On the 13th, Homeplus Co. reopened 67 stores nationwide. It came one month after the chain began a full temporary closure on the 13th of last month. Whether operations will continue is uncertain. The deadline set by the Seoul Bankruptcy Court for approval of the rehabilitation plan is on the 4th of next month. If a buyer is not found by then, the plan will be voted down and the company will proceed toward bankruptcy. The industry sees slim chances for a standalone survival without a buyer. In effect, it is a three-week "life-support operation."
Homeplus Co., which began in Daegu in 1997, has changed owners three times over 29 years. Samsung, which took the first step, did not find success, while British retailer Tesco left with significant gains. The current owner, private equity fund (PEF) MBK Partners, fell into the "winner's curse" and has been unable to exit for more than 10 years. There is no dispute that the biggest victim is Homeplus, now at the brink between life and death.
◇ Handed over during the IMF crisis, resold after accounting fraud
According to related industries on the 18th, the origin of Homeplus Co. is the discount store business of the distribution institutional sector of Samsung C&T, launched in 1997. It opened its first store in Daegu in September that year, but within two months the foreign exchange crisis (IMF) hit, putting it on the group's restructuring list. In 1999, Samsung C&T transferred management control and 49% equity to Britain's Tesco, turning it into a joint venture, and in 2011 it sold the remaining equity, making it a 100% subsidiary of Tesco.
Under Tesco's regime, Homeplus Co. expanded its size. In 2004 it introduced the corporate supermarket Homeplus Express, in 2005 it acquired Aram Mart, a Yeongnam-region supermarket, and in 2008 it acquired Homever, which E-Land Group had created by buying Carrefour, for 2.3 trillion won. Just before the sale in 2015, it controlled about 140 hypermarkets, 375 supermarkets and 327 convenience stores. Fiscal year 2014 sales were 8.6 trillion won. It was a solid No. 2 after E-MART.
But this structure did not last long either. In 2014, when Tesco headquarters became embroiled in an accounting fraud scandal and received a warning of a credit rating downgrade, it put Korea—then the most lucrative among its overseas businesses—up for sale. At the time, Homeplus Co. accounted for about 8% of Tesco's total sales. In both sales, it was not because Homeplus was weak, but due to the owner's circumstances.
In 2015, MBK Partners bought Homeplus Co. for 7.2 trillion won, the largest deal in the history of domestic mergers and acquisitions (M&A). It was known to have bid more than 500 billion won higher than rival private equity funds. There were two reasons for committing this money. Just before the acquisition in 2014, Homeplus's EBITDA, showing its cash generation capacity, exceeded 700 billion won a year, and the value of its real estate assets—stores and sites located at key points in major city centers nationwide—was estimated at more than 6 trillion won.
◇ A company that paid for itself
MBK did not buy Homeplus Co. directly. It established a special purpose company (SPC), Korea Retail Investment, first acquired a subsidiary that supplied bread to Homeplus, then expanded it through a paid-in capital increase to make it a holding company and executed a reverse acquisition of the parent company, Homeplus. Experts see this as a structure designed to have a subsidiary swallow the parent to reduce taxes.
A closer look at the source of the 7.2 trillion won makes the structure clearer. MBK's actual equity was about 2.2 trillion won, a little over 30% of the total, and this also included a significant portion of funds from limited partners such as the National Pension Service, Canada Pension Plan Investment Board (CPPIB) and Temasek. The remaining 4.3 trillion won was acquisition financing, namely debt. Pledged as collateral were Homeplus Co.'s own equity and real estate. And when two intermediate holding companies were reverse merged into Homeplus at the end of 2019 and in February 2020, that debt was transferred intact onto Homeplus's books.
The 4-trillion-won-range debt was paid down. Through sale and leaseback—selling prime stores and leasing them back—it disposed of more than 20 stores. In return, it became a tenant. Rent, which did not exist before, was added as a fixed annual cost.
Meanwhile, the business environment also slumped. As e-commerce, including Coupang, grew rapidly, offline retail took a direct hit. EBITDA, which exceeded 700 billion won at the time of the acquisition, fell to 264.4 billion won in 2024 and turned negative last year at -75.6 billion won. Operating profit also flipped from 309.1 billion won in 2016 to a loss of 546.4 billion won last year.
◇ "When buying corporations, guidelines such as loan-to-value ratio should be established"
Homeplus Co., which is undergoing corporate rehabilitation due to management difficulties, closed 37 stores, causing more than 3,500 employees to leave the company. Unpaid accounts payable to suppliers alone amount to several hundred billion won. MBK also has struggled with an exit and says it wrote off in full the 2.2 trillion won equity principal it invested, but key portfolio companies of its third fund other than Homeplus—Orange Life, Doosan Machine Tools and Daesung Industrial Gases—were sold successfully, and the fund itself is said to have recovered about 6 trillion won.
Kim Min-gi, a professor at KAIST and a member of the C&G (Control & Governance) Forum, a research group of experts on governance and management control, said, "After the acquisition, MBK relatively emphasized realizing financial value, such as securitizing store real estate, while investment to respond to the expansion of e-commerce was insufficient." Yoo Hyo-sang, head of the Unicorn Management and Economics Research Institute, said, "When buying corporations, regarding leveraged structures that create excessive liability relative to cash generation, as in the United States, financial authorities should establish clear ex-ante guidelines on debt relative to EBITDA or the concept of LTV (loan-to-value collateral ratio)."