SEOUL, South Korea--(BUSINESS WIRE)--As Homeplus faces a critical juncture following its recent entry into the corporate rehabilitation process, criticism is mounting over its parent company, MBK Partners, as well as the management practices of private equity firms (PEFs) in general. These concerns have been long voiced by Korea Zinc, regarding MBK Partners’ recent takeover attempt.
According to the Korea Joongang Daily, the mounting skepticism surrounding MBK further weakens its position in its ongoing battle for control of Korea Zinc (KRX:010130), the world’s largest nonferrous smelter. Korea Zinc has argued that MBK and its ally, Young Poong, are only after financial gains and lack the management expertise necessary for the industry.
“If MBK were to take control of Korea Zinc, its fate could end up just like Homeplus in 10 years,” warned an industry source.
With regulators now scrutinizing the implications of financial capital controlling industrial capital, doubts have arisen regarding the role of PEFs as a whole, and questions have been raised whether PEFs are to blame for the bankruptcies of their portfolio companies.
Critics argue that the short-termism inherent in private equity's business model is to blame, pointing to an increasing number of PEF-controlled companies going bankrupt in the United States.
CNBC reported on Feb. 25 that 21 restaurant and bar chains in the United States filed for bankruptcy last year, 10 of which — including Red Lobster and TGI Fridays — had previously been controlled by PEFs, citing data from PitchBook.
The retail sector experienced similar collapses, such as the liquidation of Toys R Us in 2017, which struggled under heavy debts following a leveraged buyout deal.
In 2015, a consortium including MBK Partners, Korea’s largest PEF, and the Canada Pension Plan Investment Board acquired Homeplus from British retailer Tesco for 7.2 trillion won ($5 billion). The leveraged buyout deal marked the country’s biggest-ever acquisition at the time.
However, Homeplus took on significant debt after the acquisition, with 2.7 trillion won — according to Homeplus — secured through loans backed by the retailer’s shares.
Such financial strain forced Homeplus to “preemptively” seek a court-led corporate rehabilitation program. The move aims to prevent a potential liquidity crisis following a recent series of downgrades to Homeplus's credit rating, which the company feared would greatly increase its borrowing costs and lead to a cash crunch.
The rehabilitation proceedings temporarily suspended Homeplus's debt obligations, which are worth around 2 trillion won.
Under Korea’s Debtor Rehabilitation and Bankruptcy Act, corporate rehabilitation is available to financially distressed but economically viable companies, enabling them to continue operations while coordinating the interests of shareholders, creditors and other involved parties. Companies can continue to operate, typically with debt rescheduling and other restructuring measures, or undergo liquidation if the proceeding proves unfeasible.
Financial Supervisory Service Gov. Lee Bok-hyun told reporters on Wednesday that issues involving financial capital’s control of industrial capital have been on the rise, adding that authorities are currently looking into the matter.
