August 31, 2018 / 5:10 AM / 3 months ago

Yum China buyout on back burner

* Loans: Rejected offer dashes hopes for record Asian leveraged financing

By Prakash Chakravarti and Chien Mi Wong

HONG KONG, Aug 31 (LPC) - The rejection of a US$17.6bn bid for fast-food group Yum China Holdings has dealt a blow to Asia’s leveraged finance market, which had been eyeing a big payday from China’s biggest private equity buyout.

Yum China last week rejected a mooted offer of US$46 a share from a consortium led by Chinese investment firm Hillhouse Capital Group. A formal bid would have valued the New York listed operator of KFC, Pizza Hut and Taco Bell brands in China at 13x Ebitda.

Lenders were considering providing up to US$8bn of debt, including a senior loan of around US$6.5bn–$7.0bn and a mezzanine financing of US$1.0bn–$1.5bn, although the Hillhouse consortium had not mandated any banks.

A US$8bn debt deal for Yum China would have represented leverage of around 6x, with the senior portion accounting for 4.8x–5.2x.

That would have set a record in Asian leveraged finance, eclipsing a ¥825bn (US$7.51bn) facility earlier in the year for the Bain Capital-led buyout of Toshiba Corp’s memory chip unit.

Yum China’s shares rose sharply on Tuesday on news of the rejected offer, as investors adjusted their valuation expectations. The stock jumped 11% at one point before closing 3.4% higher, and added to those gains during the week. Thursday’s close of US$38.47 was a 7.0% gain in three days.

“The deal is not entirely dead. It depends on the strategies and the appetites of the sponsors and whether they would revisit the situation,” a leveraged finance banker in Hong Kong said.

The consortium also included sovereign wealth fund China Investment Corp, and private equity firms Baring Private Equity Asia and KKR.

People familiar with the situation said DCP Capital, an investment firm run by former KKR senior executives, was also involved, and Chinese investment firm Primavera Capital, an existing shareholder in Yum China, was also expected to roll over its equity.

Yum China’s unsuccessful buyout follows an earlier private equity acquisition of a fast-food chain in China.

In February 2017, a Citic-led consortium purchased a majority stake in the China and Hong Kong businesses of US fast food giant McDonald’s Corp for US$2.08bn.

The Citic group borrowed US$986m with leverage of less than 3x.

ASIAN DYNAMICS The earlier enthusiasm around a Yum China buyout is symptomatic of the intermittent nature of Asia’s leveraged finance market, where banks jump at rare opportunities to lend at higher returns.

Private equity firms have been able to raise debt with higher leverage ratios, looser covenants and tighter pricing in Asia due to abundant liquidity and rising competition between arrangers.

In May sponsor Affinity Equity Partners closed a US$255m five-year amortising loan backing its purchase of a majority stake in Hong-Kong based garment label maker Trimco International Holdings.

Leverage of 5.25x and an average life of 4.65 years were significantly more aggressive than 2.25x gearing and 3.75-year average life on a US$55m five-year amortising loan that backed Partners Group’s earlier buyout of Trimco in 2012.

“We see changing structures for the same asset, but the margins remain the same or are even lower,” Eileen Yang of CTBC’s global capital market group, corporate finance department said at a leveraged and acquisition finance conference in Hong Kong last Tuesday.

CTBC has underwritten five loans for Trimco and banks have been willing to lend more as they become more familiar with the the credit, she added.

Other participants at the Asia Pacific Loan Market Association’s conference were more critical of the stop-start progress of the region’s leveraged finance market.

“There isn’t sufficient dialogue within the lender community or with borrowers as to moving away from the status quo, and as a result we are not making progress on obvious changes that can benefit everyone,” said John Kim, senior managing director at CVC Capital Partners.

“One good example is maturity. In Hong Kong and Singapore, we are perpetually stuck with a five-year maturity. The other example is amortisation,” he added.

Leveraged finance structures have evolved in Australia, where the domestic institutional investor base is developing an interest, and issuers are also able to tap the US TLB market.

Quadrant Private Equity recently closed a A$150m (US$110m) unitranche loan backing its purchase of a majortiy stake in before-and-after-school care provider Junior Adventures Group.

The six-year secured unitranche financing is only the fourth since the structure made its Australian debut last year, and the first for an LBO in the syndicated market. Previous unitranche loans have been largely closed as bilateral or club deals.

“I see the unitranche as a force that is going to complement bank liquidity and help grow the market,” said CVC’s Kim.

Reporting By Prakash Chakravarti and Chien Mi Wong; Additional reporting by Evelynn Lin and Yan Jiang; Editing by Tessa Walsh and Steve Garton

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