Asian tycoons give LBOs an eastern twist
By Peter Thal Larsen
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
Asia’s tycoons are taking a page from the leveraged buyout manual. Shuanghui’s$4.7 billion takeover of U.S. pork producer Smithfield, like recent deals in Thailand and Singapore, combines hefty leverage with limited synergies.
Merging China’s largest pork producer with its U.S. equivalent would seem a logical move. But there are few obvious savings: Shuanghui says it will leave Smithfield’s operations untouched. Any benefits depend on Smithfield being able to sell more pork in China because it is owned by a Chinese company.
What Shuanghui brings is debt. Banks are lending it a total of $7 billion, people familiar with the matter told Reuters. True, the $3 billion facility it has earmarked to refinance Smithfield’s borrowings may end up smaller: owners of $1 billion of the company’s high-yield bonds, which are trading well above face value, are likely to hold onto their investments. And privately-owned Shuanghui currently does not have any leverage, people familiar with the company say. Even so, the $4 billion it is raising from Bank of China is almost seven times its average EBITDA over the last three years.
Other recent deals have similar features. CP All, the Thai retailer controlled by tycoon Dhanin Chearavanont, borrowed $6 billion in May to fund a $6.6 billion takeover of Siam Makro, the Thai cash-and-carry group. Low interest rates and the hidden value in Siam Makro’s property portfolio mean the purchase can support hefty borrowing without any synergies. And in January another Thai tycoon, Charoen Sirivadhanabhakdi, won the battle for control of Fraser and Neave with a debt-heavy $11.2 billion offer based largely on breaking up the Singaporean conglomerate.
Private equity is not entirely out of the picture: funds such as CDH and Goldman Sachs are among Shanghui’s shareholders. Nevertheless, it’s noticeable that, in the midst of a debt boom, Asian takeovers account for just 9 percent of deal activity by private equity firms so far this year.
Tycoons, meanwhile, have the advantage of local clout, which helps them negotiate better terms with lenders. They can also afford to take a longer-term view of returns. Despite the obvious risks of excessive leverage, these quasi-buyouts will remain in vogue as long as the banks providing financing are flush.