CJ ENM, SK Square to merge OTTs to take on Netflix

CJ ENM Co., South Korea’s entertainment powerhouse, and SK Square Co., an investment unit of the country’s No. 2 conglomerate SK Group, are set to merge their over-the-top (OTT) media platforms to stand up to global streaming leader Netflix.

CJ ENM and SK Square agreed to sign a memorandum of understanding (MOU) to combine TVing and Wavve early next month for a final merger deal in early 2024 following due diligence, according to investment banking industry sources on Tuesday. CJ ENM is slated to become the largest shareholder of the integrated company, followed by SK Square.

CJ ENM, which holds the copyright to the Academy Award-winning film “Parasite,” currently holds a 48.85% stake in TVing, while SK Square has a 40.5% stake in Wavve, in which major local broadcasters such as the Korean Broadcasting System are also shareholders.

TVing is South Korea’s third-largest streaming platform with 5.1 million monthly users as of October, lagging Netflix with 11.4 million subscribers and Coupang Play, an OTT service by the e-commerce giant Coupang Inc., with 5.3 million. Wavve ranked No. 4 with 4.2 million users.

The merger of TVing and Wavve is set to create an OTT platform with 9.3 million subscribers to compete with Netflix. The monthly usage time of the two streaming services totaled 90.3 million hours, about 87.7% of that of Netflix, according to big data platform tracker IGAWorks Inc.

“It will make a mega domestic platform, which provides content from South Korea’s content powerhouse CJ Group’s units including CJ ENM, as well as content of major and minor broadcasters and telecommunication operators,” said an entertainment industry source.

Through the merger, CJ ENM and SK Square aim to improve their bargaining power based on of nearly 10 million combined subscribers while reducing content production costs via the partnership.

TVing and Wavve have been in talks for a merger since 2020 as the market shares of global streaming platforms such as Netflix and Disney+, as well as Coupang Play kept rising in the domestic entertainment industry.

CUT-THROAT COMPETITION

CJ ENM was shocked in August when Coupang Play topped the list of South Korea’s OTT monthly active users for the first time since its launch, beating TVing. Coupang Play, a free streaming service for Coupang subscribers, who pay 4,900 won ($3.8) a month, has been quickly expanding its presence thanks to active support from the New York Stock Exchange (NYSE)-listed e-commerce behemoth.

To defend against Coupang Play, TVing needed to invest more in content. But the platform has been suffering from mounting losses. It reported an operating loss of 117.7 billion in the third quarter, denting the earnings of its largest shareholder CJ ENM. Last year, the loss surged 56.3% from 2022 to 119.2 billion won.

Wavve faced similar issues with a 79.7 billion won loss in the first three quarters of 2023.

Such dismal earnings forced them to stream cheap and outdated content instead of originals, which need large investments.

OTT PLATFORM WITH 10 MILLION USERS

Despite the vicious cycle, negotiations for the merger had long been in a deadlock over which would become the top shareholder of the combined entity.

But CJ ENM, SK Square and their parent groups recently embraced the talks as a further delay in the merger is expected to collapse the domestic streaming industry.

SK Group agreed to let CJ become the largest shareholder of the integrated platform, while CJ Group persuaded CJ ENM executives, who held out hope for TVing’s survival, on the union. 

The merger is predicted to realize CJ ENM’s goal of creating a giant domestic streaming platform. TVing acquired telecom giant KT Corp.'s OTT platform Seezn, beating Wavve, late last year. The acquisition allowed TVing to absorb customers, who use KT’s telecommunication services, and cooperate with ENA, a TV channel of KT’s broadcasting unit KT Skylife CO. that aired “Extraordinary Attorney Woo.”

The combined entity is predicted to enjoy economies of scale by securing high-quality content earlier than others thanks to its subscriber base of nearly 10 million and bargaining power in talks with content producers, industry sources said.

The merged company is likely to save unnecessary costs for competition and spend the reduced expenses on original content production, they added.

“Netflix has been attracting good scenarios, content and actors as the streaming giant guaranteed minimum profits based on its huge subscriber base,” said a content industry source in Seoul. “A platform with nearly 10 million users will significantly help the development of local content.”

BETTER FOR FINANCIAL CONDITIONS

The merger is expected to help SK Square, which had been seeking an initial public offering of Wavve, find measures to redeem bonds.

Wavve raised 200 billion won in 2019 by selling five-year convertible bonds to Mirae Asset Venture Investment Co.’s private equity and SK Securities Co.’s private equity. Wavve needs to repay the principal amount and a 3.8% yield to maturity unless it goes public by next year.

CJ ENM is also predicted to improve its earnings. The company reported an operating loss of 73.3 billion won in the first three quarters, swinging from a profit of 130.8 billion won a year earlier.

The entertainment behemoth logged a net loss of 264.4 billion won on the ailing TVing, sluggish film and drama businesses, as well as weak earnings of its US unit Fifth Season, formerly Endeavor Content Parent, LLC. CJ ENM acquired the Hollywood studio, which was involved in the production and distribution of many Golden Globe and Oscar award-winning films including "La Land" and "Call Me By Your Name," for $775.3 million in 2021.

HURDLES AHEAD

TVing and Wavve will face obstacles, especially a review by a local antitrust body, for the merger, however.

The Korea Fair Trade Commission (FTC) approved TVing’s acquisition of Seezn as their combined market share totaled 18.05%, less than half the 38.22% of Netflix. The regulator may take a tougher stance as the total share of TVing and Wavve mounted about 32%, industry sources said.

The potential dilution of stakes of Tving and Wavve’s shareholders during the merger process may violate the mandatory stake requirements for holding companies.

The country’s law requires holding companies to hold more than 40% of unlisted subsidiaries. CJ ENM may have to spend hundreds of millions of dollars to buy shares to keep its stake of more than 40%.

It is also uncertain whether they will reach satisfactory agreements for other shareholders on the merger, given the complex stake structures of TVing and Wavve.

Write to Jun-Ho Cha and Ji-Eun Ha at chacha@hankyung.com
 

Jongwoo Cheon edited this article.