MBK in hot seat over snowballing Homeplus debacle

Chairman Michael ByungJu Kim urged to use personal assets for retailer

By Jun Ji-hye

MBK Partners, the largest private equity firm in Northeast Asia, is facing criticism for "irresponsibly" placing Homeplus into corporate rehabilitation without any self-recovery efforts, despite its massive acquisition debt having led to financial difficulties, industry officials and experts said Thursday.

Homeplus union members criticized the private equity firm for prioritizing the recovery of its initial investment in acquiring Korea’s No. 2 supermarket chain by selling stores, rather than fostering its growth.

Concerns are also growing that individual investors could face losses, as Homeplus sold commercial papers to both corporations and retail investors before filing for corporate rehabilitation.

Moreover, since MBK received a 600 billion won ($416 million) investment from the National Pension Service when acquiring the retailer, the fallout could escalate depending on how rehabilitation proceedings unfold.

On Tuesday, Homeplus suddenly filed for corporate rehabilitation with the Seoul Bankruptcy Court, stating, “The decision was inevitable to proactively ease potential short-term financial burdens arising from a credit rating downgrade.” Its corporate bond rating was downgraded from A3 to A3- on Friday.

The court approved the rehabilitation proceedings soon after the application was submitted.

In 2015, MBK acquired a 100 percent stake in Homeplus from the British retailer Tesco for 7.2 trillion won. Excluding the 1.2 trillion won in existing debt that Homeplus had assumed, the actual acquisition price was 6 trillion won.

At the time, the acquisition method as well as the high cost attracted attention, as nearly half of the total cost, about 2.7 trillion won, was raised through acquisition financing via loans from the banking sector.

About 3.2 trillion won was secured through funds, including contributions from co-investors and 700 billion won from a preferred stock fund. In this process, the National Pension Service invested 600 billion won in redeemable convertible preference shares, raising concerns about the recovery of those funds.

Acquisition financing is often used by private equity firms when acquiring companies, but covering nearly half of the total acquisition cost with such financing was viewed by many market observers as excessive and risky.

MBK moved forward with the acquisition, driven by an overly optimistic outlook that large discount stores would lead the retail sector.

However, this turned out to be a misjudgment, as the growing debt burden, caused by excessive borrowing amid rising interest rates, was further exacerbated by the rapid expansion of online retailers like Coupang in the 2020s.

The acquisition debt became a lingering burden on Homeplus’ management, prompting MBK to begin selling off the retailer’s assets one by one. Meanwhile, profitability also deteriorated.

Operating profit, which stood at 320.9 billion won in the 2016 fiscal year, started to decline sharply and turned into a 133.5 billion won loss in the 2021 fiscal year, followed by three consecutive years of losses.

This led to criticism, primarily from labor union members, suggesting that MBK was more focused on quickly paying off acquisition debt and exiting through asset sales, rather than pursuing the growth of Homeplus. As a result, thousands of employees were laid off, leading to a situation where normal store operations became impossible, they said.

On Thursday morning, the Korean Mart Labor Union under the Korean Confederation of Trade Unions, one of the country’s two biggest umbrella unions, held a press conference in front of MBK's office in Seoul, urging the firm to take responsibility for Homeplus.

Criticism is also growing over Homeplus issuing commercial papers and other financial instruments until just before initiating rehabilitation proceedings.

According to market data, Homeplus sold approximately 5 billion to 7 billion won worth of commercial papers in a single day on Feb. 21, six days before filing for corporate rehabilitation.

Market observers believe that these commercial papers were sold not only to corporate entities but also to retail investors.

“Homeplus is scheduled to submit a rehabilitation plan to the court after consulting with its creditors, but if this process does not proceed smoothly, it could inevitably lead to significant losses for investors and vendors,” said an investment industry official, who declined to be named.

Additionally, experts stressed that filing for corporate rehabilitation without making much effort to normalize management was an irresponsible decision. It was also an unusual move, given that brand image is particularly important for a retailer.

“Private equity firms are primarily focused on maximizing profits, but when acquiring a company, they must demonstrate a responsible attitude toward management improvement,” said Kim Dae-jong, a professor at Sejong University’s School of Business. “MBK’s decision to file for rehabilitation without any further self-rescue measures goes against the principles of responsible management.”

As Homeplus has entered rehabilitation proceedings, financial institutions that lent large sums for the acquisition now face uncertainty, as recovering the loans will be in limbo for the foreseeable future.

Although MBK said that Homeplus stores will continue to operate normally during the rehabilitation process, suppliers are increasingly concerned about the possibility of not receiving payments.

Amid growing concerns, LG Electronics has temporarily suspended product deliveries to Homeplus, and other major food suppliers are also halting deliveries, according to industry sources.

“When a company faces difficulties, it is common for the largest shareholders or management to invest their own funds to help restore normalcy,” Kim said. “As the largest shareholder, MBK should not avoid responsibility. If necessary, Chairman Michael ByungJu Kim should consider using his personal assets to provide additional financial support and make efforts toward the company’s rehabilitation.”