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Krafton hiccup: Financial regulator concerned over high IPO share price

Industry watchers stay tuned to see if Krafton will lower its IPO share price as advised by the financial regulator

By Jun 25, 2021 (Gmt+09:00)

Krafton hiccup: Financial regulator concerned over high IPO share price

South Korean game developer Krafton Inc.'s road to an initial public offering is getting rocky with the country's financial regulator expressing concerns that the company's high IPO share price could create chaos in the market.

According to investment banking industry sources on June 25, the Financial Supervisory Service (FSS) has requested Krafton to voluntarily correct its registration statement.

Under the Financial Investment Services and Capital Markets Act, the financial regulator can make such a request if there is false information, omission of important facts, or content that may undermine investors' reasonable judgment or mislead them in any way. 

Krafton's IPO lead manager Mirae Asset Securities had selected seven comparable companies and used their average price-to-earnings ratio of 45.2 times to reach a valuation of 35.7 trillion won ($32 billion).

The FSS determined that it was excessive for Krafton to claim such a high valuation by selecting global content companies such as Walt Disney and the Warner Music Group in the comparable companies analysis considering that their business structures differ significantly from Krafton's.

The game developer's stance was that it would release a short film, Ground Zero,  starring actor Ma Dong-seok, and become a content company that utilizes intellectual property rights.

But market watchers have pointed out that it's difficult to justify the company's valuation given that Krafton's revenue structure is exclusively dependent on its popular game PlayerUnknown's Battlegrounds (PUBG). Also, there's no guarantee that the early stage content business will be successful.

Krafton hiccup: Financial regulator concerned over high IPO share price

Another controversial issue is that Krafton has set its IPO share price in the same range as the over-the-counter (OTC) share price. Krafton's proposed IPO share price is between 458,000 won and 557,000 won ($494) -- higher than the OTC share price of 550,000 won at the time of submitting the registration statement.

"There has never been a case where a listed company's IPO share price was higher than the OTC share price," said an industry official, adding that Krafton's price per single IPO share is the priciest among all of the companies that have listed over the last decade.

RISING CONCERNS OVER KRAFTON'S IPO FLOP

Krafton's $5 billion IPO will become Korea's biggest listing to date, and if it fails to do well then it could cause a significant ripple effect, according to financial authorities.

Krafton is looking to raise up to 5.6 trillion won ($5 billion), far exceeding SK IE Technology Co. and SK Bioscience Co. which aimed to raise up to 2.2 trillion won and 1.5 trillion won via IPOs earlier this year, respectively. 

K-pop boy band BTS' latest single Butter has topped the Billboard Hot 100 chart for four weeks
K-pop boy band BTS' latest single Butter has topped the Billboard Hot 100 chart for four weeks

Some industry watchers say that Krafton may be on the same track as the K-pop boy band BTS label HYBE Co. which listed amid criticism that it was overvalued. The label went on to see its share price plummet within days of its trading debut as its major shareholders Mainstone and Estone Equity Partners sold off most of their shares.

Belize One, an investment vehicle set up by IMM Investment, JKL Partners and Krafton founder Chang Byung-gyu, is set to sell off its entire 6.4% stake in Krafton. The shareholding is valued at around 1.5 trillion won based on the top band price. The large offloading of shares may cause a negative impact on the stock market.

WILL KRAFTON LOWER ITS IPO SHARE PRICE?

Industry watchers are standing by to see if Krafton will voluntarily lower its IPO share price. 

COVID-19 test kit maker SD Biosensor Inc., which is set to go public next month, lowered its IPO share price from the previous range of 66,000 won and 85,000 won to a range of 45,000 won and 52,000 won following an FSS notice.

Krafton's bookbuilding for institutional investors is slated between June 28 to July 7, followed by public subscriptions on July 14 and 15. But the IPO schedule will be delayed if the company lowers its IPO share price and resubmits its registration statement. Also, the previous registration may cease to have an effect, meaning that overlapping subscriptions may not be possible.

Initially, Krafton was considered to be one of the last mega IPOs to accept multiple subscriptions since it filed a registration statement before June 20.

Korean financial authorities have banned multiple subscriptions for IPO shares from retail investors, except for companies that file registration statements before June 20. The oversubscription practice was blamed for the overheated IPO market and some shares' poor performance on their first trading day.

Write to Ye-jin Jun at ace@hankyung.com

Danbee Lee edited this article.

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