Kakao Entertainment’s fundraising plan hits roadblock

Kakao Entertainment Corp., a unit of South Korea’s mobile platform giant Kakao Corp., is struggling to raise money as surging inflation and rising interest rates dampened investor sentiment.

Kakao Entertainment is seeking to raise 500 billion won ($398.6 billion) from global major private equity firms through a pre-initial public offering to fund the acquisition of SM Entertainment Co., South Korea’s entertainment powerhouse, and improve financial structures.

Global PEFs are, however, reluctant to participate in the pre-IPO as they see Kakao Entertainment’s corporate value, which is estimated to reach up to 15 trillion won, as excessive.

Kakao Entertainment is currently in talks with a financial investor, but the company may not be able to raise the money unless it lowers its enterprise value or guarantees measures for a profitable exit.

“The market conditions have been so soured that Kakao’s key affiliate, which had enjoyed the liquidity party most, is facing difficulties in a fundraising,” said an industry source.

The difficulties cast doubts over if celebrities such as Yu Jae Seok, the top comedian of the famous TV show Running Man, could collect their investment and profit after participating Kakao Entertainment’s rights offering last year that valued the company at about 12 trillion won.

CANDIDATE FOR IPO JACKPOT

Kakao Entertainment is Kakao’s core affiliate that was expected to hit a jackpot from a listing after the successful IPOs of KakaoBank Corp. and Kakao Pay Corp. in 2021.

The entertainment behemoth was founded early last year by merging Kakao’s entertainment platform Kakao M with a webtoon and web novel platform KakaoPage. Kakao Entertainment has grown up to a major player with 47 affiliates through acquisitions of content producers and entertainment management agencies since then.

The company raised its global ambition with takeovers of foreign content platforms such as Tapas Media Inc., Radish Fiction Inc. and Wuxiaworld last year.

Such expansion boosted its confidence in an IPO.

“We will go public with a corporate value of more than 20 trillion won,” Kakao Entertainment CEO Lee Jin-soo said in an interview with a foreign media in April 2021.

TOO EXPENSIVE

But investor sentiment toward Kakao Entertainment has been cooling down rapidly since late last year. It was reportedly in talks with a global PEF consortium that included KKR & Co. at that time to raise about 1 trillion won. Its corporate value was estimated at about 18 trillion won during the talks.

Kakao Entertainment failed to raise the money as the consortium withdrew the investment plan at the last minute. Since then, the company has tried to secure investment from selected major PEFs, but none of them provided funds.

The industry is keeping an eye on whether Hong Kong-based Anchor Equity Partners to participate in Kakao Entertainment’s latest pre-IPO. Anchor, Kakao Entertainment’s No. 2 shareholder with a 17.14% stake, invested 125 billion won in KakaoPage in 2016 and 209.8 billion won in Kakao M in 2020. The value of its stake in Kakao Entertainment was estimated to have grown to more than 2 trillion won on the assumption of the company’s corporate value at 12 trillion won.

CHILLED SENTIMENT

The difficulties in Kakao Entertainment’s fundraising indicated sluggish investor sentiment in the local pre-IPO market, analysts said.

Kakao’s key affiliates had not guaranteed any investor protection measures such as call options and drag-along rights when they raised money from PEFs. In May last year, Anchor invested 600 billion won in Kakao Piccoma Corp., without any protection guarantee, valuing the Japanese webtoon platform at 8.8 trillion won.

Despite such conditions, Kakao’s affiliates had been able to draw interest from PEFs as they could pocket hefty returns from investment in those companies. KakaoBank Corp. provided multiple profits to PEFs with a listing in less than one year after a pre-IPO. Kakao Mobility Corp., the country’s largest taxi-hailing company, became a key affiliate with a corporate value of 10 trillion won after starting the business with a 500 billion won investment from PEFs and other investors.

“All of major PEFs would have been lined up to see core investment managers if Kakao Entertainment sought the pre-IPO early last year,” a source at a global major PEF. “It would be interesting to see if Kakao Entertainment adapts to the recent market conditions by compromising investment conditions.”

The company may run into trouble if it fails to raise money in the pre-IPO, some industry sources speculated. It currently holds 240 billion won in cash and cashable assets on a consolidated basis, although it needs to spend about 1 trillion won to acquire SM Entertainment.

“It is possible to consider acquisition financing in the financial sector or short-term funds to complete the SM Entertainment deal,” said a source in the local financial sector. “Kakao Entertainment may have not expected such a rapid change in the market condition.”

The company said it has yet to decide on anything although it is considering various fundraising measures.

Write to Jun-Ho Cha at chacha@hankyung.com
Jongwoo Cheon edited this article.