Beauty chain CJ Olive Young’s pre-initial public offering (IPO) is expected to start soon, with the valuation of the company being closely watched because of the likely impact of new accounting standards for leases.

Joint deal managers Credit Suisse and Shinhan Investment recently informed potential buyers of the timeline for the preliminary round of bidding, industry sources said on Wednesday (October 14). Owner CJ Group, the South Korean food and entertainment conglomerate, has adopted a limited competitive bidding approach for the pre-IPO to boost prospects of a deal.  

A number of companies have shown strong interest in possibly participating in the bidding, which is scheduled for early November. Four or five major private equity (PE) firms, including Hahn & Company, Bain Capital and Carlyle were allowed to review the target, and a mid-sized PE firm reportedly signed a non-disclosure agreement with CJ Group to join the race. 

CJ Group has expanded the pool of potential buyers as it is worried there might be a tepid response. Industry sources said CJ Olive Young’s earnings before interest, tax, depreciation and amortization (EBITDA) will be affected by the new K-IFRS16 accounting standards, as the beauty chain leases more than 1000 stores.

Based on the previous accounting model for leases, CJ Olive Young’s EBITDA would be expected to amount to 166 billion won ($145 million) in 2020, but CJ Group said this is likely to jump to about 313 billion won if the new standard is applied.

CJ Group is selling a minority stake in CJ Olive Young, including a 17.97% shareholding held by Lee Sun-ho, the only son and heir apparent of group chairman Lee Jae-hyun, and a 10% stake owned by the chairman’s younger brother Lee Jae-hwan.

“It has taken longer than expected since the company announced its plan to sell its stake and set the date for its preliminary round of bidding,” said an industry source. “The deal is unlikely to be carried out at a rapid pace, when you consider that investors that have reviewed the target seem to be continuing to ponder deeply over their participation in the deal.”

CJ Group expects the unit to record sales of approximately 2.07 trillion won in 2020, up 5.4% from last year, while its operating profit is forecast at 109 billion won, an increase of 24% from 2019.

Market insiders had expected the firm to see fallout from the Covid-19 pandemic, but CJ Group anticipates a stronger financial performance thanks to booming online sales. (Reporting by Ar-rum Rho)