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Business deals

Tencent and Kakao battle for South Korea's biggest game company

Estimated $12bn deal seen as a game changer in Asian market

Bidders for Nexon are attracted by the South Korean game developer's numerous hit titles. (Image from Nexon website)

SEOUL/HONG KONG -- Big-name Asian tech companies are facing off to acquire South Korean game company Nexon, in a deal that is expected to reach $12 billion and reshape the industry landscape.

Chinese powerhouse Tencent Holdings emerged as a shortlisted bidder for the Tokyo-listed Nexon this week. It is up against Kakao, the operator of South Korea's top messaging app, as well as other contenders, such as No. 2 South Korean game developer Netmarble.

If Nexon sells for the expected value, it would be South Korea's biggest acquisition deal yet, beating Samsung Electronics' $8 billion purchase of Harman International in 2016.

For the hefty price, the winning bidder stands to gain an edge in an Asian gaming market worth an estimated $66.2 billion.

Analysts see a couple of ways this could play out. For the South Korean bidders, Nexon represents a chance to compete with bigger players in China and Japan, like Tencent and Nintendo. Netmarble, for instance, would be able to add Nexon's strong PC lineup to its collection of mobile games.

But with Tencent poised to swoop in, the Nexon sale also poses a major risk from a South Korean perspective.

"One scenario is that a domestic game company merges with Nexon, which would level up its competitiveness," said Kim Dong-hee, an analyst at Meritz Research. "But if a Chinese company buys Nexon, that will strengthen the influence of Chinese money in the Korean game industry. Many Korean companies' intellectual property will be in China's hands."

Nexon founder Kim Jung-ju, who now chairs its holding company NXC, put a 98.3% stake in NXC up for sale earlier this year. Market watchers say Kim lost interest in the game industry after becoming embroiled in a corruption scandal. He stood accused of giving 425 million won ($376,000) in bribes to a friend, senior prosecutor Jin Kyung-joon. The case dragged on for two years before he was acquitted in 2018.

NXC owns 66.7% of Nexon, whose market value is about $14 billion.

Analysts say it makes perfect sense for Tencent to bid for NXC, since the Chinese gaming company faces roadblocks at home.

"Tencent has realized that the domestic gaming industry in China will be slowing down. ... Their only way of expanding is through mergers and acquisitions outside of China"

Harry Yuen, analyst

"Regulations in China have become much tighter in recent years, especially in terms of regulating the playing time of children," said Harry Yuen, an associate director at Hong Kong-based Oceanwide Securities. "Tencent has realized that the domestic gaming industry in China will be slowing down."

Yuen said that if Tencent wants to stay in the gaming industry, "their only way of expansion is through mergers and acquisitions outside China."

Although Chinese regulators in December ended a nine-month freeze on new gaming licenses -- a major cause of the market slowdown last year -- they have yet to approve two potentially lucrative games for Tencent, "Fortnite" and "PlayerUnknown's Battlegrounds."

Kakao, for its part, wants to strengthen its content business with NXC, after buying music streaming service Roen a few years ago. Roen has become a cash cow, generating 20% of Kakao's revenue in the fourth quarter.

"Kakao is well-positioned to benefit from Nexon's casual games, since Kakao's game affiliate has strengths in developing and operating casual games," said Ahn Jae-min, an analyst at NH Research Center. "Kakao's chatting app also offers a good platform for casual games."

Kakao runs KakaoTalk, which has 50 million users. The company declined to comment on its bid.

Seoul-based Netmarble, which trails only Nexon Korea in the country's game market, is eager to beat Tencent and Kakao. Netmarble has said it holds Nexon's intellectual property and development capacity in high esteem. "We believe we can create good synergy effects, if that is connected with our mobile games and global publishing skills," a company representative said in a conference call last month.

Nexon's game lineup includes "Kingdom of the Winds" -- one of the world's first online games -- along with "Maple Story," "Dungeon Fighter," "Mabinogi" and "Kart Rider." Its revenue reached 253.7 billion yen in 2018, up 8% from 234.9 billion yen a year earlier.

Kim, 51, established Nexon in 1994 with "Kingdom of the Winds." At the time, he was a Ph.D. candidate in computer science at the Korea Advanced Institute of Science and Technology. His father, a lawyer, gave him 60 million won in seed money.

After succeeding at home, Nexon branched out abroad, helping to make South Korea a key force in online gaming.

Nexon employs 5,500 people worldwide, including 2,400 in South Korea. Besides its home base, it has offices in Japan, the U.S. and Taiwan, offering more than 100 games in 190 countries. It listed on the Tokyo Stock Exchange in 2011 because Kim wanted a larger and more stable market than Seoul's -- and a chance to compete with Japan's legendary game developers.

Now that Kim wants out, the stage is set for a megadeal that could dramatically tilt the competitive balance.

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