KKR-Led Group Buys Taiwan's LCY Chemical for $1.56 Billion

(Bloomberg) -- KKR & Co. said it is taking over Taipei-based LCY Chemical Corp. in a deal valued at NT$47.8 billion ($1.56 billion), part of a quest by the global buyout firm for more transactions involving controlling stakes in the Greater China region.

A consortium led by New York-based KKR agreed to acquire all of LCY’s shares for NT$56 each, a 17.3 percent premium to Friday’s close, according to a press release. LCY shares jumped the 10 percent daily limit in Taipei on Monday, to NT$52.50.

The LCY deal is part of KKR’s effort to achieve a “healthy balance” between transactions in Greater China involving controlling stakes and minority deals, said Paul Yang, the buyout firm’s Greater China chief executive. Many of KKR’s previous deals in the region have involved minority shareholdings, he added.

The transaction is KKR’s second in Taiwan following the purchase in 2007 of $230 million of convertible bonds in Yageo Corp. However, KKR’s subsequent attempt to take over the electronic-parts maker was rejected by regulators in 2011.

“This is significant for KKR because we’re returning to Taiwan,” Yang said in an interview. “China accounts for a significant portion of our Asian portfolio, but there’s greater scope to focus on Taiwanese opportunities. This transaction adds a different dimension to our Greater China portfolio.”

Taiwan Opportunities

Yang said he sees opportunities to invest in Taiwanese firms with a market value of between $2 billion and $5 billion, citing strong cash flows, reasonable valuations, and a favorable financing environment. Private equity will be increasingly attracted to “hidden champion” Taiwanese companies, in lower-profile and specialized industries such as the chemicals sector, in which LCY is a leader, he said.

Before Monday’s share price surge, LCY was trading about 7 times its 2017 earnings before interest, taxes, depreciation and amortization, compared to more than 10 times at global peers, according to KKR estimates.

“Taiwan isn’t frequently the most focused-on market for private equity, but we do see other firms assessing opportunities here,” Yang said. “We may be lucky to have one of the first privatizations across the finish line, but we do expect PE activity to pick up in the next two to three years.”

Global investors have faced challenges disposing of their holdings in Taiwanese companies in recent years. Carlyle Group finally got approval to sell its stake in Eastern Broadcasting Co. in January after previous attempts were unsuccessful, while MBK Partners Ltd. faltered in attempts to offload its holding in cable television operator China Network Systems Co.

“In previous years, the PE community has been extremely focused on the process of getting exits and deals approved,” Yang said, adding that this also caused some buyout firms to overlook the opportunities in Taiwan.

International Markets

The KKR-led consortium, which includes LCY employees and certain LCY founding family members, plans to help the Taipei-based firm expand in international markets through mergers and acquisitions. LCY has production plants in Taiwan, mainland China and the U.S., the release said.

“Many of these companies are family-controlled and are beginning to explore opportunities to expand their geographic coverage, broaden their portfolios, and elevate their business to a higher level globally,” Yang said. “A lot of these companies are cash-rich, so the need for capital is secondary. They are realizing that a global partner can help them to become more visible in their industry.”

The LCY deal is expected to close in the fourth quarter, subject to regulatory approvals. KKR is making the investment from its $9.3 billion Asia fund III. Goldman Sachs Group Inc. advised on the deal and will arrange financing for the consortium, the release said.

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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