omonatheydid | Korean entertainment firms fail to go public

Big-name South Korean celebrities have worked their charm on overseas entertainment markets, successfully landing in them, but the same appeal seemingly hasn't quite worked for their agencies with domestic investors.

Unstable cash flows and some bad apple cases in the past have left the stock market skeptical about investing in talent agencies, many of which, despite the glam and the fame, are struggling to make ends meet.

The latest case that denotes such a dismal circumstance is the merger between J.Tune Entertainment where singer Rain had been the major shareholder until a massive sell-off in July 2010 and JYP Entertainment led by singer and producer Park Jin-young.

J.Tune announced on Dec. 27 that it will raise capital by issuing new stock, which were later bought by JYP. Park and three others now own 17.7 percent of J.Tune.

It is widely believed that the recapitalization was aimed to help JYP going public in the KOSDAQ market via a back-door listing, a strategy of making a presence on the bourse by acquiring a listed firm. Those that fail to meet the listing criteria of a stock exchange tend to choose this method.

Although JYP is considered to be among Korea's top three talent agencies, its recent earnings were disappointing. It generated 10.2 billion won in revenue in 2009 and 0.2 billion won in operating profit. Yet, it netted a 4.7 billion won loss, which is bigger than 3.6 billion won a year ago.

Its American business, JYP Entertainment Incorporation, accounted for most of the loss at 3.1 billion won while the Chinese unit lost 225.2 million won.

The performances are not good enough to allow JYP to get listed because the KOSDAQ market requires a company to have a net income of at least 2 billion won. In particular, the much-healthier YG Entertainment failed in November to be listed.

YG Entertainment, led by singer-turned-producer Yang Hyun-suk, had its application rejected by the Korea Exchange (KRX) after screening.

It came as a surprise to the market because Yang's talent agency, unlike many others in the same industry, has made healthy profits. In 2009, YG made 35.7 billion won in turnover for 7.4 billion won in operating profit and 4.2 billion won in net profit. Its Japanese branch, YG Japan, also earned 241.2 million won in net profit ― up from a mere 129 million won in 2008.

As the stock exchange does not disclose its evaluation procedures, it is assumed that YG's business portfolio wasn't diverse enough to generate a stable bottom line. A large pool of well-known artists is required for steady profitability as fame can evaporate overnight, but YG's assets are currently limited to a handful of groups such as Big Bang and 2NE1.

In addition, the stock market is said to have become conservative about investing in talent agencies.

"In 2005 when bubbles formed in the entertainment industry, many companies went public through back-door listing. A vast majority of them failed to meet the expectations of investors," Daewoo Securities analyst Kim Chang-kwean said in a recent report.

In the past, show-biz entrepreneurs acquired KOSDAQ-listed firms in troubles and turned them into entertainment companies. Boosted by one or two big-name celebrities, they succeeded in attracting investors at the beginning. Yet, the one-off strategy could not save the acquired companies, which had already been faltering.

For instance, J.Tune was an IT company before Rain, or Jung Ji-hoon, turned it into a talent agency. In 2007 when Rain became the major shareholder, the stock price hiked to above 5,000 won per share. It then plunged to as low as 250 won in July after Rain has disposed of all his shares.

Entertainment firms have also been vulnerable to disputes and fraud. In 2007, Fantom Entertainment, one of the largest agencies back then, got kicked out of the bourse after it was found out to have manipulated its stock price.

In addition, De Chocolate E&TF ― where top entertainers Koh Hyun-jung and Kang Ho-dong belonged ― nearly collapsed due to fights over control of the board.

The sole exception?

S.M.Entertainment, Korea's largest talent agency, may be an exception. It had been in the red until 2008, but turned profitable in 2009. S.M. is now equipped with globally known celebrities including Girls' Generation, Boa, Super Junior and TVXQ, and the lineup seems to be diverse enough to create stable income. On a more positive note, S.M. stars succeeded in penetrating into Japan, where albums and MP3 sell at much higher prices than in Korea.

"S.M.Entertainment can now release a new album every month or two. More importantly, its market share in Japan is ever expanding with Girls' Generation, Boa and TVXQ,” Kim said, adding that the agency plans to debut a new male-only idol group this year.

In 2008, 21 percent of its revenue came from overseas, but Kim predicts 49 percent of sales will be generated abroad this year.

In addition, Kim points out that S.M. has benefited from the new digital environments as its ventures go global. While singer Boa had to start from scratch entering the Japanese market, Girls' Generation was already popular there thanks to their popular YouTube videos.

"The advent of smart electronic gadgets such as the iPhone, iPad and Galaxy Tab as well as the proactive use of social-networking sites, Facebook, YouTube and Twitter will create more demand for videos and music," Kim said.

"As the nation's top music company that has a track record of developing high quality content, S.M.Entertainment is expected to have many business opportunities abroad, not limited to just Japan."

Source: Kim Da-ye @ The Korea Times