Asia: the new home of the club deal

Yum China’s rejection of a $17.6bn takeover bid from a Hillhouse Capital-led consortium sheds light on Asia’s changing deal landscape.

Deal sizes, club deal and the complexity of transactions are all growing as the Asian private equity market matures.

One potential club deal that has grabbed headlines in the last few weeks is the $17.6 billion take-private offer of NYSE-listed Yum China Holdings, the operator of Pizza Hut, Taco Bell and KFC franchises in mainland China. Hillhouse Capital Group reportedly led the group that also included KKR, Baring Private Equity Asia and sovereign wealth fund China Investment Corporation.

The fast-food operator, however, rejected the buyout offer for undisclosed reasons and is still looking for a buyer. The rejection was a surprise, a source with knowledge of the deal told PEI. Yum China had no other offers.

Other notable club deals in the region in the last year include the $18 billion takeover of Toshiba’s memory chip business by a Bain Capital-led group that included Japan’s Hoya Group, Apple, Dell, Kingston, Seagate and Korea’s SK Hynix; and the $5.8 billion take-private of retailer Belle International by CDH Investments and Hillhouse.

A significant, simple reason for more club deals in Asia is growing deal size. The Toshiba and Belle International deals broke records for size and it would have been either imprudent or impossible for one buyout house to acquire them alone. Most private equity funds provide for concentration limits for a single deal, usually not more than 10 percent to 20 percent of the fund.

Asia-Pacific deal value climbed to an all-time high of $159 billion in 2017, up 41 percent from 2016 and 19 percent higher than the historic deal-value peak in 2015, according to Bain & Company’s Asia-Pacific Private Equity Report 2018. The number of deals valued at $1 billion or more in Asia nearly doubled to 27, while the average deal size in 2017 rose 47 percent to $156 million, more than 50 percent higher than the annual average in 2012 to 2016.

“For many years deals in Asia were tiny compared with US and Europe. With Asia growing, particularly China, the size of deals has become bigger,” said Frank Yu, founder of Hong Kong-headquartered healthcare-focused investment firm Ally Bridge Group.

2019 Global Private Outlook, a report from law firm Dechert, which surveyed 100 GPs globally with at least $500 million in assets, also found that “club deals are becoming increasingly widespread… whether collaborating with other PE firms, strategics or, with a fund’s own LPs, these deals are a means of more effectively competing for targets”.

There is no conclusive data, however, as to whether club deals contributed to the volume of deals in the region.

In today’s fiercely competitive deal environment, GPs are becoming more incentivised to think more creatively about deal types and structures – 73 percent of respondents in the survey said partnering with a strategic buyer was a likely consideration.

Aside from providing GPs more firepower for larger transactions, other advantages of a club deal include reducing the burden of writing a large equity cheque and diversifying investment portfolios. Bringing in sponsors with different expertise and a wider talent pool can also help the target company in its operations post-acquisition.

In the case of the consortium chasing Yum China Holdings, a source close to the deal said the make-up was less about an injection of capital and more about a mixture of members’ skill sets: Hillhouse’s digital transformation expertise, KKR’s track record in China’s consumer space, Baring’s real estate development know-how and CIC’s government relationships.

Another characteristic of a club deal in Asia is that a large majority are mainland Chinese-sponsored deals that involve state-owned enterprises and GPs, Scott Peterman, a Hong Kong-based partner at law firm Orrick said. Peterman added that these deals usually have “clearly defined strategies that benefit the needs of China”, such as investments in healthcare and artificial intelligence.

Peterman, however pointed out that completing club deals will actually get harder in the region as anti-monopoly laws come into play. This means regulators now need to look at the revenue streams of investors in a deal, particularly if they are Chinese.

“If for example you have five or six heavy-hitters – some of which are strategic investors more so than financial investors – you have to look at where their revenue is around the world. This means that the bigger players that can pony up the cash for these deals also need to look at the knock-on consequences of any acquisition.”