Supermarket chain's credit woes raise doubts over MBK's hostile takeover of Korea Zinc
MBK Partners, one of the largest private equity firms in Asia, is facing backlash over its incompetence to operate its major portfolio firm Homeplus, which entered court-led rehabilitation proceedings amid potential insolvency.
On Tuesday, Homeplus filed for corporate rehabilitation with the Seoul Bankruptcy Court for possible insolvency following a series of credit rating downgrades.
MBK acquired Homeplus in 2015 for 7.2 trillion won ($5.4 billion), financing much of this acquisition through debt. While MBK invested 2.2 trillion won, it borrowed 5 trillion won under Homeplus' name, a move that has drawn criticism due to the ensuing financial burden on the company.
Critics have argued that the significant debt from the buyout has hindered Homeplus’ operations, leading to a liquidity crisis exacerbated by increasing interest obligations.
In the years following the acquisition, Homeplus’ sales demonstrated a downward trend, dropping from 7.9 trillion won in 2016 to 6.9 trillion won in 2023, reflecting a 12.7 percent decline.
During the period when MBK operated Homeplus, the number of Homeplus’ discount stores decreased from 141 to 126, and the number of Homeplus Express supermarkets decreased from 371 to 308.
By closing dozens of stores, MBK is believed to have recovered its investment in Homeplus.
According to the Financial Supervisory Service’s disclosure system, the total cash secured by disposing of tangible assets, assets to be sold, and real estate from March 2016 to February 2024 amounts to 4.11 trillion won.
The decision to seek rehabilitation has attracted scrutiny, as MBK has not outlined any strategy to rectify the financial issues after the downgrade of Homeplus' credit rating.
Last Friday, Korea Investors Service and Korea Ratings Inc. downgraded Homeplus' corporate bonds to A3- from A3, citing insufficient efforts to enhance its financial health.
“There will be an increase in the number of other PEFs that acquired companies and recovered their investment but failed to manage them, using legal procedures such as corporate rehabilitation to handle the acquired companies like MBK did for a safe exit plan,” an industry source said.
The controversies surrounding Homeplus came under the radar of financial authorities. “We were keeping a close eye on Homeplus’ poor financial structure. The company had also incurred fairly large operating losses for several fiscal years,” Lee Bok-hyun, head of the Financial Supervisory Service said on Wednesday.
The retail chain’s liquidity problem shed light on MBK’s incompetence to manage its portfolio firms with its short-term profit-taking strategy.
This could be a setback for MBK’s ongoing attempt to acquire Korea Zinc, the world's largest zinc smelter.
Industry watchers have cast doubt over the ability of MBK to run Korea Zinc amid concerns that the takeover of the world’s largest zinc smelter could erode its position in global markets and cause high-tech supply disruptions.
“Considering the special nature of the non-ferrous metal manufacturing industry, the current management’s long-term accumulated expertise and management know-how are its core competitiveness,” a Korea Zinc official said.
This comes as Korea Zinc and MBK await a Seoul court decision that could significantly impact control over the company's management. MBK has filed an injunction to nullify the resolutions passed at an extraordinary shareholders' meeting that favored Korea Zinc Chairman Choi Yun-beom.
In the meantime, US House of Representatives members and other political figures have recently expressed concerns over MBK's attempt to acquire Korea Zinc, arguing that the deal could expand China's control over critical minerals and undermine US national security.
Rep. Mariannette Miller-Meeks, a Republican member of the US House of Representatives and a member of the House Committee on Energy and Commerce, urged the US Congress and administration to collaborate on strategies to counter China's growing influence in the mineral and resources sectors.
She conveyed this message in a letter sent on Wednesday to Diane Farrell, the acting Deputy Under Secretary for International Trade at the US Department of Commerce.
In her letter, Rep. Miller-Meeks emphasized the need for the US to secure independent and resilient supply chains by enhancing domestic mining capabilities and investing in allied partnerships.
“I have been informed that China-linked entities are attempting to gain control over Korea Zinc through a hostile takeover attempt led by MBK Partners,” the letter she posted on social platform X read.
“This is an industry dominated by China, and independent entities like Korea Zinc play a crucial role in supplying critical materials, including those now under China's export restrictions.”
Korea Zinc produces several rare metals crucial for semiconductor manufacturing, renewable energy and defense projects directly tied to US security interests. These include antimony, indium, tellurium and cadmium, all of which China has restricted from exporting.
By Park Han-na (hnpark@heraldcorp.com)
