pressing ahead with the sale of its diagnostics business unit.
Finally, SK Group, which has aggressively pursued inorganic expansion over the years, has also been earmarked as a likely future divestor, according to a PE executive. The giant, which became Korea’s second-largest Chaebol by asset value after Samsung as of April 2022, owns 201 entities across the semiconductor, telecoms, chemicals, retail, technology, biopharma, and energy sectors, per regulatory filings.
