Shareholders in South Korea's Hi-Mart Co Ltd (071840.KS) have rejected a request by private equity fund MBK Partners to extend its exclusive negotiating rights to a majority stake in the electronics retailer, reopening the door to rival bidder Lotte Shopping Co Ltd (023530.KS).
MBK, one of South Korea's better known funds, had asked for more time after very recent performance data that it saw during diligence revealed a greater-than-expected deterioration, said a source familiar with the matter, who declined to be identified because the negotiations were private.
The mid-market buyout fund had reportedly outbid the nation's biggest department store operator with a $1.1 billion offer, but Lotte has been regarded by the market as a better fit for Hi-Mart and the news of MBK's loss of exclusivity sent Hi-Mart shares surging 8 percent.
The sellers, Hi-Mart's largest shareholder Eugene Corp (023410.KQ) and two other shareholders are expected to turn to other bidders, said a separate source with direct knowledge of the matter. The source declined to be identified as he was not authorized to talk to the media.
Just last week, MBK was picked as the preferred bidder for the 65.3 percent stake after offering as much 80,000 won per share according to local media reports -- a deal that would have ranked among Asia's top three private equity transactions this year.
But shares in Hi-Mart, South Korea's biggest electronics retailer, lost roughly a fifth of their value after bidding closed on June 20, hit by disappointment that Lotte was not the preferred bidder and after a steep drop in first-quarter earnings.
The stock closed at 52,000 won on Tuesday, which values the stake at $700 million.
MBK, run by former Carlyle Asia Partners president Michael Kim, could not be reached for immediate comment.
It had been sounding out South Korean banks for financing of around $400 million for its Hi-Mart stake purchase, according to Thomson Reuters publication Basis Point.
Media reports said Lotte had bid between 75,000 to 80,000 won per share. A Lotte spokesman said the company did not know if MBK had withdrawn from the sale or whether the sale was now open to other bidders, adding that it will consider the issue once it knows.
Department store operator Lotte Shopping, is part of the Lotte Group which has in recent years pursued an aggressive M&A strategy snapping up targets across Asia, including Chinese supermarket operator Times Ltd in 2009.
Hi-Mart reported a 43 percent tumble in first quarter operating profit from a year earlier with analysts citing weak consumer demand for home appliances. They added that Hi-Mart was particularly hard hit, with leadership suffering after its former CEO was charged in a $228 million embezzlement case.
Seo Jung-yeon, retail sector analyst for Shinyoung Securities, said she expects a worse slide for second-quarter profit.
Founded in 1987, Hi-Mart operates about 290 stores, controlling 35 percent of the market, ahead of Samsung Digital Plaza.
North Asia-focused MBK plans to raise a new $1.5 billion fund, according to sources with knowledge of the matter, but in a tough fundraising climate has hit a series of snags as it actively pursues acquisitions and sales of its assets.
Last year, MBK, which has $3.8 billion in capital under management, tried unsuccessfully to sell its stake in Japanese software developer Yayoi, one of a number of private equity sales that stalled as buyers have turned bearish on Europe's debt woes.
The firm also faces an anxious wait on an agreed $2.4 billion sale of Taiwan cable TV operator China Network Systems, as the buyer may have to pull the deal because of delays getting regulatory approvals.
This article is copyrighted by Reuters
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