As Tencent, the No. 2 shareholder of Netmarble, decided to dispose of 13.4% out of its 18.1% equity in Netmarble, attention is focusing on the background. It is seen as part of a recent strategy by Tencent to reorganize its investment portfolio. Since the start of the year, Tencent has been recouping investments by selling equity in overseas game companies in countries such as Korea and Japan—where profitability has weakened or results have fallen short of initial expectations—back to existing management.
Some view that Tencent, which declared an "all-in on artificial intelligence (AI)," has begun to clean up underperforming game companies to secure AI dry powder. As growth in the global game industry slows due to rising costs, intensifying competition, and user churn, there is also analysis that the investment priority of Tencent, the "big player" in the game industry, is shifting to AI, which has greater growth potential.
Concerns about an "overhang (large potential sell supply)" stemming from Tencent disposing of more than 10% of its Netmarble equity will be eased as Chair Bang Jun-hyuk of Netmarble and Coway steps in to directly acquire the block for 374 billion won. Netmarble's share price has halved over the past year, and if a large volume were released directly into the market, it could add downward pressure on the stock. Bang is seen as stepping in as a firefighter to prevent that.
◇ Chair Bang Jun-hyuk to directly acquire Tencent equity for 374 billion won
On the 25th, according to Netmarble and the Financial Supervisory Service's electronic disclosure system, Bang Jun-hyuk, chair of Netmarble and Coway, will directly acquire 13.4% equity in Netmarble held by Tencent affiliate Han River Investment for 374 billion won. Netmarble said, "To preemptively reduce market uncertainty that could arise if a large block were to be released into the market, the largest shareholder, Chair Bang, will directly acquire the equity," adding, "The acquisition funds will be raised directly through a stock-collateralized loan and other means."
The share transfer and payment are scheduled for Oct. 21, and once the transaction is completed, Bang's Netmarble equity stake will rise from 24.93% to 38.34%. As the founder and largest shareholder's holdings exceed the combined equity of the No. 2 to No. 4 shareholders, Netmarble's governance centered on Bang is also expected to strengthen.
With this transaction, Tencent's Netmarble equity stake is expected to fall from 18.11% to 4.7%. As Tencent's holdings shrink significantly, CJ ENM, with 17.34% of Netmarble equity, becomes the No. 2 shareholder, NC, with 7.03%, rises to No. 3, and Tencent moves down to No. 4. Han River Investment said in a disclosure that the purpose of this equity sale is "to recoup investment funds by disposing of Netmarble common stock."
Tencent does not disclose a specific investment roster, but it is a "big player" in the game industry, having invested in or holding equity in more than 100 game developers worldwide. It holds global game companies such as U.S.-based Riot Games, developer of "League of Legends (LoL)," and Finland's Supercell as subsidiaries. In Korea, in addition to Netmarble, it is a major shareholder of Krafton, Kakao Games, and SHIFT UP, and it has also cooperated with Nexon, NC, and Smilegate over a long period. A significant portion of Korean games served in the Chinese market are distributed through Tencent.
In 2014, Tencent invested $500 million (about 530 billion won) in CJ Games, the predecessor of Netmarble, through Han River Investment and secured about a 28% equity stake. It had remained a major shareholder of Netmarble for roughly 12 years before deciding this month, for the first time, to dispose of part of its holdings. A Netmarble official said, "Separate from changes in equity relations, the business cooperation between the two companies will continue without disruption."
◇ "Selection and concentration" to shed underperforming game assets… reallocating capital to AI
Last month, Tencent disposed of its entire 20% equity in Japanese game developer Marvelous and is additionally reviewing the sale of equity in several local game companies. Japanese game trade media Gamebiz reported that as Tencent adjusts investment priorities with a focus on "capital efficiency," many Japanese game companies that received Tencent investment around 2020 will be affected in the future.
A game industry official said, "In the case of underperforming game companies, Tencent decided to tidy up by selling its equity back to existing management even at a loss, and to deploy the funds secured in areas it judges to have high growth potential."
Tencent is currently competing fiercely with China's Alibaba and TikTok's parent ByteDance Ltd. to seize the upper hand in the AI supremacy race. As it executes large-scale AI investments, Tencent's second-quarter capital expenditures hit a record 52.8 billion yuan (about 11 trillion won), and it said its annual AI-related investment this year will double from a year earlier. Alibaba also sold its game division "Lingxi Games" as part of streamlining noncore businesses, and ByteDance likewise is disposing of game operations, such as selling Shanghai game developer "Moonton Technology," to funnel capital into the fast-growing AI business.
With Netmarble's profitability worsening amid the recent poor performance of new titles and its share price struggling for a year, there is an interpretation that this influenced Tencent's decision to unwind its equity. Netmarble's second-quarter sales this year were 749.2 billion won, up 4.4% from a year earlier, but operating profit was 80.1 billion won, down 20.8% over the same period. That's because games launched in the second quarter, including "MonGil: Star Dive" and "Game of Thrones: King's Road," fell short of market expectations. To improve profitability, the company said it would shift strategy from expanding scale by releasing numerous new titles to focusing on expense efficiency and extending the lifespan of existing popular intellectual property (IP).
Netmarble's share price rose to the 60,000-won range as of September last year but fell into the 30,000-won range this month, nearly halving in about a year.
Wi Jeong-hyeon, a professor in the business administration department at Chung-Ang University, said, "Netmarble's reliance on external IP is higher than other game companies, and recent stock performance has also been weak, so from Tencent's perspective, it appears to have judged that it could unwind part of its holdings and maintain the partnership with only a minority stake."
The game industry assesses that Chair Bang's Netmarble equity rising to a level nearing 40% is positive in terms of strengthening governance. An industry official said, "As Chair Bang has shown a commitment to responsible management, we expect Netmarble to pick up speed in pursuing its mid- to long-term business strategy, including strengthening capabilities in original IP developed in-house."