February 22, 2019 / 10:00 AM / in 5 months

Godiva serves up tasty multiple

* Loans: LBO financing stretches boundaries in cash-rich Japanese market

By Wakako Sato

TOKYO, Feb 22 (LPC) - Cash-rich private equity firms and Japanese banks flush with liquidity are pushing the boundaries of leveraged finance in Asia, with an unusually high leverage multiple expected on the leveraged buyout of Godiva Chocolatier’s businesses in parts of the region.

South Korean private equity firm MBK Partners won the bid for four of Godiva’s 100-plus markets: Japan, South Korea, Australia and the future rights to develop New Zealand. It is said to be paying an acquisition price between US$1bn and US$1.5bn.

Japan’s three megabanks and mezzanine investors are preparing to provide debt financing of up to ¥100bn (US$903m), representing an unusually high debt-to-Ebitda multiple of up to 10 times.

“There are tons of small-cap deals in the market, but limited number of mid to large-cap transactions, so everyone flocks to such deals,” said a leveraged finance banker in Tokyo.

The strong interest from lenders to support the LBO is not surprising. MBK pipped four other PE firms, including Baring Private Equity Asia, CVC Capital Partners and Marunouchi Capital for the assets, which carry strong brand value and generate stable cashflows.

“From a lender’s point of view, as long as the existing business is steady, you can expect the loan to be repaid despite high leverage multiples,” said another leveraged finance banker in Tokyo.

Godiva’s Japanese business is said to contribute around 90% of the revenues across the four markets MBK is buying. Revenues at Godiva Japan almost tripled since 2010 to ¥39.8bn in 2017, according to the company. Godiva Japan’s Ebitda is slightly less than ¥10bn, according to market participants.

Japan is the world’s sixth-biggest chocolate market, according to Euromonitor International, with estimated 2018 retail sales of US$5.2bn.

HIGH LEVERAGE PRECEDENT

It is not the first time MBK has employed such a high leverage multiple in an Asian LBO. Back in 2007, before the global financial crisis, it raised ¥45.5bn in debt, representing a nearly 12 times Ebitda multiple, for its ¥71bn purchase of accounting software firm Yayoi.

The same year MBK wrapped up a NT$31.5bn (then US$947m) three-tranche LBO loan backing its purchase of a controlling stake in Taiwanese cable television operator China Network Systems. The leverage on the borrowing was covenanted at around 8.75 times.

Several other LBO loans from Taiwan’s cable TV sector followed in later years with leverage multiples of over seven times, proving to be the norm in a hugely liquid domestic banking market, where lenders were hungry for yield.

In most other parts of Asia, LBO loans have typically carried leverage multiples of around five to six times given the conservatism among lenders in a bank-dominated market. In some instances, mezzanine funds and institutional investors have provided additional leverage of between 0.25 times and 1.00 times.

In Japan, the most recent high-water mark for LBO loans was the 2017 buyout of cheese-tart shop Bake in 2017, when homegrown private equity fund Polaris Capital Group raised debt with an eight times leverage multiple, according to one banker.

In the last couple of years, leveraged finance has produced strong numbers in Japan, although the record US$13.3bn in 2018 was largely due to one jumbo financing – a ¥825bn loan backing Bain Capital’s buyout of Toshiba Corp’s chip unit in Japan, according to LPC data. It was sold to only four banks even though it was the biggest LBO financing from Asia.

Less than a year later, another jumbo borrowing from Japan is poised to beat that record. KKR-owned Japanese auto parts maker Calsonic Kansei is raising about ¥1trn to acquire the high-tech car parts unit of Italy’s Fiat Chrysler Automobiles and refinance existing debt. The loan is expected to carry a leverage multiple of over five times the combined Ebitda of Calsonic Kansei and the target Magneti Marelli.

Reporting By Wakako Sato; editing by Prakash Chakravarti and David Holland

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