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Sunday, May 26, 2024

All on the line: Naver has decision to make with $7.3B stake in Line Yahoo

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Workers pass by the Line Yahoo's headquarters in Tokyo, Japan, on Thursday. [YONHAP]
Workers pass by the Line Yahoo’s headquarters in Tokyo, Japan, on Thursday. [YONHAP]

With mounting pressure from Japan on Naver to cut capital ties with the operator of the Line messaging app, market insiders have been quick to calculate the potential value of the equity sale, which could top 10 trillion won ($7.3 billion).

The capital ties in question are Naver’s 50 percent holdings in Tokyo-based A Holdings, the largest shareholder of Line Yahoo (LY), the operator behind the messenger app. The remaining half is owned by Japan’s SoftBank.

The value of the Korean company’s share is estimated to be 8.3 trillion won, but adding the premium of transferring management rights, the total price tag of the divestment could reach 10 trillion won.

Despite the fact that Naver hasn’t made a determination concerning the Japanese government’s administrative guideline to separate from LY, interest in the ongoing issue has intensified.

The search index for the keyword “Line” spiked to the maximum of 100 on Thursday, according to Naver’s data lab, a massive jump from 28 on May 1. The figure quantifies daily search volume, with the maximum based on the highest volume over the past two years.

Thursday was when SoftBank CEO Junichi Miyakawa publicly announced that discussions with Naver on divesting from LY were underway.

The following day, Naver also admitted that it was “in earnest negotiations with SoftBank, exploring all possibilities including a divestment of shares.”

The synergy both companies aimed to create through co-management did not spark as they’d hoped, which is why they’ve long been reviewing a reduction of Naver’s capital influence on LY, some sources said.

The possibility is growing that the Korean platform giant will eventually choose to divest, as management rights are, for all intents and purposes, under the control of SoftBank through its board member majority.

“Given the board composition, LY’s management rights have essentially been held by SoftBank, while Naver has faced practical challenges in integrating its technological expertise with Line Yahoo, leading to the consideration of various alternatives, including divestment,” 2nd Vice Minister of Science and ICT Kang Do-hyun said at a press briefing on Friday.

On the same day, SoftBank announced it is to receive 42.1 billion yen ($30.8 million) in government-backed subsidies to build AI supercomputers. Tokyo has been increasing redoubling its efforts to bolster domestic platforms — and buying the shares during this wave wouldn’t be such a terrible option.

However, some experts argue that it won’t be a straightforward decision for Naver, particularly given Line’s status as a global messaging service boasting nearly 100 million users, with Japan claiming a significant portion.

Regardless of the Korean company’s intentions, the situation has already escalated into a clash of national interests, and there might be no choice but to opt for resilience rather than divestment.

“It the midst of diplomatic tensions, it’s unrealistic to assume that Naver will definitely sell its stake,” said Prof. Lee Ji-pyeong of the division of integrated Japanese studies at the Hankuk University of Foreign Studies. “And not one involved party can coerce the other because they’re allies. From Naver’s perspective, it could be seen as a breach of trust, and SoftBank, too, risks a drop in stock prices if they spend a large sum in one go [to buy up Naver’s shares]. It’s not an easy decision to make, for both parties.”

With the transfer of even one share to SoftBank effectively resulting in its seizure of management control of LY, it remains to be seen whether Naver would only partially unload its shares, allowing the two to continue jointly operating Line while also easing pressure from the Japanese government. If the company believes that preserving the ownership holds no value, it may wholly divest the shares and exit the Japanese market altogether.

For Naver, the money is an ample amount to invest in its core business of AI, which the company has been aggressively pursuing recently.

However, if SoftBank is being pressed by Tokyo to buy up the shares, whether or not Naver would be paid the proper price for giving up ownership, and whether SoftBank has the financial capacity to suddenly buy a huge chunk of the shares, remain unknown.

The Japanese firm had said the scale of the divestment will be determined “under the premise that it will have no impact on our business or cash flow,” according to the company’s CEO.

The deadline hanging over the two companies is July 1, as set by Japan’s Ministry of Internal Affairs and Communications, although Miyakawa admitted that it was a tight deadline to meet.

Perhaps the final decision won’t be made by then, but the course of action is anticipated to be outlined. The choices eventually boil down to two: whether Naver will decide to divest, or retain the shares and management rights over Line.

The final decision-maker would be Naver’s founder and global investment officer, Lee Hae-jin, who was behind the company’s successful expansion into the Japanese market and co-management of LY with SoftBank.

“Line itself was able to come this far due to the decisions of Lee, who is also the chairman of LY’s parent company, A Holdings,” an anonymous source in the IT industry commented. “We can only watch what manner and when they will proceed with the decision.”

BY YUN JUNG-MIN, YOUN SANG-UN [lee.jaelim@joongang.co.kr]