Carlyle is betting on rising inequality in South Korea. The buyout firm won the hotly-contested auction of Tyco's security business in the country with a $1.93-billion cash offer. The price looks punchy. Unless, that is, Koreans start feeling less secure, and demand for the division's products increases. If incomes continue to grow and become less equal, that might happen.
Tyco's decision to sell is logical. The former conglomerate spun off its ADT security arm back in 2011 but kept ADT Korea. That made it something of an orphan asset. An adverse US tax ruling last year may have added to Tyco's desire to raise some cash.
Whatever the motivation, Tyco got a good price. Several big buyout firms contested the auction, reflecting the relative scarcity in Asia of large deals where private equity buyers can take control. At three times expected revenue for the year to September 2014 and almost 11 times expected Ebitda, Carlyle's winning bid looks fully valued. Moreover, there's no obvious need for private equity-style cost-cutting: ADT Korea's 21 per cent operating margin is roughly the same as its former US parent's.
Returns therefore depend on revenue growth. Penetration of home-security systems in Korea is less than half the level in the United States, and behind Japan, which has a lower crime rate. Demand for alarms is driven partly by rising incomes, but also by a growing sense of vulnerability - and Korea has become steadily less equal as it develops. The country's Gini coefficient, which measures income inequality, rose steadily from the early 1990s until 2009, according to the Organisation for Economic Co-operation and Development. ADT Korea can also use its network to offer other services, like emergency medical care for the country's ageing population.
Korea has been a happy hunting ground for private equity in recent years: in January, KKR and Affinity made a big profit by selling Oriental Brewery back to AB InBev for $5.8 billion. In the past, however, buyout firms have faced scrutiny when selling out of lucrative investments. If Carlyle is right about Korea's rising inequality, it might want to play down any bumper returns.
Tyco's decision to sell is logical. The former conglomerate spun off its ADT security arm back in 2011 but kept ADT Korea. That made it something of an orphan asset. An adverse US tax ruling last year may have added to Tyco's desire to raise some cash.
Whatever the motivation, Tyco got a good price. Several big buyout firms contested the auction, reflecting the relative scarcity in Asia of large deals where private equity buyers can take control. At three times expected revenue for the year to September 2014 and almost 11 times expected Ebitda, Carlyle's winning bid looks fully valued. Moreover, there's no obvious need for private equity-style cost-cutting: ADT Korea's 21 per cent operating margin is roughly the same as its former US parent's.
Also Read
Korea has been a happy hunting ground for private equity in recent years: in January, KKR and Affinity made a big profit by selling Oriental Brewery back to AB InBev for $5.8 billion. In the past, however, buyout firms have faced scrutiny when selling out of lucrative investments. If Carlyle is right about Korea's rising inequality, it might want to play down any bumper returns.