MBK Partners may be on cloud nine after striking a deal to buy British retail behemoth Tesco's Korean unit, but a rough road lies ahead for the Seoul-based private equity fund as it faces tough business conditions and negative public sentiment, industry watchers say.

In South Korea's largest-ever buyout deal, MBK sealed a US$6.1 billion contract with Tesco on Monday to acquire Homeplus, the country's No. 2 discount chain, from the British company that wanted to dispose of its largest overseas operation to reduce debt amid a prolonged business slump. 

MBK beat a rival bid led by KKR & Co. to clinch the mega-deal, leading a consortium involving Singaporean sovereign wealth fund Temasek as well as the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board. The deal, the largest in Asia this year, is expected to be completed in the fourth quarter.

Founded by former Carlyle mangers in 2005, MBK has grown into one of the biggest Asian buyout funds with about $8.2 billion in assets under its management, with a focus on Korea and other Asian regions.

After the fanfare, MBK now faces the daunting task of assuaging concerns of Homeplus employees, who worry the leveraged buyout deal with a whopping price tag may cost them their jobs.

MBK said it will respect the current terms of their employment, pledging to consult with Homeplus executives for continued operations in the local market.

"Homeplus is South Korea's leading retailer, which is profitable and has a bright business outlook," said Kim Kwang-il, chief of MBK Partners.
 
"We will invest 1 trillion won ($828.1 million) in Homeplus in the next two years to strengthen its market leader position and competitiveness."

The labor union of Homeplus has urged MBK to come up with measures to guarantee their job security, threatening to go on strike if their demands are not met.

"We urge to guarantee our employment security and not to split up units for future sales," the union said.
 
"If MBK negotiates with the labor union, it would help restore Homeplus'
dented image and resolve distrust between labor and management."

Homeplus employs more than 26,000 people and operates 1,075 outlets in Asia's fourth-largest economy, involving 140 hypermarkets and 609 supermarkets as well as 326 convenience stores, according to Tesco. It logged $9.4 trillion won in sales in the 2014 fiscal year that ended on Feb. 28, serving more than 6 million shoppers each week.

Tesco will pull out of the Korean market 16 years after launching the joint venture with Samsung Group. 

The nation's top conglomerate sold its stake back to Tesco in 2011. 

Tesco's exit comes after Walmart of the U.S. and Carrefour of France closed their shops in Korea in 2006 after being cornered by Korean chains operated by the nation's conglomerates with massive firepower and products supplied by their affiliates.

Not only the tougher competition with local rivals, but also strict regulations on retail giants, have squeezed Homeplus' profitability over the last three years.

In 2012, the parliament passed a bill to force big retailers to close their stores every other Sunday in response to rising criticism from owners of nearby mom-and-pop stores, who complained of plunging sales. 

The mandatory closing rule still remains controversial, with cases raised by provincial governments pending in the top court. 

"The result (of regulation) has been a reduction in like-for-like sales over the past three years, with overall revenue being stabilized through growth in the number of stores and online," Tesco said.

While Homeplus paid 120 billion won to Tesco for its license and business know-how, the retailer now has to stand alone to adapt to changing trends in the retail scene.

The growing popularity of grocery shopping via personal PCs and smartphones, with the help of fast delivery service and convenient
payment options, has eaten into sales in the brick-and-mortal shops in recent years.

E-Mart, the leading retailer run by Shinsegae Co., has expanded market share on the back of the fast rise in online grocery
shopping among younger consumers.
 
Lotte Mart, a chain run by Lotte Group, recently started the nation's first drive-through service to allow customers to order products online and pick them up offline.

"The domestic retail market is highly competitive as big supermarkets have waged price wars to grab a bigger chunk of the market amid weak household spending, while customers have fast adopted the new shopping platforms," Kim Ji-hyo, an analyst at Eugene Securities, said.

"As MBK promised to invest in Homeplus to make it the market leader, a restructuring move seems inevitable."

E-Mart claims a 33 percent share of the local discount market by 2014 sales, followed by Homeplus' 25 percent and Lotte Mart with 15 percent.

On top of the intense competition, a prolonged dispute with the labor union could further hurt the image of the retailer after it was accused of selling customers' personal information to local insurance companies without their consent. 

A class-action lawsuit raised by 2,220 clients is under way in local courts.

Despite all these challenges, industry watchers say a successful restructuring can leave the MBK-led consortium with handsome returns, given that several retailers have shown interest in buying stakes in Homeplus in hopes of using its strong sales network.

"Homeplus is an attractive investment for CPPIB as it provides us with access to one of the largest retail markets in Asia through a well-established business with a strong cash flow profile," Pierre Lavallee, CPPIB's senior managing director and global head of investment partnerships, said in a release. (Yonhap)