Explainer: Who is in the driver's seat in battle for S.Korean gaming giant Nexon?

Netmarble

12/04/2019 04:21

(Adds Nexon share move)
    By Kane Wu and Hyunjoo Jin
    HONG KONG/SEOUL, April 12 (Reuters) - The sale of a
controlling stake in the parent of South Korean gaming firm
Nexon Co  3659.T  is now narrowing to a handful of serious
bidders after generating fevered speculation.  
    A deal would rank as one of South Korea's biggest, and, at
potentially $16 billion, be the biggest ever gaming deal
worldwide. Bidders, though, would have to find the funding and
navigate the intricacies of Nexon's relationship with partner
Tencent Holdings  0700.HK  as well as protectionist South Korean
sentiments. 
        
    WHAT EXACTLY IS UP FOR GRABS?
    Billionaire Jungju Kim is selling a 98.64 percent stake held
by himself and his wife in NXC, the holding company that owns 48
percent of Nexon.
    Founded in 1994, Nexon is now the biggest game developer and
publisher by revenue in South Korea, the world’s second-biggest
online games market. 
    51-year-old Kim said last year he did not plan to leave his
company to his children, and earlier this year he hired
investment banks Deutsche Bank and Morgan Stanley to explore a
sale of his NXC stake, sources said. 
            
    WHY SUCH HYPE?
    Bankers are licking their lips in anticipation of a deal
because not only can they earn fees from advising potential
players but also they might get to finance any transaction. 
    A 48 percent stake in Nexon is worth $6.7 billion, given the
company's $14 billion market capitalisation. But some bidders
may also explore a deal to take Nexon private, sources close to
the situation have said.
    Nexon, which has $4 billion in net cash, is trading at an
enterprise value of 13 times its earnings before interest, tax,
depreciation and amortisation, according to Eikon data. That is
the average multiple at which other large gaming deals were
struck, according to Dealogic data.  
    Add a takeover premium of 15 per cent, which has more or
less been the standard for other gaming deals, according to
Dealogic data, and the transaction could be worth as much as
$16.1 billion.
    Local media named Amazon  AMZN.O , Comcast  CMCSA.O  and
Electronic Arts  EA.O  as initial bidders, but Reuters could not
verify that. 
    Sources close to the deal said there were only a handful of
serious bidders. 
    Chinese gaming giant Tencent, its South Korean peer Kakao
 035720.KS , as well as private equity firms Bain Capital, MBK
Partners and KKR  KKR.N  submitted initial bids, according to
five sources.
    They have began due diligence in late March, three of them
added. 
    The sale move, however, is angering some South Koreans.
    “I feel devastated,” said Wi Jong-hyun, president of Korea
Academic Society of Games, an industry research group, likening
the possible sale of Nexon overseas to that of national icons
such as Samsung Electronics  005930.KS  or the management firm
of hit K-pop group BTS.    

    TENCENT'S ROLE
    Tencent is seen as the key to any deal since it owns the
exclusive China licence for Dungeon Fighter (DNF), Nexon's most
successful game. 
    Neople, the Nexon unit which developed DNF, generated 1.24
trillion won ($1.1 billion) revenue from Tencent in 2018, up 17
percent year-on-year, under a publishing deal which is effective
till 2025, according to Neople’s public filings. 
    As the winner of the world's biggest gaming deal to date -
paying $8.6 billion to buy Supercell in 2016 - Tencent knows how
to bag deals.     
    But two sources close to the company say it has not yet
fully recovered from China's crackdown on new online games last
year and it has also been going through its largest-ever round
of executive lay-offs.  urn:newsml:reuters.com:*:nL3N2180V6  urn:newsml:reuters.com:*:nL3N2161B7
    "What does Tencent have to gain from taking over the company
when it already enjoys a good partnership with it in China and
contributes so much to its revenue?" said a separate source
involved in the situation.
    Tencent also has stakes in Nexon’s competitors, which could
further complicate a deal since whoever wins NXC or Nexon
entirely would have to ensure Tencent is cooperative, according
to sources.
    Tencent owns 11.9 percent of Kakao, and 17.7 percent of
Netmarble  251270.KS  which announced it would bid for Nexon. 
    The Chinese tech giant earlier this month raised $6 billion
in a bond sale, with proceeds earmarked for refinancing and
general corporate purposes, but is likely to be part of a
consortium in a bid for Nexon.  urn:newsml:reuters.com:*:nL3N21M066 
    "The key is, who is going to attract Tencent as part of
their consortium," said a third source briefed about the deal.  
    Tencent has so far played its cards close to its chest and 
did not provide any comment for the story.
    
    WHAT IS THE MOST LIKELY OUTCOME?
    No single bidder would be able to stomach such a large deal
without Tencent or other financial investors, sources said.
    “Netmarble and Kakao don’t have enough funding. Even if they
do, the deal size is too big to be true. It is burdensome,” said
Kim Min-jung, an analyst with HI Investment & Securities in
Seoul.
    There is no formal deadline for binding bids, one of the
sources said, indicating any agreement may take time. 
    Nexon, whose shares fell as much as 1 percent on Friday
morning, and NXC declined to comment. Representatives at Bain,
KKR, MBK, Kakao and Netmarble declined to comment. Deutsche Bank
and Morgan Stanley declined to comment.
    All sources declined to be named as the information is
confidential.

 (Reporting by Kane Wu in Hong Kong and Hyunjoo Jin in Seoul;
Additional reporting by Julie Zhu in Hong Kong and Heekyong Yang
and Ju-min Park in Seoul; Editing by Jennifer Hughes and
Muralikumar Anantharaman)
 ((kane.wu@thomsonreuters.com; +85228436590; Reuters Messaging:
kane.wu.thomsonreuters.com@reuters.net))