Kohlberg Kravis Roberts & Co LP will pay $159 million for 10 percent of Vietnam's Masan Consumer Corporation (HOSE: MSN) in the country's largest ever private equity investment, underscoring buyout funds' increasing appetite for Asian consumer-linked plays.
The deal comes as intense competition in China and India pushes buyout firms into smaller frontier markets in pursuit of assets as they seek to deploy $73 billion in unused capital raised for investing, according to Thomson Reuters data.
It values Masan Consumer, a unit of Masan Group and Vietnam's leading producer of fish, soya, chili sauce and branded noodles, at $1.6 billion.
KKR is betting on Vietnam's strong consumer growth to drive returns for its latest investment.
"There are opportunities to enter into attractive new consumer goods categories that are growing rapidly and do not have strong incumbents. The consumer industry is attractive due to both demographic and structural trends, there is growth potential for Masan Group," KKR Managing Director Ming Lu told Reuters.
Analysts said the deal suggested the Masan conglomerate might look to spin off some units.
"Previously management said there would be no sales of stakes in subsidiaries, now it's selling 10 percent, which may signal an intention to spin off these businesses in the next year or two," said Peter Pham, head of institutional sales at VinaSecurities.
The deal will give KKR one seat on Masan Consumer's board of directors, said Lu, but the firm will not be involved in day to day management of Masan Consumer.
Masan Consumer's net profit more than tripled to $60 million in 2010, on revenue of $272 million.
The deal will reduce Masan Group's stake in Masan Consumer to 78 percent from 86.6 percent. Shares in Masan Group rose 1.81 percent in early trade on Wednesday.
KKR's Masan investment follows news last week of its plans to take Taiwan's Yageo Corp private in a deal that also values that company at $1.6 billion. The Masan Consumer deal is KKR's fourth investment in Southeast Asia and its first in Vietnam.
After a quiet start to the year, private equity activity in Asia has spiked with a flurry of recent deals. Investments in March totalled $3.15 billion, 48 percent more than a year earlier. April's $1.19 billion in new investments has already outstripped the figure for the whole of April 2010.
Last month, CVC Asia Pacific invested $269 million equity investment for a 49 percent stake in Indonesia's First Media.
Masan Group's business interest spans from mining to financial services and it has raised $500 million in private equity capital in the past two years as the conglomerate looks to expand the company into a proxy for Vietnam's economy.
Earlier this year, U.S. private equity firm Mount Kellett Capital Management invested $100 million in Masan Group's mining unit, Masan Resources. In 2009 TPG Capital invested $35 million in the Masan Group, which also has Techcombank among its assets.
Buyout funds are also circling Viet Thai International, another food retailer focused on the country's middle class, sources have said. Viet Thai's flagship business is Highlands Coffee, a chain of Starbucks-like cafes around the country. They also run the Hard Rock Cafe in Ho Chi Minh City.
Wild ride
Over the past decade, Vietnam has emerged from the hangover of war to play a central role on Asia's factory floor, producing everything from footwear to computer parts.
The country, with a population of around 87 million, also offers the opportunity for early investment in an underdeveloped consumer market with strong growth. The country's economy grew 6.78 percent in 2010, exceeding the official growth target.
But Vietnam has proved a wild ride for investors. Its main stock index rose by 400 percent between 2005 and early 2007 before giving up all those gains over the following two years. It has doubled since 2009.
KKR downplayed macroeconomic concerns, emphasizing the long-term nature of private equity investing and Masan Consumer's growth potential and domestic strength.
"KKR is a long-term investor and we believe that the macroeconomic situation will normalize and improve in the long run," said Lu, who is also senior operating executive.
"Masan Consumer's business is almost 100 percent driven by domestic consumption, and we expect it to be relatively insulated from macroeconomic conditions," he added.
Private equity investors around the region are betting on a consumer boom in developing markets with youthful populations, but with intense competition for assets they are increasingly accepting minority stakes to deploy their equity.
KKR's investment in Masan Consumer is from its $4 billion Asian Fund L.P., which closed in 2007 and is now around 65 percent invested.