"A 100 billion won deal becomes 167 billion won..." Mandatory tender offers to change 'PEF math' [fnMarketWatch]

[Financial News]  Hanwha Investment & Securities analyzed that, following the introduction of the mandatory tender offer system, the key factor in private equity funds' acquisitions and mergers of listed companies may shift from enterprise value to funding capability. The total acquisition cost rises because buyers must purchase ordinary shareholders' stakes at the same price, rather than simply paying a higher control premium to the largest shareholder.
On the 21st, Park Se-yeon, a researcher at Hanwha Investment & Securities, said in a report titled "Redistribution of Control Premiums: 1Mandatory Tender Offers and Private Equity Funds," "A mandatory tender offer is not a system that raises a PEF's per-share premium; it is a system that changes the formula for calculating total acquisition funds."
According to Hanwha Investment & Securities, the median disclosed premium was approximately 26% among domestic listed-company transactions since 2010 in which a PEF participated as the buyer and a premium was disclosed. In other words, PEFs have already been paying substantial control premiums over market prices.
What will change going forward is "volume" rather than "price." Until now, the premium has mainly applied to the stake sold by the largest shareholder. Once mandatory tender offers take effect, however, the same price must also apply to tender offers targeting ordinary shareholders. The amendment approved by the National Policy Committee requires a party that acquires at least 25% of a listed company and becomes its largest shareholder to make a tender offer aimed at reaching 50% plus one share of the issued shares, including its existing holdings.
The difference is substantial when applied to an actual deal. If a PEF with no existing stake acquires a 30% stake from the largest shareholder for 100 billion won, it must make an additional tender offer for approximately 20 percentage points to secure a majority. At the same price, the total acquisition cost would rise to about 167 billion won. If the largest shareholder holds a 45% stake, the additional burden would be much smaller.
As a result, the largest shareholder's ownership stake itself is expected to become a new variable in M&A. Even with the same enterprise value and premium, the amount of capital a PEF must raise will vary depending on how much of the stake the largest shareholder sells.
Hanwha Investment & Securities also expects acquisition financing and co-investment to become more important. The financing structure must include not only the purchase price for the largest shareholder's stake but also the funds needed for the tender offer to ordinary shareholders. As the equity capital and acquisition financing committed to each deal increase, the number of transactions that can be pursued by the same fund may decline.
Still, it is too early to conclude that mandatory tender offers will immediately discourage PEF investments in listed companies. The actual burden may vary depending on co-investment, acquisition financing terms and the timing of exits from existing portfolio companies.
Park noted, "Ultimately, what changes is the question asked by the PEF investment committee (IC)," adding, "Whereas the focus in the past was on 'How much should we pay for the largest shareholder's stake?', going forward, the key questions will be 'How much is needed to secure a majority, and how will it be financed?'"  Park continued, "In effect, the issue of the control premium is shifting from price to volume, while the battleground in M&A is moving from valuation to financing."  
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