Retail chain Homeplus is running out of time. The company has failed to find a new buyer during the court-led rehabilitation process that began in March last year. The Seoul Bankruptcy Court decided to terminate the rehabilitation proceedings after Homeplus failed to secure the 200 billion won ($130 million) in funding needed for its restructuring plan.
In a July 3 press release, the court said that while Homeplus Express, the supermarket subsidiary, had been sold, the company's remaining businesses continued to operate without attracting a buyer through a merger or acquisition. As a result, revenue has continued to fall while debt has increased. The court cited Homeplus' deteriorating financial condition and lack of a viable recovery plan as the reasons for ending the rehabilitation process.
To avoid bankruptcy, Homeplus — once the nation's second-largest hypermarket chain — has only one remaining option: It must secure 200 billion won and file an appeal within the next two weeks asking the court to overturn its decision.
That, however, appears highly unlikely. Raising such a large amount of capital within such a short period would be extremely difficult. If Homeplus fails to do so, bankruptcy will be all but inevitable.
The consequences would extend far beyond the company itself. A Homeplus bankruptcy would deal a blow to the Korean economy. Massive job losses would be unavoidable. More than 12,000 Homeplus employees, along with roughly 1,000 workers employed in related services such as cleaning, security and logistics, could lose their jobs. Thousands of small and medium-sized suppliers that depend on Homeplus would face delayed payments and unpaid receivables, potentially causing a chain of bankruptcies.
Once bankruptcy proceedings begin, the court will liquidate Homeplus' remaining nonexempt assets to repay creditors, while eligible debts will be discharged. The resulting disruption could spread throughout the retail supply chain.
There is little doubt that MBK Partners, Homeplus' largest shareholder, bears primary responsibility for the firm's current crisis. The private equity firm acquired Homeplus in 2015 for 7.2 trillion won, financing roughly 4.3 trillion won of the purchase through a leveraged buyout secured by Homeplus' own assets. The deal saddled the retailer with an enormous debt burden that has impaired its finances ever since.
Since the acquisition, Homeplus has spent hundreds of billions of won annually on interest payments, leaving little room to invest in innovation or strengthen its competitiveness. Its debt-to-equity ratio has soared to nearly 3,000 percent, placing the company under severe financial strain. MBK Partners should take responsibility and present credible measures to prevent the worst-case scenario.
Politicians also share responsibility for Homeplus' decline. In March 2012, the National Assembly passed the controversial Retail Industry Development Act, which imposed mandatory closures on major retail stores twice each month. The law also prohibits them from operating between midnight and 10 a.m., effectively preventing hypermarkets from fulfilling online delivery orders during those hours.
These regulations were introduced to promote "balanced growth" between large retailers and small neighborhood stores. But in the digital era, they have instead undermined the competitiveness of hypermarket chains. As consumer shopping habits rapidly shifted online, Homeplus and other major retailers found themselves constrained by outdated regulations, losing market share to e-commerce giants such as Coupang.
The Homeplus crisis is the product of both corporate greed and shortsighted policymaking. MBK Partners financed its acquisition largely with borrowed money while using Homeplus' own assets and cash flow to service the debt. Such financial engineering weakened the retailer rather than strengthening it. Leveraged buyouts of this nature may generate profits for investors, but they can leave operating companies burdened with unsustainable debt. Policymakers should consider safeguards to prevent similar cases in the future.
Meritz Financial should also feel a sense of responsibility. It has maintained it would guarantee only 100 billion won to MBK. Yet it needs to consider extending the guarantee from a broader perspective as it had been earning a substantial amount of interest income as the largest creditor.
At the same time, politicians should acknowledge that well-intentioned but outdated regulations have also contributed to the decline of Korea's hypermarket industry. Mandatory store closures and restrictions on nighttime deliveries did little to protect small retailers. Instead, they handed an unintended competitive advantage to e-commerce companies while reducing the competitiveness of brick-and-mortar retailers.
Nor did these policies achieve their stated objective of fostering balanced growth between large and small retailers. Competition is a fundamental driver of innovation and economic vitality. Policies that unnecessarily restrict competition ultimately weaken the broader economy rather than strengthen it.