Next-generation tech buoys Kakao’s $1b GDR issue

South Korean internet giant fills war chest for overseas expansion – with a focus on artificial intelligence and fourth revolution technologies.

Internet giant Kakao raised $1 billion from Asia’s largest global depositary receipt (GDR) sale in 11 years this week as it seeks to further its ambitious goal of developing next-generation technologies.

The South Korean company has made it clear it will use the new capital for acquisitions in the fields of global mobile content, artificial intelligence and fourth revolution technologies, extending its investment in disruptive technologies after announcing plans to develop South Korea’s first cryptocurrency exchange last year.

South Korea is the world’s third-largest digital currency market after Japan and the US, and Kakao has definitely followed the trend closely. In September it said it would develop its own cryptocurrency platform, named Upbit, that allows trading in around 100 digital currencies.

The ambitious plan sent Kakao shares to a three-year high of W161,000 in November, but the strong run came to a halt last week after the Korean government proposed to ban trading of digital currencies domestically. Still, the prices appeared to have settled around the W135,000 mark after the government was reported to have reconsidered the ban after a fierce backlash from the financial community.

More important for Kakao is the fact the planned government crackdown has not affected its jumbo fundraising plan. As it stands, Kakao’s GDR issue was the largest of its kind in Asia since Taiwan’s Innolux Display issued $1.35 billion in November 2007.

Overseas push

Best known for its instant messaging app KakaoTalk, Kakao has become a household name in Korea since it rolled out the service in 2010, and a leading technology stock since going public in 2014.

However, in contrast to its huge success domestically, Kakao has struggled for years to gain traction overseas.

Its overseas woes contrast with some of its peers such as China’s Tencent and Japan’s Line, which have both ventured into overseas markets with their own instant messaging services. In particular, Tencent said it had more than 70 million overseas users for its Wechat app, topping KakaoTalk’s 50 million users both domestically and abroad.

Given South Korea’s population is about 51 million, Kakao is clearly aware that its user base is unlikely to expand if it does not venture abroad. As such, it is filling its war chest for acquisitions in a bit to diversify its business away from the domestic market.

One source familiar with Kakao said that might be part of the reason behind the company’s decision to raise funds through a GDR issue instead of selling shares domestically. As the GDR will be traded in Singapore, the fundraising exercise could also help bolster the Kakao brand in Southeast Asia.

Apart from expanding overseas, Kakao has also been expanding its service to reduce its reliance on advertising revenue. The company’s gaming and music business accounted for the biggest part of its revenue for the first time in the third quarter of 2016 after it acquired a majority stake in local music streaming company Loen Entertainment.

Deal terms

Kakao’s GDR sale was filed in mid-December and the company swiftly executed it in just a month.

The GDR issue, consisting of 8.26 million new global depositary shares, was officially marketed at $121.04 to US$121.97 per share before settling at the lowest end of that range.

The final price was equivalent to W129,004, or a 3.7% discount to the stock’s W134,000 closing price on Wednesday.

The GDS will begin trading in Singapore on February 2.

Citigroup and Goldman Sachs were joint bookrunners of the GDR issue.

¬ Haymarket Media Limited. All rights reserved.
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