South Korean music platform MelOn under Kakao Entertainment Co. recently received a valuation of 6 trillion won ($4.61 billion) in a funding round conducted earlier this year, raising expectations of synergies expected with the takeover of K-pop powerhouse SM Entertainment Co.

According to sources on Thursday, Kakao Entertainment’s music division was valued at 6 trillion won when it attracted 1.2 trillion won in investment from Saudi Arabia‘s Public Investment Fund and Singapore’s sovereign wealth fund GIC Pte earlier this year. Considering the Korean company’s total valuation of 10.5 trillion won, over half of its value has been generated by its music business.

Loen Entertainment Inc. owned MelOn before it was acquired by Kakao Group for 1.8 trillion won in 2016. Compared with the time of acquisition, the business valuation has increased over three times in seven years. Since buying Loen, Kakao has earned over 100 billion won in operating profit from its music business annually. Loen plays the role of cash cow for Kakao Group.

Kakao Corp. and Kakao Entertainment recently won a high-profile battle against Hybe Co. over managerial control of SM Entertainment and Kakao’s future cooperation with SM can be extended to webtoons, web novels and video content and bring even more value to its music industry.

Kakao has been increasing its sales and profits by providing various advertisements and business services based on its national messenger app, KakaoTalk. However, the most promising growth driver within the group is its content business. In particular, the music sector is a core business that leads the group’s global expansion and future growth.

Loen has become the foundation of Kakao Entertainment’s music business. The acquisition of Loen was strongly pushed by Bae Jae-hyun, Kakao’s chief investment officer. Although there were opposing opinions internally due to the high takeover price of 1.8 trillion won, the deal was made possible with the support from Kakao founder Kim Beom-soo.

Kakao’s acquisition of Loen has proven to be a wise investment. From 2016 to last year, Kakao’s operating profit in the music sector reached 830.5 billion won. Kakao could generate approximately 1.2 trillion won in cash profits over eight years based on Loen’s cash of 192.2 billion won held at the time of the acquisition and the estimated operating profit of 190 billion won in the music sector for this year. Kakao funded the acquisition by issuing new shares worth 1.2 trillion won and paid only 600 billion won in cash. As a result, Kakao could have more than 600 billion won in excess funds by the end of this year.

Thanks to the synergy with Kakao, Loen has also grown rapidly. Loen’s revenue was 357.6 billion won and operating profit 63.4 billion won in 2015, just before the acquisition. Kakao’s music division posted an operating profit of 160 billion won last year with sales of 855.2 billion won, more than doubling in seven years.

Kakao’s recent purchase of SM Entertainment shares at a significant premium of 150,000 won per share is likely due to strategic effects expected in Kakao’s music business. With SM Entertainment’s market capitalization currently ranging between 2.7 trillion won and 3 trillion won, the combined company valuation for Kakao’s music business could be around 10 trillion won.

Kakao’s music business has the potential to have its music business valuation grow at a rapid pace considering the expected synergies from cooperation with SM Entertainment. With Kakao Entertainment’s dominance in the domestic music distribution industry, cooperation between the two companies could lead to increased revenue in all aspects of the music-related business, from performances to albums. Moreover, the integration of Kakao Entertainment’s strengths in webtoons, web novels and video content is expected to add even more value.

By Oh Dae-seok and Minu Kim

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]