Leveraged Buy-Out (LBO): The Case of Yakjin Trading

This case examines the process The Carlyle Group (“Carlyle”) acquired Yakjin Trading, an OEM-focused clothing manufacturer, through a leveraged buy-out (LBO), a rare case in Korea; and multiple exit strategies practiced by the private equity fund to recoup its investments. This paper offers opportunities to review both benefits and vulnerabilities of an LBO by discussing the private equity fund’s exit strategies. At the end of 2013, Carlyle announced its planned acquisition of Yakjin Trading at roughly 200 billion KRW, of which 90 billion KRW is borrowed from banks, with the managerial rights of Yakjin Trading held as collateral. Following the acquisition, Carlyle secured cash through a leveraged recapitalization in early 2015, using the cash in turn to purchase treasury stocks. Carlyle retired these treasury stocks against retained earnings, harvesting approximately 100 billion KRW. Carlyle also attempted to sell-off Yakjin Trading and with closed doors, talked to potential buyers in vain. After the struggle, Carlyle has been demonstrating a dual-track strategy, merging Yakjin Trading with Yakjin Holdings and pursuing both liquidation and IPO. This case walks readers through Carlyle’s acquisition process of Yakjin Trading and endeavors to collect invested capital, helps readers understand characteristics of an LBO, and offers lessons on how stock retirements against retained earnings differ from those against contributed capital and dividends. The story about a private equity fund’s investment cycle also displays shifts in financial status and management performances of the acquired firm, enabling an examination of effectiveness of exit strategies such as liquidation and IPO.