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Take West and take East

The late nineties Asian financial crisis provided Western private equity firms in Asia with an attractive source of deal flow in the form of turnaround transactions. But as the market matures, firms are increasingly looking at acquiring stakes in profit-making Asian businesses, according to the Asia Private equity Review.

The 1997-98 Asian financial Crisis might have brought havoc to Asia, but it was the launching pad for buyouts in Asian private equity.  In the first half of 2003, the buyout fund pool exceeded the non-buyout portion, for the first time commanding over 53 per cent or US$1bn of the US$2bn of fresh capital known to have come into the Asian private equity industry. At the same time, divestment performances of buyout transactions are demonstrating encouraging results. Significantly, however, buyout investors are no longer wholly engaged in the restructuring of financially delinquent companies, but are instead looking at substantial stakes in those that are profit-making.

CVC Asia Pacific (‘CVC A/P'), the Asian arm of the UK-based CVC Capital Partners (‘CVC'), is the most active buyout investor in Asia's buyout scene. On the vast map of the Region, in the first half of 2003, CVC A/P has stamped its footprint onto Japan, Singapore and Australia through three transactions, amounting to a total of US$522.8m  Its latest deal, the A$345m (US$235m) leveraged buyout of Tech Pacific Group (‘Tech Pacific') underscores the importance of having a global network, in addition to well established local presence in order to access to profit-making private enterprises.

Deal Origination
Tech Pacific first took a seat at the negotiation table in CVC A/P's boardroom two years ago.  CVC Capital Partners' Dutch office was in fact the primary source of this deal. Prior to the current new shareholder structure, Tech Pacific was a wholly-owned subsidiary of the Dutch-based Hagemeyer NV, a business-to-business (B2B) distribution service group with operations in Europe, North America and Asia Pacific. “In the past two years, the quality of the management team of Tech Pacific has improved significantly and we became interested”, said Mr Andrew Cummins, managing director of CVC A/P's Australia office.  Over their 24 months of courtship, a strong bond was developed between both parties.  When Hagemeyer was ready to reduce its equity holding in Tech Pacific, CVC A/P was given an “exclusive offer”, according to Mr Cummins.

The Company
Established in 1981 as a broad-based distributor of information technology products in Australia, Tech Pacific has expanded its network into more than nine countries over the last decade. Some of the company's vendors include prominent names like 3Com, Cisco, Hewlett-Packard/Compaq, IBM/Lotus as well as Intel and Microsoft.

Tech Pacific's background could be described as “uncharacteristically Asia”, which traditionally keeps an unbroken record of sole ownership, often family-held, before inviting third party shareholders.  Ten years after its establishment, in June 1991, Tech Pacific became a 100 per cent subsidiary of Hong Kong listed First Pacific Group. Six years later, in September 1997, Tech Pacific's new parent was the Netherlands-based Hagemeyer, which assumed a 100 per cent ownership of the company.  

During the past few years, Hagemeyer has been preparing for the disposal of Tech Pacific. The new handover of control saw CVC A/P took up a 58.5 per cent position in the company while Hagemeyer will retain its presence, but reduced to become a 31.5 per cent equity holder, with the residual proportion to be held by Tech Pacific's management.

Investors' Strategy
The A$345m Tech Pacific transaction was two-thirds financed by financial institutions, with the residual one-third as equity capital.  Mr Cummins revealed that local institutions shouldered A$205m of the debt financing, of which A$175m came from Australian banks and A$30m in mezzanine debt from AMP.  An additional A$25m came from India. 

Mr Cummins explained that CVC A/P's capability in securing such a substantial amount from local institutions is largely due to the private equity house's lengthy history in Australia. While CVC A/P has been in operation in Australia since 2000, its parent, CVC traces its activities Down Under back to 1998 when it participated in the A$1.6bn buyout of Amatek. 

CVC and its Asia Pacific subsidiary have established the reputation as a leader of the Australian buyout market. Their names have been associated with the country's three largest deals. In addition to the Amatek transaction, there was the A$780m Pacific Brands buyout completed in 2001. And Tech Pacific is the latest additon to this list.

 Although the prevailing interest rate in Australia is higher than other economies, Mr Cummins substantiated
CVC A/P's exposure in Australia in that it has been able to negotiate “favourable terms” with local financiers.

Future Outlook
CVC A/P is confident of its ability to add value in Tech Pacific, which has been enjoying growth in turnover since 1998.  For the current fiscal year, Mr Cummins disclosed that Tech Pacific forecasts A$3bn in revenues, a growth of 7.9 per cent compared with that of last year.  He is confident that the company can maintain a 2 per cent EBIT margin.

Although Australia is Tech Pacific's largest market, CVC A/P's road map for its newest investee is to further open up the Indian market, where technology development and a rapidly growing middle class presents “the biggest growth opportunity” for the company.  Currently, on Tech Pacific's product distribution ladder, India commands second position and the market is anticipated to grow further at 20 per cent per annum.

Tech Pacific will be principally engaged in “customer-relationship” and “vendor-relationship” enhancement, in a drive to further strengthen its existing relationships with blue-chip clients.

On the finance side, the private equity house aims to reduce Tech Pacific's debt before helping the company seek public listing status. All these, it hopes to complete within the next three years, at which time, CVC A/P expects to reap a 25 per cent internal rate of return from this colossal investment.

Observation
Leveraging on its global network and established local presence in Australia, CVC A/P has been able to access Tech Pacific, an undisputed leader in the distribution of technology products and services. But the deal is not without peril. Tech Pacific's future hinges on its ability to maintain its high revenues in its low margin business. Mr Cummin is realistic and has aptly described Tech Pacific as a “one banana skin business”. In summary, there is very little room for error and should this happen, the result would be detrimental to Tech Pacific's long term growth.

CVC A/P ‘s immediate task in Tech Pacific is to sustain the company's cash-flow, while at the same time directing its resources to relationships with existing blue-chip customers.  Mr Cummins believes enhancing the company's all important client and vendor relationships, as well as preserving Tech Pacific's strong management team, will be crucial in this landmark buyout transaction (Australia).

Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit our website at www.asiape.com or email us at info@asiape.com.