Korean instant messaging service provider Kakao Corp said on Monday that it plans to buy a controlling stake in Loen Entertainment for W1.88 trillion ($1.6 billion) to help diversify its portfolio and reduce its reliance on advertising income.
Kakao, which operates Korea’s largest instant messenger KakaoTalk, said it plans to acquire 76.4% of the K-Pop music distributor from Star Invest Holdings and SK Planet through a combined cash-and-shares bid.
It is potentially Korea’s sixth-largest acquisition by a technology company since 2010, according to data provider Dealogic.
Kakao will buy 19.3 million Loen Entertainment shares at approximately W97,000 apiece, or a 23.4% premium to the stock’s Friday close of W78,600.
As part of the transaction, Kakao said it will issue W754.4 billion worth of shares to Star Invest Holdings and SK Planet to settle the majority of the payment, while the rest will be settled with internal cash and debt.
Kakao plans to issue 6.91 million shares at W109,121 each, representing a 5.3% discount to the stock’s closing price before the deal was announced. The new issue implies an 11.5% dilution for existing Kakao shareholders.
The deal values Loen Entertainment at around 53.5 times forward 2016 earnings, compared with 74.2 times for Kakao.
News of the acquisition lifted Loen Entertainment's share price by 5.5% to W82,900 by the close on Monday, while Kakao's eased 0.4% to W114,700.
Kakao’s acquisition of Loen Entertainment is considered an important step for its business strategy as it looks to diversify away from its core advertising business, where revenues have been largely static in the past few quarters due to slowing growth in the number of active KakaoTalk users.
The firm aims to reduce its reliance on advertising earnings generated on its KakaoTalk platform and web portal Daum, which contributes around 60% of its total revenue, according to the company's quarterly result announcements.
As such, it appears pretty much to be following the strategy of Chinese internet giant Tencent, which started a comic and animation business as early as 2012 before launching the film-making business Tencent Pictures in 2014.
Kakao recently also launched the Kakao Taxi app to tap into the taxi hailing service, mirroring Tencent’s investment in Didi Dache in early 2014. And in November, Kakao received an official licence to operate private online lender Kakao Bank, 10 months after Tencent launched WeBank targeting small-to-medium sized borrowers.
The acquisition of Loen Entertainment, which distributes music for Korean artists such as IU, Girls' Day and EXID, allows Kakao to tap into the fast-growing K-Pop industry. In 2013, overseas sales generated by Korea’s pop culture industry was nearly double that of five years earlier at $730 million, according to Bank of Korea.
Once the acquisition is completed, Loen Entertainment’s music streaming app Melon could serve as a new growth driver for Kakao as it has the potential to increase the price of streaming music domestically as well as expand in China, Morgan Stanley analyst Sam Min said in a research note.
By comparison, KakaoTalk is believed to have limited growth prospects outside of Korea because of the high penetration rate of Tencent’s instant messenger Wechat in China and WhatsApp in the rest of Asia.
