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IFLR ASIA M&A FORUM 2014

FOCUS: KOREA

February 26, 2014 | Yulchon LLC / Gaw Capital Partners / Dominus Investment Co., Ltd.

Korea Session

Speakers

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Sai Ree Yun Jin Kook Lee

Managing Partner

Yulchon Mergers & Acquisitions / Antitrust / Tax

Founding partner, Yulchon

Baker & McKenzie, Chicago and New York

J.D., Hastings College of Law

LL.M., Harvard Law School

LL.B., Seoul National University

Orrick, Herrington & Sutcliffe LLP, Tokyo

J.D., Harvard Law School

B.A., University of California, Los Angeles

Tehyok Daniel Yi

Senior Foreign Counsel

Yulchon Mergers & Acquisitions / Finance

Partner

Yulchon Mergers & Acquisitions / Capital Markets

LL.M., Georgetown University Law Center

LL.B., Seoul National University

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Speakers

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Goodwin Gaw DoHyun Tony Chung

Founder / Managing Principal

Gaw Capital Partners

Stanford University, M.S., Construction Management,

Wharton School, University of Pennsylvania, B.S., Finance

University of Pennsylvania, B.S., Civil Engineering

CEO / Founding Managing Director

Dominus Investment Co., Ltd.

Eugene Asset Management Co., Ltd.

- Head of Private Equity Division / Managing Director

Lone Star Advisors Korea Inc.

Bain & Company Korea Inc.

Deutsche Banc Alex. Brown, Inc., New York

- M&A and Corporate Restructuring Group, Analyst

Harvard University, MPA, International Development, Kennedy Fellow

Williams College, B.A., Political Economy with Honors, Summa Cum Laude

Seoul Science High School

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Recent Trends in Korean M&A Market

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Why invest in Korea?

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Huge market - Population of 50 million and GDP of

US$1.2 trillion

Open economy - World’s 8th largest trading nation;

free trade agreements with 45 countries, including

ASEAN, EU, US, India and Peru

Diversified and technically advanced industries

Highly-educated and motivated workforce - Highest

among the OECD countries in college graduation rate

and labor productivity improvement rate

Promotion of foreign investments - Tax incentives,

double tax treaties and foreign investment promotion

laws

Korea-targeted M&As in 2013

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0

50

100

150

200

250

300

0

5

10

15

20

25

30

35

40

45

2007 2008 2009 2010 2011 2012 2013

: value of deals($bn)

: Number of deals

Source: mergermarket

274 deals valued at US$36.1 billion (increase of 22.5% by volume)

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Increasing participation by private equity funds

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$0

$10

$20

$30

$40

$50

$60

$70

2004 2006 2008 2010 2012 2013

Deal value, in billions Private equity Total

Source: Dealogic

The Wall Street Journal

11% of Korea-targeted deals by volume

Selected transactions

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Target Buyer Seller Value (USD)

ING Life Insurance MBK Partners ING Group 1.7 billion

Woongjin Coway MBK Partners Woongjin Group 1 billon

Cheil Industries

Fashion Business

Samsung

Everland Cheil Industries 1 billion

STX Energy GS Holdings /

LG International Orix 600 million

NEPA MBK Partners 520 million

LIG Nex1 STIC Investment

Consortium LIG Group 400 million

Woongjin Chemical Toray Woongjin Group 400 million

Hanjin Shipping’s

Bulk Carrier

Business

Han & Company Hanjin Shipping 400 million

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Key observations

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Abundant supply of acquisition targets

Emergence of private equity funds

• Economic conditions pressure mid-sized conglomerates and distressed companies

to sell assets

- Woongjin, STX and Tong Yang

- Preemptive restructuring of Dongbu, Hanjin, Hyundai and LIG

• Korean government continues to sell stakes for fiscal stability

- Woori Finance Holdings: Woori Bank and other financial services companies

• Slowing involvement by conglomerates

- Liquidity crunch and ongoing restructuring efforts

• Surging investments from private equity funds, particularly domestic funds

- Increasing competition for quality assets

Key observations

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Domestic private equity funds

Increasing foreign investments

• Korea-registered private equity funds have USD30 billion in assets under

management

• Diversified investment strategies

- large buy-out transactions to investment in mid-sized and distressed assets to mezzanine

investments

- individually or jointly with strategic or financial investors

• Foreign investors’ acquisitions of Korean companies increased from 28 to 41 (46.4%

increase) and from 1.77 billion dollars to 1.96 billion dollars (15.8% increase)

- Largest investors: Japan (14), EU (11) and US (7)

- Strategic transactions

IXYS’s acquisition of Samsung Electronics microcontroller business

Groupon’s acquisition of Ticket Monster, a social commerce company

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Key observations

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Transaction structures

Opportunities

• Share deal (37%), merger (27%), joint venture (16%) and asset deal (9%)

- Share deal is the most predominant form

- Mergers and asset deals used commonly for intra-group consolidations and restructuring

Samsung Everland’s acquisition of Cheil Industries fashion business

CJ Korea Express’s merger with CJ GLS

• Positive outlook: supply of acquisition targets expected to continue

- Mid-sized conglomerates, Korean government

- Assets held by private equity funds

• Continued relaxation of regulations – considering amendments to:

- Capital Markets Act: Korean private equity funds to acquire assets directly

- Commercial Code: Reverse triangular mergers

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Recent Transaction Structures

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Transactions led by private equity funds

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SPC Lenders

Target

PEF 2

PEF 1

PEF 4

PEF 3

Equity Financing

RCPS (Redeemable Convertible Preferred

Shares) Common Shares

Mezzanine Financing

Controlling Stake

Debt Financing

Loan

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Recent Regulatory Developments

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Tax issues

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Korean tax authorities’ view on ultimate beneficiary issues

Target OpCo Korea

Ultimate Investors

Foreign Juris.

Lenders

Offshore HoldCo

Onshore HoldCo

Korean NTS

② Capital Gains Tax

① Corporate Income Tax

Tax

Treaty

Dividend

Loan

Repayment

Labor issues

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Supreme Court’s recent decision broadening the scope of “ordinary wage”

Severance

Pay Wage

Structure Overtime/

Nighttime

Pay

Ordinary

Wage

Labor Cost Payback Issue (3 yrs)

150% ???

Monthly

Wage

Regular bonus

Certain allowances

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Compliance issues

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Privacy issues

Antitrust issues

• 3 major credit card companies experienced leakage of customers’ personal

information

- Resignation or dismissal of key officers

- Class action suit for data leakage filed

• Financial authority requested all financial institutions to report status of their

personal information management policies

• Many financial institutions considering undergoing compliance programs

• International merger filings

- Foreign and domestic players’ growing tendency to actively object in merger review by KFTC

- KFTC will independently review each case to consider withholding clearance or imposing conditions

on M&A

• Advance planning for international merger filings required

Risk allocation

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Due diligence exercise

Purchase agreement negotiation

• No longer a routine process – substantial focus on due diligence required

• Integration of analysis from legal, accounting and financial perspectives necessary

• Quantitative analysis of risks found in due diligence becomes important

• New issues arising from recent changes in courts’ or government’s position or

policy may not have been well reflected in typical purchase agreements

• Quantitative assessment of potential risks need to be reflected

• More aggressive, but realistic negotiations on indemnification, such as specific

indemnification or limitations on indemnification (survival period, threshold,

deductible and cap)

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Korean M&A - from the perspective of a foreign private equity fund

Gaw Capital

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Attractive opportunity to make investment in Korea

• Expansion of investment opportunity with Continuous and stable growth in Korea

economy

- On-going success of Korean major company such as Samsung, Hyundai, and LG etc. and further

growth of national economy.

- Increasing investment demand of foreign investors from national government, local governments

and companies.

• Dynamic environment and cultural diversity in Korea

- Expansion of K-pop and K-entertainment industry would boost up the investment opportunity in

diverse sector.

• Balanced portfolio in Northeast Asia investment between China, Japan and Korea

- Korea became one of the important market among the Northeast Asia countries.

Issues in investing in Korea

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Gaw Capital

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Limitation of Korea Investment

• Exposed to global economic changes

- Difficult to predict FX and Financial market (unstable KRW currency rate etc.)

• Tax and Labor issues

- Uncertainty of tax base for foreign fund and relatively high tax

- Rigid labor unions and rigidities in labor market.

• Comparably High-barrier in financial market

- Recent pullout decision of Goldman Sachs investment management, ING Life, and Aviva etc.

- Excessive intervention of National Government and profit declined.

Issues in investing in Korea

Gaw Capital

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Attractive opportunity to make investment in Korean RE market

• Increasing opportunity in Lifestyle type Real Estate assets

- Increasing demands in the Real Estate asset with cultural diversity and originality

- Hotel: Opportunity in Lifestyle hotel, up-scale hotel and glamorous boutique hotel

- Residential: Opportunity in Luxurious high-end housing and Soho-style housing

- Office: Opportunity in Creative office

• Opportunity of Co-investment with Korean investors

- Most of Korean institutional investors are conservative and seeking for the stable investment

opportunity (Senior and mezzanine loan, Preferred equity etc.)

- Increasing investment opportunity of co-investment with high risk-return profile type foreign

investors (common equity etc.)

- Liquidity in Korean financing market (stable loan financing)

Issues in investing in Korean Real Estate

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Gaw Capital

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Attractive opportunity to make investment in Korean RE market

• Limitation of REITs and REF investment structure

- REITs: Limitation of the maximum share holding rate up to 40%, Demanding conditions to establish

REITs such as public placement conditions etc.

- REF: Excessive regulation by FSS and operating limitation such as minimum holding period of 1

years etc.

• Benchmark - Tax incentives for foreign investors and convenient investment structures

- Ex. JPUT structure in UK: acquisition and registration tax exemption, Capital gain tax exemption etc.

- Ex. Flexibility in operation of private REIT in US

Limitation of Korea RE Investment

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Korean M&A - from the perspective of a Korean private equity fund

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Private Equity Market in Korea

Korea has a relatively distinct private equity market primarily dominated by local LPs

Appetite for Korea LPs in Private Equity

Major LPs in Korea

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• World’s third largest pension fund in terms

of AUM

• AUM: Over USD 424 Billion

• Global alternative asset allocation:

7~8% of AUM

• Korea’s second largest LP after NPS in

terms of AUM

• AUM: Over USD 108 Billion

• Supervisory organization for nation’s

various community credit

cooperatives/unions

• AUM: Over USD 33 Billion

• Korea’s big three life insurance companies

• Asset Size:

- Samsung: USD 186 Billion

- Hanwha: USD 78 Billion

- Kyobo: USD 70 Billion

All figures above are based on latest publicly available

information from 2013 and 2014

(USD 1 = KRW 1,000)

Features of Many Korea LPs Investing in Private Equity Market

Mid Risk / Mid Return

Majority of local LPs focus on protecting their investment

against downside risk, which leads to mid return targets

Interim Cash Flows

Cash flow based realized profit throughout an investment period is

essential for investment decision making process

Investment Principal loss at an asset level

Major LPs face external audit by the government on a regular basis as to

whether investment principal recorded a loss at an asset level

• State-run institutional investor

• National Agricultural Cooperative

Federation (NACF), Nonghyup Bank,

Nonghyup Life Insurance

• Total Asset: USD 305 Billion

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Major Insurance Companies

Other Major Mutual Aids

Association and Pension Funds

Mezzanine-structured Investment

Due to a number of LPs asking for downside risk protection in equity investments, some PE funds

make mezzanine-structured investments

Mezzanine-structured Investment

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Debt

CB/BW

Equity

Risk

Return

Mezzanine

Investment

Upside

Potential

Having an equity kicker can give an investor a convertible feature to

exchange for shares or warrants to purchase shares at a set price at

some point in the future

Triggering an equity kicker provides upside potential as the issuer’s

stock price rises

Downside

Protection

Mezzanine-structured investment offers investors downside protection

against decline in the issuer’s stock price as a debt holder

Registered security against collateral strengthens downside protection

Downside risk is levied on Strategic Investors and major shareholders in

a return of favorable upside profit sharing

Mezzanine-structured investment provides diverse options to realize equity return with conversion to shares

while securing stable downside protection as a debt holder

Mezzanine-structured Investment

Return/Risk Profile

Equity with

Downside

Protection

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Mezzanine-structured Investment Cases by Dominus

Dominus Investment, a local private equity firm funded entirely by local LPs, specializes in mezzanine-

structured investments

Latest Mezzanine-structured Investment by Dominus Investment

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U.S Sportswear Brand Specialized in

Athletic Shoes

Overview

Invested at

KRW 7,500/share

Exited at

KRW 13,500/share

• Dominus has invested as a financial investor in a co-acquisition

of Inicis Inc. with KG Group (strategic investor)

• Invested Amount : KRW 40 Billion

Downside

Protection

• Secured minimum return in a debt-linked structure

• Registered security against shares held by KG

• Drag-along right

Upside

Potential

• Dominus has significantly increased the value by driving

positive changes in business strategy with the SI, which

resulted in realizing an IRR of 51.5%

Overview

• Dominus has invested as a financial investor in a co-acquisition of

K-Swiss Inc. with E-Land Group (strategic investor)

• Invested Amount : KRW 113 Billion

• Notable cross-border outbound M&A deal in 2013

Downside

Protection

• Secured minimum return in a debt-linked structure

• Registered security against collateral and shares held by E-Land

• Drag-along right

Upside

Potential

• The acquisition of the U.S sportswear brand will allow E-Land,

the No.1 fashion company with over 6,000 stores in China and

Korea, to tap deeper into the Asia market and ultimately

increase the value of the company in the near future

• Expecting to realize upside potential in 4 ~ 5 years

KG Inicis (Mezzanine-structured M&A) K-Swiss (Mezzanine-structured Cross-border M&A)

Korea’s Leading Online Payment Gateway (PG)

Service Provider

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More About Speakers

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Yulchon

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Antitrust

Intellectual Property

Tax

Corporate &

Finance

Real Estate &

Construction

Dispute Resolution

- Yulchon is a full-service law firm of 330

professionals

- We consistently rank among Korea’s

top-tier M&A practices

- Our strong antitrust, tax and intellectual

property practices add considerable

value to our M&A practice

Yulchon

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"Yulchon, a market leader in the development

and practice of law in Korea"

“Yulchon stands out as one of the most trusted law firms in Korea”

"Top 30 rapidly growing law firm in Asia"

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Gaw Capital Partners

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Gaw Capital Partners is a Hong Kong based real estate private equity fund management

company that focuses on markets in Greater China and other high barrier to entry markets

globally. Gaw Capital Partners currently manages four real estate funds targeting the

Greater China and Asia Pacific region, while Gaw Capital Partners USA is providing

services for separate account direct investment and fund management in the US and UK

markets. Gaw Capital Partners has raised equity in excess of $3.6 billion since 2005 and

currently commands assets of USD 7.5 billion under management.

Goodwin has over 20 years of real estate investment and management experience in Asia

and the United States, serving also as Managing Principal of Downtown Properties.

Gaw Capital's US associate Downtown Properties was set up in 1991 to manage a

privately owned US focused real estate portfolio of 2.5 million square feet of office

buildings and hotels of over 1,000 rooms as well as residential and industrial assets in the

US. These included the renovation of the iconic Hollywood Roosevelt Hotel in Los

Angeles and converting over 456,000 square feet of empty historical buildings into hip

residential lofts in downtown Los Angeles including the acclaimed Douglas Building.

Dominus Investment

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Dominus Investment Co., Ltd. is a Korea-based management firm of private equity funds

with assets under management totaling KRW637 billion.

Its key members possess experience in Korean and overseas investments via various

investment structures.

Dominus Investment currently manages NV Equity Fund, Dominus-Neostar Strategic

Growth Private Equity Fund, Dominus Strategic Growth Private Equity Fund 1, Dominus

New Growth Private Equity Fund and Dominus Global 1 Private Equity Fund.

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Yulchon LLC (Vietnam, Ho Chi Minh City)

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Street, Tu Liem District, Hanoi, Vietnam

Tel: +84-4-3837-8200 Fax: +84-4-3837-8230 E-mail: eyang@yulchon.com

Thank you