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M&As

Barbarians at the gate: fraud-hit Osstem wooed by bankers

Investment banks, PE firms keen to reach out to Osstem's founder-cum-top shareholder to make 'good proposals'

By Jan 26, 2022 (Gmt+09:00)

5 Min read

Barbarians at the gate: fraud-hit Osstem wooed by bankers

South Korea's Osstem Implant Co., battered by the country's largest-ever embezzlement scandal for a listed company, is now being courted by investment banks and private equity firms, who believe there is much room for improvement in its corporate value.

"Is there any way to have top management contacts of Osstem Implant?,"  a Korean private equity fund manager asked Market Insight, the capital market news outlet of The Korea Economic Daily.

"I'd like to have tea time with them. ... I have a really good proposal." 

The country's largest dental implant maker has come into the spotlight this month, after it revealed itself the victim of the embezzlement of 188 billion won ($160 million) by its ex-finance team manager. The number was later revised upward to 221.5 billion won to include the money the accused had previously stolen from the company and secretly returned.
 
The fraud case led to the suspension of its share trading since Jan. 3. 

NO FUNDAMENTAL CRISIS

Investment bankers said Osstem is an attractive target given that its current crisis was not derived from its market share fall, nor a massive recall on its products, but only because of employee fraud.

They take note of the company's strong brand awareness and its position as the No. 2 dental implant supplier in China, where the oral care market is forecast to grow 20% per year.

Osstem would be able to enhance its value mainly by upgrading its internal oversight systems and introducing advanced management systems, where M&A bankers have strength.  

Some IBs would go even further: Osstem could be taken over by a foreign company in the same industry and rebranded.

"Generally, companies put up for sale due to exceptional circumstances tend to generate high returns," said a PE source.

VALUATION

If Osstem is put up for sale, it would be valued at around its market capitalization of around 2 trillion won ($1.7 billion) as of end-2021, or about 17 times its price-to-earnings ratio, according to IB sources.

On Tuesday, Osstem said its operating profit in 2021 jumped 44.6% on-year to 141.8 billion won, with sales up 30.3% to 822.9 billion won. But its net profit plunged 69% to 31.9 billion won, after booking the embezzlement-related losses. 

Still, its estimated valuation is far lower than the average PE multiple of 28 for its rival companies, including Straumann of Switzerland, Dentsply Sirona of the US and South Korea's Dentiums Co.

Last July, local media reported that Straumann was considering buying South Korea's No. 3 dental implant brand Dio Corp. As of late December of last year, there has been no progress made on the plan to sell a controlling stake owned by its holding company, according to Dio's regulatory filing.

(Courtesy of Osstem)
(Courtesy of Osstem)

PENDING ISSUES

Osstem's top management seems unlikely to offer its controlling stake in the immediate future. But investment banking sources said its founder-cum-top shareholder Choi Kyoo-ok could eventually give up his 20.61% stake to resolve pending issues.

Choi put up a 12.3% stake in Osstem as collateral for 110 billion won in loans. On the back of the embezzlement scandal, the loan will unlikely be rolled over, and Choi could find it difficult to repay the loan, according to the sources. 

If he fails to pay off the debt, his shareholding might shrink to 8.31% and his status as a top shareholder could be threatened, with Lazard Asset Management, trying to dispose of its 9.7% stake in Osstem at a sharp discount, according to sources with knowledge of the matter. But Lazard denied the report.

Further, the dental implant maker is facing a class-action lawsuit from minority shareholders, seeking compensation for their investment losses caused by the suspension of its share trading.

On Feb. 17, the Korea Exchange will announce the conclusion of its review of Osstem's qualification as a listed company. Market observers said the company has a slim chance of its shares' trading being resumed anytime soon.

SUCCESS CASES

There are a number of success stories for PE firms when it comes to acquisitions of companies facing exceptional challenges. 

Bain Capital took advantage of the conflict between the two co-founders of Hugel Inc., who locked horns not to give up their management rights over the country's top botox maker. It finally bought a majority stake in Hugel from the co-founders in 2018.

Bain Capital is now set to pocket close to 1 trillion won ($835 million) in proceeds from the sale of a 46.9% stake in Hugel for $1.48 billion to a consortium led by Korea's retail-focused GS Group. 

In 2019, MBK Partners secured double-digit returns from the sale of Coway Co. back to its parent company Woongjin Group, which had unloaded the water purifier rental company on the back of reckless business expansion.

Seoul-based private equity firm Hahn & Co. last year approached Namyang Dairy Products Co.'s Chairman Hong Won-sik, who faced a public backlash over the company's unfounded claim that its popular yogurt drink was effective in fighting the coronavirus.

Back in 2013, Namyang was accused of bullying small stores to buy more milk than they needed, even though some of the products were near their expiration date. 

The series of scandals sparked a campaign to boycott Namyang products and pushed its share prices sharply lower. In response, Chairman Hong offered to resign and agreed to sell a majority of the country's No. 2 dairy producer to Hahn & Co. for 310.7 billion won.

Despite Chairman Hong's cancellation of the transaction, a local court ruled in favor of Hahn & Co. and validated the deal.

(Updated with details on the scandal surrounding Namyang Dairy Products and comments from Lazard Asset Management)

Write to Jun-ho Cha at chacha@hankyung.com
Yeonhee Kim edited this article.

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