Affirma Capital Restructures Smartscore... Divergent Aims with Major Shareholder VIG [PE Now]

Appointment of Former Sungkyung Food CEO and Restructuring of Finance and Strategy Divisions
Different Calculations for Each Side Due to Convertible Bond Deal Structure
Challenge Ahead: Enhancing Competitiveness of Smartscore’s Golf Platform Business

Affirma Capital, the private equity fund (PEF) manager that invested 110 billion won in the domestic golf platform company Smartscore, has begun restructuring its organization, such as appointing co-CEOs. The company is reorganizing its finance and strategy divisions while moving into active capital management, starting what can be described as an "uneasy coexistence" with the previous largest shareholder, VIG Partners. Although both firms share the common goal of increasing corporate value through a convertible bond (CB) call option structure, their approaches to management rights are different. Moreover, some believe it will be difficult for Smartscore to significantly enhance its core business competitiveness in the short term.

According to the investment banking (IB) industry on the 14th, Affirma Capital recently established a new management division for Smartscore and appointed Hyuk Hyunjin as the new CEO of the management division. Mr. Hyuk previously served as CEO of Sungkyung Food (Sungkyung Gim), which Affirma Capital sold to Samchully late last year. The company also created a new position of Chief Strategy Officer (CSO), bringing on board Executive Director Moon Seungse, who previously handled sales and marketing at Sungkyung Food. Meanwhile, Lee Jaemin has filled the vacant Chief Financial Officer (CFO) position following the recent departure of former Executive Vice President Seo Kyusik. At the same time, the finance team responsible for managing company funds has also been newly restructured, including a new team leader. An IB industry official noted, "Smartscore, having suffered losses from brand distribution businesses like Majesty, has faced management difficulties. As a major investor, Affirma Capital is particularly attentive to capital management." Although Affirma Capital does not own a controlling stake of common shares, it is effectively exercising managerial control and is seen as undertaking a practical post-merger integration (PMI).

Everyone Wants Smartscore's Value to Scale Up

Affirma Capital invested by acquiring 110 billion won in convertible bonds (CB) issued by Smartscore in February of this year. If converted to common shares, this would account for a 40% stake. The shareholder structure of Smartscore is as follows: VIG Partners with 22% (the largest shareholder), Chairman Jung Sunghoon with 20%, NH PE with 11%, and IBK Capital with 9%. Even before exercising conversion rights, Affirma Capital secured the authority to appoint co-CEOs and directors. Instead, VIG Partners acquired a call option (put option) on the CBs, along with a restriction preventing Affirma Capital from exercising the conversion right for two years after investment. VIG Partners can exercise the call option before the conversion occurs.

This structure means both Affirma Capital and VIG Partners want Smartscore’s corporate value to increase. Notably, in 2022, VIG Partners invested 180 billion won in Smartscore. In that process, VIG Partners secured the right to exercise a drag-along (tag-along sale request right), allowing them to sell even Chairman Jung’s shares to a third party, should Smartscore fail to go public (IPO) by 2027. If operating profit increases and the IPO is successful, VIG Partners can exercise a call option to repurchase Affirma Capital's CBs using the proceeds from the public offering, thus facilitating their exit. In other words, Smartscore must recover for investors to realize returns. If Smartscore achieves sufficient operating profit and VIG Partners exercises the call option, Affirma Capital can recover its principal investment of 110 billion won plus interest after two years. On the other hand, if Smartscore fails to repay the debt and Affirma Capital becomes the largest shareholder, it would only be possible to resell the company to another business or fund if Smartscore becomes a profitable and competitive company; thus, both parties have an interest in increasing corporate value.

Smartscore Faces Financial and Accounting Issues with Major Businesses Also Disrupted

However, it remains uncertain whether Smartscore can boost its operating profit in the short term. Its business conditions are currently deteriorating. According to last year's audit report, Smartscore did not generate enough earnings to cover its interest expenses. Last year, the operating profit was 9.26 billion won, while interest expenses were 17.18 billion won. The interest coverage ratio, a financial indicator showing how many times a company can cover its interest expenses with operating profit, stands at only 0.54—well below 1.

The deterioration of its key affiliate, the golf distribution company Majesty Golf, is also a concern. Majesty Holdings recorded a net loss of 30.5 billion won last year, with Smartscore seeing 14.3 billion won reflected as equity method losses proportional to its stake. In addition, Smartscore recognized an impairment loss of 19.85 billion won on investments in affiliated companies, reflecting the assessment that the future retrievable value of the investment made for acquiring Majesty is virtually nil. Continued losses have resulted in an accumulated deficit of 178.3 billion won on the company's books. Furthermore, current liabilities due within one year amount to 97.3 billion won, while it holds only 16.6 billion won in cash and cash equivalents, underscoring its worsening financial condition.

There are also disruptions in major business lines. Recently, Yun Inook, Head of Overseas Business Division, resigned, and several team members reportedly followed suit. Consequently, the operation to expand into Australia, including setting up a local entity, has been halted. Despite Smartscore’s high domestic market share—providing IT solutions to 420 golf courses—the significant need for overseas expansion means this is a considerable setback.

This content was produced with the assistance of AI translation services.