Affinity set for over 6x return on Korea's Loen Entertainment - Update

Kakao will pay KRW1.87 trillion ($1.55 billion) for a 76.4% interest in Loen, or 19.3 million shares at KRW97,000 apiece, according to a regulatory filing. This represents a 23.4% premium to the January 8 close. Shares in Loen were around the KRW84,500 mark as of morning trading on January 12.

Affinity bought a 61.4% stake in the company in mid-2013. The PE firm picked up 13.3 million shares for KRW20,000 apiece from mobile operator SK Telecom - which was said to be under pressure to divest assets and focus on its core business - for a total consideration of KRW265.9 billion, while additional shares were acquired from RealNetworks. SK subsidiary SK Planet retained a 15% interest in the business.

A separate filing by Loen indicates that Star Invest will receive KRW1.5 trillion in total for approximately 15.5 million shares, including KRW900 billion in cash. Kakao said it would fund the deal by issuing KRW750 billion in new shares to Affinity and other investors, with the rest covered using cash, debt, and new share issuance.

A source close to the transaction told AVCJ that Affinity would generate a 96% IRR on the investment, based on the current price of the Kakao shares it will receive.

Through its MelOn platform, Loen is the runaway market leader in Korea's music streaming space, with a 60% market share in 2015, while iTunes' was in the single digits. The company 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 MelOn.

Most of Loen's paying subscribers - MelOn had 28 million members and 7.1 million unique visitors in 2014 - 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."

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 in the video for Gentleman, the follow-up to Gangnam Style by rapper PSY.

Since Affinity's investment, the company has expanded into related businesses that can utilize its existing user base. An online shopping service has launched and a ticketing platform for concerts and performances is expected in 2016.

Revenue came to KRW323.2 billion in 2014, up from KRW252.6 billion the previous year and KRW185 billion in 2012. Over the same three years, net income has jumped from KRW23.8 billion to KRW34.1 billion and then KRW45.9 billion.

Kakao sees the acquisition as a launching pad for creating new content offerings and expanding into global markets by combining its mobile platforms and Loen's music content. It also plans to consolidate Loen's market position by introducing new streaming services based on social networks, user database-driven music curation, and artist-centric music creation communities.

"Music is one of the most loved content genres in the mobile era. It is also incredibly powerful in that one song can set trends for an entire generation and highly influence the global pop culture," said Jimmy Rim, CEO of Kakao, in a statement. "By combining Kakao's various platforms and content services and Loen's leading music content, we expect tremendous synergy that could establish a strong foundation for global expansion."

Kakao generated revenues of KRW498.8 billion in 2014, up from KRW210.8 billion the previous year. Net profit rose from KRW61.4 billion to KRW149.8 billion over the same period.

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• Topics
• Trade sale
• Media
• Technology
• North Asia
• Trade sale
• Exit
• Affinity Equity Partners
• Media
• TMT
• South Korea