Two units of South Korean internet giant Kakao Corp are facing delays to their IPO plans after a ruling that Kakao must exit part of its business, as part of increased regulatory scrutiny of the country's biggest tech companies.
Planned floats of Kakao Pay, South Korea’s largest online payment provider, and car-hailing service Kakao Mobility have been thrown off track, following lawmakers' criticism of their parent's dominant market position.
Ant-backed Kakao Pay delayed its IPO from July to September after the financial regulator ordered a revision of its registration statement, with market participants suspecting the main reason was the high valuation that was targeted.
Kakao Pay, the fintech arm of internet giant Kakao, is scheduled to open books on September 23 for a W1.53trn (US$1.32bn) float, down 6% from the July target.
However, the regulatory pressure on Kakao in the past two weeks could delay Kakao Pay’s IPO again.
It all began when the ruling Democratic Party of Korea on September 7 held a discussion on over-dominance and excessive business expansion by internet giants Naver and Kakao. Prominent lawmakers called Kakao, the nation's biggest messaging and social media service, "a symbol of greed".
The Financial Services Commission and Financial Supervisory Service on the same day ruled that the financial product recommendation services provided by Naver Financial and Kakao Pay violated the Financial Consumer Protection Act. That means that fintech companies will require separate licences if they want to offer brokerage and insurance products in their apps.
Shares of Naver and Kakao slumped more than 8% and 10% respectively on the following day.
In response to the ruling, Kakao Pay last week suspended a service comparing various insurance products. Kakao Pay will be required to revise its offering document as the move will have a material impact on the businesses. Local media reported the float is likely to be delayed to November or December.
Banks were supposed to submit proposals for roles on the planned IPO of car-hailing service Kakao Mobility on Friday, but the company told them the process has been put on hold, according to the people familiar with the matter.
To soothe regulators, Kakao also announced a plan to turn its investment firm K-Cube Holdings into a social enterprise and spend W300bn over five years to support small and medium enterprises and the self-employed.
Kakao also said that it will reform Kakao T, a taxi service that is part of Kakao Mobility, by lowering the monthly pro-membership fee of taxi drivers from W99,000 to W39,000.
Another China?
The actions by South Korea’s regulators are eerily similar to measures taken by their Chinese counterparts. Chinese authorities have in the past year brought technology giants to their knees, cracking down on perceived monopolies and abuses of market dominance as part of a campaign to tackle social inequality.
A clampdown of the fintech industry derailed the US$37bn Hong Kong and Shanghai IPO of Ant Group, the payment arm of Alibaba, in November 2020. The float had been set to be the world’s largest.
To placate the authorities, China’s tech giants Alibaba Group Holding and Tencent Holdings have recently offered to donate Rmb100bn (US$15.5bn) each to China’s new “common prosperity” campaign to narrow the gap between rich and poor.
“The Korean government which is trying to crack down on the two key internet giants in Korea is similar to how the Chinese government is trying to crack down on the internet giants in China,” said analyst Douglas Kim, who publishes on research portal SmartKarma, in a report on September 8.
While China's campaign has forced many Chinese listing candidates to put their IPO plans on hold, bankers and analysts generally believe Korea's regulatory clampdown will not affect the broader market.
“It is more about Kakao having gone unchecked (regulation-wise) in so many aspects during its enormous expansion in the past several years. I don't think the IPO sentiment in general will be impacted by Kakao Pay,” analyst Sanghyun Park, who also publishes on SmartKarma, told IFR.
For instance, shares in shipbuilder Hyundai Heavy Industries opened up 83% on their trading debut on Friday, following a W1.08trn KRX IPO.
“This is more like a deal-by-deal basis and this will not result in a somewhat China-like tech crackdown,” said an ECM banker.
For Kakao Pay, Kim believes the company is likely to lower the IPO price even further by about 10%–20% in order to attract more investors.
The changes are also expected to put pressure on Kakao Mobility's IPO valuation, which bankers had put at around US$6bn before the clampdown.
Kakao holds 55% of Kakao Pay while Ant Group's Alipay owns the remaining 45%.
Goldman Sachs, JP Morgan and Samsung Securities are leading the deal with Daisin Securities as co-underwriter.
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