Deal focus: Affinity agrees chaebol restructuring carve-out

In South Korea, iTunes' market share is close to 1%. The company has yet to gain momentum in the face of competition from local players that charge less than Apple's $0.99 per song. MelOn, which is owned by digital music platform Loen Entertainment is the runaway market leader with approximately 60%; it charges $0.60 per download.

Last week mobile operator SK Telecom agreed to sell a majority stake in Loen to Affinity Equity Partners for KRW265.9 billion ($239 million). The PE firm will buy 13.3 million shares - or a 52.6% stake - at KRW20,000 apiece from SK Planet, a subsidiary of SK Telecom. SK Planet will retain a 15% interest in the business. Affinity will also acquire shares from RealNetworks for an overall stake of 61.4%. It is the first deal from the GP's fourth Asia buyout fund.

SK Planet said the divestment would allow it to focus on growing its entertainment business globally. Sources familiar with the transaction put it another way: this is part of a government-mandated restructuring of Korea's conglomerates, or chaebols.

"There has been talk for a long time about chaebol restructuring and now it's real because the government has introduced regulations that force them to divest," one source tells AVCJ. "There has been a huge political backlash against the chaebols - they have squeezed out the small to mid-sized guys over the years - and more deals like this will come."

Loen was founded in 1978 as Seoul Records and listed on KOSDAQ in 2000. SK Telecom bought a 60% stake in the business in 2006 for KRW29.2 billion, and it was given responsibility for MeIOn. Revenue has seen compound annual growth (CAGR) of 22% in the last three years, reaching $180 million in 2012, while income has expanded 74% to $24 million.

Most of Loen's seven million paying subscribers are on the downloads side of the business, which comprises an iTunes-style store and a subscription-based music streaming service described as "Spotify without ads," which accounts for nearly three-quarters of revenues.

Other interests cover music rights ownership and artist management and production. Talent on the books includes pop stars IU and Ga-In. The latter is best known overseas for her appearance on Gentleman, the follow-up to Gangnam Style.

While Loen's principal attractions are its scale and dominant market position, the business model employed by digital music platforms in Korea has come under pressure.

Subscription package charges are rising as a result of government measures to ensure higher margins for musicians and content owners. MelOn's unlimited streaming service, for example, has now doubled in price to KRW6,000 per month. The move came after copyright holders complained that payment rates must move closer to international standards for the domestic music industry to be sustainable.

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• Topics
• Buyouts
• North Asia
• Media
• Affinity Equity Partners
• Media
• South Korea