[ANALYSIS] 'Living with COVID-19' causes concern over golf course M&A deals

Doubts rise over profitability of PEFs betting on golf industry

By Park Jae-hyuk

Golf courses in Korea have begun facing skepticism lately about their soaring valuations on the M&A market, in the wake of the country's "Living with COVID-19" scheme, which has enabled Koreans to resume a wider variety of indoor activities and play golf overseas at more affordable prices.

Some industry insiders have warned private equity firms (PEFs) and asset managers about a possible decline in their profits from their recent investments in the golf industry, saying that the prices of golf courses here have peaked out.

"Golf tours to Southeast Asia and Saipan have been fully booked, so starting this winter, golf courses on Jeju Island and those in South Jeolla Province and regions located more than a two hour's drive away from large cities will have no choice but to lower their fees," said Kim Ki-sae, who runs a golf course M&A consultancy named KS Leisure Development. "Considering that PEFs tend to seek an exit within five years after their investment, I'm not sure whether they will be able to find buyers who can offer higher prices than now."

The Korea Leisure Industry Institute (KOLE) also expected the profitability of golf courses and their prices on the M&A market to be lower, due to the potential outflow of players in their 20s and 30s from the domestic golf industry, and the forthcoming construction of more than 70 golf courses here over the next five years.

Signs of a downturn

Some owners of golf courses remote from the Seoul metropolitan area have already experienced difficulties in selling their assets.

The largest shareholder of The Golf Club in Ulsan failed to reach an agreement with Kakao VX in negotiations over the sale of the golf course, so the seller recently started talks with Mastern Investment Management, according to industry sources.

It also remains uncertain when Hanwha Hotels & Resorts will complete the sale of its Golden Bay in Taean, South Chungcheong Province, to Golfzon County, an MBK Partners-backed golf course operator that was selected as the preferred bidder in October last year, after defeating Daemyung Sono Group, Duham Partners and Kiwoom Securities.

Although Yido recently succeeded in signing a contract with GIC to sell ClubD Boeun in North Chungcheong Province to the Singaporean sovereign wealth fund for 100 billion won ($85 million), or 5.5 billion won per hole, the price was lower than those of other golf courses near the Seoul metropolitan area, most of which were estimated to be worth around 10 billion won per hole.

The negative sentiment has also affected the stock prices of golf course operators.

The stock price of KMH, which owns the Shilla and Paju country clubs, dropped below 9,000 won, after showing a downward curve over the past five months since it closed at 14,050 won on June 28. The stock price of Venue G, which owns Venue G Country Club, also went down to around 2,000 won, after a half-year-long downward trend, since it peaked at 2,920 won, May 27.

Buying spree amid pandemic

The rapid growth in the domestic golf industry over the past two years is mainly attributed to the inflow of a younger generation, who have had difficulties in going abroad or enjoying indoor activities amid the pandemic.

Among the 5.15 million people who are considered to have played golf in Korea last year, the number of players in their 20s was estimated to reach 267,000 and that of players in their 30s around 669,000, according to KOLE. The former's number rose 92.1 percent year-on-year, while the latter's rose 30.7 percent. The institute anticipates that the combined number of players in their 20s and 30s will top 1.15 million this year.

Amid their popularity, the size of golf course acquisition deals here between January and July this year surpassed 1.08 trillion won, making the annual size of such deals exceed 1 trillion won for the third consecutive year, according to data compiled by the institute.

"Based on abundant cash floating on the market, PEFs have led the upward trend by participating in multiple golf course acquisitions," the institute said in report. "From January last year to July this year, they acquired eight golf courses among the 18 traded during the period."

Centroid Investment Partners, for example, acquired South Springs in Icheon, Gyeonggi Province, from BGF for 172.1 billion won in March, a few months before the PEF took over TaylorMade and Nassau Golf to expand its global presence in the industry. A consortium comprised of Stonebridge and Kakao VX also acquired Ceragio in Yeoju, Gyeonggi Province, from Halla Group for 153 billion won in July.

These mega-sized deals have raised doubts among skeptics, but Samjong KPMG partner Shim Jae-hoon, who leads the accounting firm's team specializing in the golf-related deals, remained optimistic about the domestic golf industry, regardless of the "Living with COVID-19" scheme. He cited the increasing popularity of the sport among the nation's MZ generation and young women during the pandemic.

"After the law made it difficult for private companies to expropriate land to construct golf courses, the supply has been limited, while the demand has grown," he said. "It is virtually impossible to expect a price fall for golf courses."