Kakao to buy South Korea's top music streaming operator for $1.6 billion

SEOUL (Reuters) - Chat app operator Kakao Corp on Monday unveiled a $1.6 billion (1.9 trillion won) deal to buy control of South Korea’s top music streaming service provider, tapping the market for Korean pop to diversify revenues and even expand offshore.

An employee of mobile messager Kakao Talk displays the mobile game "Anipang" on a smartphone at the company in Seongnam, south of Seoul, March 26, 2013. REUTERS/Lee Jae-Won

The South Korean firm said it would buy a 76.4 percent stake in MelOn streaming service operator Loen Entertainment Inc for $1.6 billion. Leon also owns its own record label with “K-Pop” artists such as IU.

The deal, Kakao’s biggest since its 2014 all-stock merger with web search operator Daum, gives the mobile chat company access to the biggest streaming service user base in South Korea as well as a library of popular music content.

It will also give the operator of the country’s dominant chat app, KakaoTalk, a head-start on Swedish music streaming service Spotify, which has yet to launch here. South Korea’s music streaming and download market was worth an estimated $406 million in 2015, according to Seoul-based brokerage Hana Financial Investment.

“Kakao is trying to draw a pretty big strategic picture, but it’s not clear whether they will be able to successfully monetize,” HDC Asset Management fund manager Park Jung-hoon said.

As for its offshore ambitions, Kakao did not elaborate but Park said overseas expansion would not be easy as both MelOn and KakaoTalk lacked meaningful user bases outside of Korea.

Kakao shares pared gains and were up 0.6 percent as of 0337 GMT as investors scrutinized the merits of the deal and factored in the dilution impact from new shares being issued to help finance the deal.

Kakao said the deal would be funded partly by issuing 754 billion won worth of new shares to top Loen shareholders Affinity Equity Partners and SK Planet Co Ltd.

“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 Chief Executive Jimmy Rim said in a statement.

Kakao is seeking to diversify its model and reduce reliance on traditional businesses, which are slowing partly due to increasing competition from rivals such as Naver Corp.

It has expanded into new services such as a premium taxi service and mobile payments.

“This acquisition is the right move from a long-term perspective, because the company is lagging behind Naver in terms of its content offerings,” LIG Investment analyst Kim Sung-eun said.

Loen reported an operating profit of 45.5 billion won for January-September, compared with 68 billion won for Kakao.

Reporting by Se Young Lee; Editing by Richard Pullin and Stephen Coates