Ron Sim the founder of OSIM has done very well for himself as he expands his foot print in the Peoples’ Republic of China (PRC). It was reported in February 2022 that V3 (the holding company of OSIM) was attempting its second try at listing on the Hong Kong Stock Exchange[1].
This article is a mixed corporate strategy and legal article which hopefully will be of interest to the companies with Asian operations and private equity firms looking for ideas for investing and growth for their portfolio companies. Here we will look at three different strategies that OSIM used when expanding across South East Asia and later into the PRC.
#1: Fund Raising from IPO in Singapore then delisting and moving to Hong Kong for its IPO listing aspirations
At this point in time, OSIM’s business was largely focused on Singapore and South East Asia with a small footprint in the PRC. It then went for an initial public offering and listing on the Singapore Stock Exchange (SGX). It raised money to expand its business throughout South East Asia and a bit of China.
Learning Lesson: Why Choose SGX to list your company
SGX as a stock exchange is good for companies with business ventures with a Singapore and South East Asia footprint.
When OSIM was listed on the SGX, it was approached by Temasek and a US Private Equity fund to acquire Brookstone which was at that time a US speciality retailer with 300 stores. Brookstone failed to transition to online shopping and the entire investment was written off by OSIM in 2009 when Brookstone went bankrupt.
During the period when OSIM was listed on the SGX in 2011, it used its listed status to acquire a stake in TWG (the fine tea company) and had an earn out provision. The acquisition was done in 2 stages. In the first stage, OSIM acquired a 35% stake in TWG for S$31.36 million[2] and later in stage 2, there was a board tussle and OSIM acquired a majority control of TWG. This two stage acquisition strategy would pay off big time for OSIM as it expanded in its various markets as it also brought TWG into those markets.
Learning Lesson: Use an Earn Out Structure if you are a buyer or an investor in a business
The learning lesson from a legal and deal structuring perspective here is having an earn out structure when investing or acquiring a stake in a business. This means the payment consideration is paid out in two stages:
Stage 1: A flat amount based on an agreed valuation;
Stage 2: The amount paid and equity stake bought is based on a formula after 2 to 3 years (depending on which year valuation the target wants to based its valuation on) and if the target does well, the owner gets more payment consideration. If the target does badly, the owner gets less and the acquirer gets more shares.
Learning Lesson: Use a Cash Box Structure if you are a buyer or an investor in a business
Another way to structure this acquisition from the investor perspective is a cash box structure. Whereby the buyer will keep part of the payment consideration with a law firm/escrow agent and this balance of the consideration will be paid out in accordance with the formula which is tied to the performance of the target company.
At this point in time, OSIM was pivoting its strategy. It intended to expand its network to the PRC. It also considered that if its operational income from PRC rose, its valuation in the Hong Kong exchange may be higher than on the SGX. Thus as its PRC blueprint increased, the decision to delist from the SGX was made and to try to get better valuations in the Hong Kong stock exchange.
#2: Fund Raising from Private Equity
OSIM was not short of suitors after delisting from the SGX. As it continued its Hong Kong IPO listing strategy KKR came knocking. Ron Sim knew that to expand his PRC network, he needed more funding so finally in 2018, KKR invested USD 500 million for a significant stake in V3.
When your business has a large pan Asian footprint, taking in funds from a global private equity firm allows you access across many markets in ways that traditional organic growth cannot match. The larger private equity firms will also bring in professional expertise and consultants to help companies growth larger in a more structured way across multiple jurisdictions and scale up your business.
Undoubtedly, having KKR as a shareholder should help V3 in its Hong Kong IPO listing plans for the second time and hopefully get a better valuation on the Hong Kong stock exchange.
#3: Asset Light Expansion Strategy
OSIM realised that it was best at creating/marketing its brand of massage chairs across Asia and manufacturing high quality massage chairs (because of its joint venture with Japanese manufacturer). It also realised that globally, an asset heavy strategy was capital intensive and also risky as in local markets, it would be easier for local businessmen with their capital and knowledge of local conditions to help run the stores.
Thus, it choose a franchising which is an asset light expansion strategy. Here the ownership of the brand, manufacturing and intellectual property sits with OSIM while the funding of the stores and the roll out across the jurisdiction sits with the franchisee. From a corporate strategy perspective this helps to increase revenue and reduce cost at the same time. It also shifts the risk of not selling stock to the franchisees.
Thus, OSIM expanded its network of stores largely by franchising agreements. This strategy has done well as each time OSIM signs a franchise agreement, the franchisee agrees to pay royalties to OSIM and also co-fund advertising of the business in their geographical region and share in the national advertising budget for OSIM for that country.
A franchise agreement is a complex agreement which sets out the fees payable by the franchisee to the franchisor. It also details the intellectual property rights which the franchisor grants to the franchisee for a term. The economic structure of a franchise is complex so there may be a master franchisee for an area and a sub-franchisee for a smaller area. The master franchisee may have to run the service and maintenance function for the brand for his area and possibly hold most of the stock for the geographical region. If you want to understand the key commercial issues involved in this, do speak to a corporate lawyer on this.
In conclusion, OSIM one of the Singapore well-known brands has grown beyond our shores using three different corporate and fund raising strategies. Always grow your business with a good corporate lawyer in Singapore that has an understanding of corporate strategy and understands the capital markets well so that while you are growing your business as a private limited company now he can value add by helping you plan ahead for your public market debut.
https://www.SingaporeLegalPractice.com is a corporate law and commercial law educational website headquartered in Singapore which aims to demystify business law and 新加坡商业法 for SME Company Owners, Startup Founders and 新加坡新移民老板。The information provided on this website does not constitute legal advice. Please obtain specific legal advice from a lawyer before taking any legal action. Although we try our best to ensure the accuracy of the information on this website, you rely on it at your own risk. Click here to signup for our newsletter today to be kept updated on the latest legal developments in Singapore.
Click here to speak to a specialist Corporate Law Practitioner today to advise you on your corporate transaction today. The corporate law team has acted for a diversified client base including transactions involving several hundred startups across the startup eco-system in Singapore and for private equity fund deals and is well placed to help you in your corporate transactions.
[1] https://www.forbes.com/sites/pamelaambler/2019/09/02/the-billionaire-who-welcomed-the-barbarians-to-save-his-company-ron-sim-knew-kkr-was-his-best-hope/
[2] https://www.asiaone.com/print/News/Latest%2BNews/Business/Story/A1Story20110419-274454.html
Signup for our website newsletter to be updated on the latest in Singapore law!
