Landmark deals in Asian private equity

PEI Asia presents 15 private groundbreaking transactions that, for many and varied reasons, are set to leave a lasting legacy in Asian private equity.

THE 15 MOST INFLUENTIALPRIVATE EQUITY INVESTMENTS IN ASIA

1999 Bharti Tele-ventures
2000 Shinsei Bank
2001 Pacific Brands
2002 Aramex
2002 Shanda Interactive Entertainment
2003 Korea Exchange Bank
2003 Yellow Pages Singapore
2004 Baidu
2004 DDI Pocket
2004 Shenzhen Development Bank
2005 Xugong Group Construction Machinery
2006 Myer
2006 Nilgiris
2006 Skylark
2007 Colorado Group

1999 BHARTI TELE-VENTURES
TELECOM TRANSFORMED

When Warburg Pincus first invested in Bharti Tele-ventures in October 1999, the company was one of the smallest telecom operators in India with just over 100,000 subscribers. By the time the private equity firm had achieved its final sale of shares in 2005, Bharti had become India's largest private sector telecom business. Today, now known as Bharti Airtel, it is India's fourth-largest company and, in May 2007, had around 40 million subscribers.

For Warburg Pincus, the deal was a stunning commercial success. Having invested a total of $293 million in the company, it exited with around $1.9 billion in proceeds. Following the listing of Bharti on the Bombay Stock Exchange in 2002,Warburg Pincus realised its 18.5 percent stake through a series of block trades. The last of these took place in November 2005 through the sale of a 5.6 percent interest to the UK's Vodafone (part of what was then the largest single direct foreign investment in an Indian company).

Perhaps the most impressive aspect of the deal was how rapidly the company scaled up, partly through a number of acquisitions. Dalip Pathak, who led the deal for Warburg Pincus: “First and foremost, we encouraged the company to think big and not to view capital as a constraint.”

The success of the Bharti deal also had a benevolent knock-on effect on the Indian private equity market, proving as it did the ability to achieve extremely lucrative exits in the country.

2000 SHINSEI BANK
COLLINS AND FLOWERS START A RIPPLE EFFECT

Given how many Western GPs today are setting up shop in Tokyo, it is worth nothing that as recently as ten years ago, most so-called smart-money had written off the world's second-largest economy as a basket case.

In 1998,Tim Collins of Ripplewood Holdings enlisted former Goldman Sachs financial institutions whiz J. Christopher Flowers and former US Federal Reserve head Paul Volker and assembled a group of investors to target Long-Term Capital Management, a bank dating back to 1897 that was on the verge of collapse. Two years later the group acquired LTCM for the equivalent of $1.1 billion. The deal did not complete without some alarm from the press and some politicians, who viewed the Ripplewood investment group as vultures.

New CEO Masamoto Yashiro launched the renamed Shinsei Bank by declaring that it would not be like other Japanese banks. Customer-service initiatives were launched to create new accounts. Investment banking services were bolstered. Roughly $10 billion in bad loans were unloaded on a national debt resolution corporation.

In 2004, Shinsei went public, producing an immediate $2.1 billion windfall for its backers. A further stake was sold producing another $2.8 billion. David Rubenstein of Carlyle has said Shinsei may be the most successful private equity deal of all time.

2001 PACIFIC BRANDS
FLYING OFF THE SHELF

When retailer Pacific Brands listed on the Australian Securities Exchange in April 2004, it was an instant hit with investors. At the offer price, private equity firms CVC and Catalyst Investment Managers were reported to have doubled the A$730 million investment they made in the company in November 2001. But, with the shares rising 5 percent on their first day of trading, investors clearly did not view the offer price as excessive – not initially, at least.

The deal was notable as a retail turnaround. CVC and Catalyst took stodgy clothing brands and revived them by enlisting the help of national heroes such as golfer Greg Norman and pop star Kylie Minogue. Sales and profits duly soared during the period of ownership.

Beyond its commercial success, the deal was also symbolic of a period when an unprecedented degree of bullishness surrounded the Australian stock market – which private equity firms were not slow to take advantage of. A few months prior to the Pacific Brands IPO, for example, Gresham Private Equity reaped a 5.5 times multiple on investment when listing car parts business Repco.

But the Pacific Brands IPO marked a less happy turning point: following the buzz on its first day of trading, the company's shares fizzled in the after-market. It was one of a number of poor post-IPO performers that prompted Australian institutional investors to question the attractions of private equity-backed IPOs.

2002 ARAMEX INTERNATIONAL
ALL EYES ON THE MIDDLE EAST

In 1997, logistics group Aramex International became the first Middle Eastern company to list on NASDAQ. Five years later, in February 2002, it was taken public again by a group of investors led by Arif Naqvi, founder of Abraaj Capital in Dubai, in a $65 million transaction involving $25 million of equity. It was the first M&A transaction on NASDAQ after 11 September, and the fact that it involved an Arab business and an Arab sponsor made sure that US regulators kept a close eye on proceedings.

Aramex spent three years as a private entity before listing again on the Dubai Financial Market.According to Abraaj, the deal delivered nearly seven times cost and has ever since stood as the firm's signature transaction. The firm went on to build a multi-fund alternative investment business with currently $4 billion under management.Alongside other investment groups based in the Persian Gulf, it has also made strides building up a market for private equity in the MENA region which some observers believe will soon rank as the fourth most active private equity region in the world.

There may be a lot more to come.Very recently, in early June,Abraaj inked another headlinegrabbing LBO. For $1.4 billion, the firm acquired the Egyptian Fertilizers Company in what constitutes the largest MENA LBO ever organised by a home-grown sponsor. More significantly still, the equity funding for the deal came from Abraaj's Infrastructure and Growth Capital Fund, which has raised $500 million towards a $2 billion target. The fund complies with the principles of Shariah; its participation in the fertiliser deal hints strongly at the potential of Islamic financing techniques making inroads into private equity.

2002 SHANDA INTERACTIVE ENTERTAINMENT
CHINESE HOMERUN

Chinese online gaming firm Shanda Interactive Entertainment, founded by Chen Tianqiao, grabbed the headlines when it went public on NASDAQ in May 2004 – and continued to get attention for some time thereafter. Having entered the market with an issue price of $11 per share, the share price had reached a peak of $45.50 by the end of that year.

For the firm's Hong Kong-based private equity backer, SAIF Partners, the deal was a runaway success. Its initial $40 million investment returned $520 million, or 13 times cost, within a 22-month period.

As a consequence, the deal helped propel SAIF Partners, headed by Andrew Yan, to international recognition. The firm notably managed to attract a long list of blue-chip institutional investors into its latest $1.1 billion fund, which closed earlier this year.

Beyond enhancing SAIF Partners' prospects, the deal had broader implications. In demonstrating the outsize returns available from early-stage investments in China, it provided encouragement to both domestic investors and a host of Western venture capital firms – especially from Silicon Valley – that were piling into the country.

In addition, by proving that fast-growth Chinese companies could receive an enthusiastic reception on NASDAQ, Shanda paved the way for the likes of Focus Media, Suntech and Alibaba to follow suit.

2003 KOREA EXCHANGE BANK
TURNAROUND TRIUMPH ON HOLD

When Texan distressed specialist Lone Star invested $1.2 billion for a controlling stake in Korea Exchange Bank in 2003, the starting pistol was fired on a transaction that has come to exemplify the paradox of investing in emerging markets: great opportunity coupled with high risk.

For the first three years of ownership, KEB helped to underline the scale of opportunity in a South Korean banking sector also characterised by lucrative private equity deals such as Good Morning Securities (H&Q Asia Pacific), Koram Bank (Carlyle Group) and Korea First Bank (TPG). When Lone Star put its KEB stake up for sale in 2006 with a price tag reported to be around $7.3 billion, it looked set to deliver the most stunning success of all.

And then everything began to unravel. Amid what some observers believed was essentially a backlash against foreign private equity firms, local prosecutors probed allegations that financial information had been manipulated at the time of the original deal to enable the bank to be sold for less than its true worth. Lawsuits against Lone Star professionals followed as the firm became embroiled in a PR disaster.

Recently, two bids for the firm's remaining stake in the bank fell by the wayside because of the uncertainty generated by the ongoing investigations. The deal might still be one of Asia's most successful ever – if Lone Star ever manages to extricate itself, that is. At press time, South Korea's National Pension Service was mulling a bid for the firm's remaining shares.

2003 YELLOW PAGES SINGAPORE
SINGAPORE'S FIRST LBO

CVC Asia Pacific and JP Morgan Partners became Asian private equity pioneers when their $127 million acquisition of Yellow Pages Singapore from Singapore Telecommunications (SingTel) – a portfolio company of the Singapore government's investment arm Temasek – became the first leveraged buyout in the country. The GPs bought equal 50 percent stakes in the company in 2003 before refinancing it with a $77 million bond in 2004. Later that same year, they raised $145 million via an IPO.

The deal raised hopes that more government-linked businesses would be willing to sell assets to buyout firms willing to turn them around. Since the IPO, which launched at $1.08 per share,Yellow Pages' share price has slipped to $0.89. It is currently under pressure from activist investors Stanley Tan and Pang Yoke Min, who used their 27.4 percent stake to help force the resignation of CEO Goh Sik Ngee in May 2007. Despite the subsequent decline, CVC and JP Morgan's precedent has left buyout executives optimistic about the likelihood of further sell-offs in Singapore.

2004 BAIDU
SEARCH SUCCESS ONE HUNDRED TIMES

Given that a major source of venture capital investment ideas in Asia is to try to recreate companies that were winners in the West, it is notable that it wasn't until 2004 that a Chinese equivalent of Google was credibly financed. Credible, because one of the investors was Google. Add together the buzz-words “Google” and “China” and one can imagine that Baidu.com was a highly sought-after opportunity.

Joining existing investors Integrity Partners and Peninsula Capital was co-lead investor Draper Fisher Jurvetson ePlanet Ventures. Additional investors included Bridger Management, China Equity, China Value and Venture TDF. Just a year later, Baidu became the single most successful first-day IPO of a foreign company in US history. The company, based in Beijing and founded by Robin Li, now has a market capitalisation of more than $5 billion.

In case your Mandarin needs a polish, the word baidu means “one hundred times” – an appropriate moniker for an investment this lucrative.

2004 DDI POCKET
CARLYLE ON THE LINE

Yes, mega-deal corporate spin-outs with local partners are possible in Japan, as The Carlyle Group proved in 2004 after years spent refining its strategy in the country. The $2.03 billion (at the time ¥220 billion) buyout of DDI Pocket from KDDI Corp was done in conjunction with Kyocera Corp, which rolled an existing stake into the LBO. Seen as evidence that corporate Japan was slowly becoming more flexible, the deal opened eyes in Japan and beyond to the possibilities dormant in the country's potentially huge M&A market.

DDI Pocket provides so-called personal handyphone services (PHS) as well as wireless data and voice services to millions of customers through a network of base stations in Japan. PHS is a technology that covers a smaller area than a standard cell phone network, but at a lower cost.

The terms of the deal gave Carlyle 60 percent of the company, 30 percent to Kyocera and ten percent to KDDI. Carlyle, whose Japanese business is run by Tamotsu Adachi, promised to keep the company's management and employees in place, a nice counter to the image of private equity firms as job-killing vultures. At the time, the investment stood as one of Carlyle's largest deals ever.

The company has since been renamed WILLCOM and is rolling out a series of flat-rate services, as well as services targeted at the corporate market. Where it goes from here will help set the course for Japanese private equity in the years to come.

2004 SHENZHEN DEVELOPMENT BANK
NEWBRIDGE BREAKTHROUGH IN CHINA

The stakes are high in China, and the wait can often be long. These facts are well known to Newbridge Capital, now a division of TPG, which in 2004 finally succeeded in buying an 18 percent stake in China's Shenzhen Development Bank, a first-of-its-kind deal in the country.

Newbridge had attempted to buy into the bank in 2002 and again in 2003, but negotiations fell apart because of price and other issues. Finally in June 2004, China announced that for the first time a stake in a Chinese bank would be sold to a foreign strategic investor. The investment received approval from the China Banking Regulatory Commission.

Newbridge paid 1.2 billion yuan, at the time $145 million, for its interest. The sellers were several government entities. Frank Newman, a former deputy secretary of the US Treasury Department, was selected as the bank's new chairman. Several months later, General Electric agreed to buy a 7 percent stake in Shenzen Development Bank, bringing total foreign ownership in the bank to 25 percent, the maximum allowed by law. Shares of the bank have increased roughly 100 percent this year, boding well for TPG's and GE's investments.

2005 XUGONG GROUP CONSTRUCTION MACHINERY
BUYOUT BOTHER

Had it been completed in its original incarnation, Xugong would have merited inclusion in our list of influential deals for one very simple reason: it would have represented the first buyout on the Chinese mainland of a major state-owned enterprise by a foreign private equity firm. In the event, the deal has turned out anything but simple.

As those who have followed the Xugong saga will know it has been tortuous: In October 2005, an agreed deal was announced through which Carlyle stood to acquire an 85 percent stake for around $375 million. It did not succeed. A year later, Carlyle came back to the table with a proposal to acquire 50 percent of the target, which was also rejected.At the time of going to press, a persistent Carlyle was still negotiating to buy a minority 45 percent stake worth a reported $231 million.

Instead of the reason signalled at the outset, the deal has become influential for the way in which it has discouraged private equity firms keen to try and nurture a Chinese buyout market. Who should receive the blame for this continues to be a talking point. Some point to intransigence on the part of the Chinese authorities who, they say, have time and again held up the progress of the deal with red tape – perhaps motivated by protectionism.

Others say Carlyle could have dealt differently with key stakeholders. Either way, hope remains that a deal can still be struck – even though bearing little resemblance to the one envisaged two years ago.

2006 MYER
BILLION-DOLLAR BREAKTHROUGH

Texas Pacific Group and its Asian affiliate Newbridge Capital (since renamed TPG Capital) acquired Myer department store chain from Coles Group for A$1.4 billion ($1 billion) in March 2006 in the first billion-dollar private equity deal in Australia.

The Myer deal will be remembered as iconic in Australia. As one professional in Sydney put it, Myer represented the first Australian household name to be acquired by a US buyout group and shifted a broader range of targets onto private equity's radar than had previously seemed possible.

Newbridge notably fought off CVC Asia Pacific in the race for Myer, arguably the only foreign private equity group to have registered significant successes in Australia prior to 2006.

At the time of going to press, the flagship Melbourne Myer store was reportedly the subject of a A$500 million-plus bid from Commonwealth Bank and billionaire John Gandel, which alone could deliver TPG Capital a profit of more than A$200 million.

2006 NILGIRIS
INDIAN PIONEER

When Actis invested $65 million in Indian dairy chain Nilgiris in October 2006, in the process it became a pioneer of the Indian buyout market. India has historically been dominated by growth capital and infrastructure deals but now a buyout trend is beginning to emerge too.

Says one Indian GP: “The Nilgiris deal was groundbreaking because it was one of India's debut buyouts. Before that deal, private equity players had bought minority stakes in Indian companies, not majority stakes.” Another local fund manager agrees: “The Nilgiris deal has got the buyout ball rolling in India. Growth capital still dominates the market but more and more players are taking majority stakes in Indian businesses.”

The deal is also notable for the fact that Nilgiris was familyowned. Market sources say the family mindset has changed in India to the extent that more such business owners looking to address a succession situation are becoming more receptive to the idea of partnering with private equity. For the many buyout firms seeking to crack the Indian market, families may provide the key.

2006 SKYLARK
KEEPING IT IN THE FAMILY

The takeover of restaurant chain Skylark by CVC and Nomura Principal Finance was notable for at least three reasons. Let's refer first to perhaps the most obvious of these: at $3.1 billion, the deal entered the record books as Japan's largest management buyout to date.

Second, the deal encapsulated a theme steadily gaining ground: namely, Japanese management teams' increasing disillusionment with public markets. Feeling constrained by a short-term focus that mitigated against the restructuring or additional investment that many companies needed, the private arena began to look inviting by comparison. It was also seen as a potential refuge from hostile bids at a time when the domestic M&A market was gathering pace.

Third, the deal reflected the growing trust being placed in private equity by Japanese family owners – the Yokokawa family stayed on board to work alongside the company's new backers. For all of these reasons, Skylark was hailed by a market source as “a signature deal of 2006 and a harbinger of good things to come in Japan”. The plethora of international buyout groups disembarking at Tokyo International Airport were certainly hoping so.

2007 COLORADO GROUP
WHERE OTHERS FEAR TO TREAD

The take-private of Australian apparel retailer Colorado Group was advancing toward completion as this issue went to press, about one year after pan-Asian buyout firm Affinity Equity Partners first launched its hostile takeover of the company.

To buy the business, Affinity dared to go where other private equity firms feared to tread, and many peers have been wishing it success from the sidelines.As one source commented, the trend toward unsolicited take-privates is an inevitable consequence of highly competitive auction processes having seemingly become ubiquitous in Australia.

Affinity, which is run by KY Tang, is currently preparing to take over the company for an enterprise value of A$442 million ($375 million). The firm, which is currently investing a $2.8 billion fund closed earlier this year, appears to have overcome some initial objections to the deal. Having offered shareholders in Colorado A$4.70 a share, according to a source familiar with the deal, Affinity accumulated an 83 percent stake before agreeing to pay A$6.20 to buy out the remaining shareholders.

Colorado was the precursor to other notable Australian take-private attempts recently, including department store chain Coles and national airline Qantas – failed deals which demonstrated that taking a company off the Australian Stock Exchange is a less than straightforward task. Affinity wins full marks for its determination to get the job done.