June 17, 2019

Tencent and Nexon, an unlikely match

PUBLISHED : January 09, 2019 - 13:36

UPDATED : January 09, 2019 - 13:36

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[THE INVESTOR] The spotlight is back on Korean online game industry magnate Kim Jung-ju, two years after he was embroiled in a bribery scandal. The charges against him have since been dropped, but this time, it’s not about his past. It’s about his future.

The 50-year-old entrepreneur made headlines on Jan. 3 by vowing to dump his controlling stake in NXC, the holding company at the apex of Korean-Japanese internet game software giant Nexon. The announcement came more than three decades after he co-founded the video game publisher.

NXC’s combined 98.64 percent stake -- owned by Kim, his wife and his company -- gives control over the publishing rights of Nexon’s popular online game lineup that includes “Sudden Attack” and “MapleStory.” 

Nexon logo (Yonhap)

It’s going to be a mega-deal, roughly worth 10 trillion won (US$8.94 billion), which is 10 times the projected 2018 earnings before interest, taxes, depreciation and amortization of the privately-held company, on assumptions of an uptrend from 741 billion won in 2017.

Given the sheer size, not to mention Kim’s status as one of the first-generation Korean online gaming entrepreneurs, industry watchers are speculating over what’s going to happen.

Right now, many are eyeing Tencent, the ever-expanding Chinese internet juggernaut, as a potential buyer. However, given China’s toughening regulatory stance on the gaming industry, it won’t be easy. Kim himself has also said that he wouldn’t like to put the company or the industry in jeopardy, indicating he may not be considering Tencent. So for now, other options, such as selling to a consortium, a private equity fund or another global game giant, are still being weighed.

Curse or blessing?

Experts say that even if Tencent does acquire a controlling stake, it won’t be Nexon’s ticket into the Chinese online gaming market that was worth 235.5 billion yuan (US$34.40 billion) in 2017, up threefold in five years, according to the National Copyright Administration.

“Tencent is a soon-to-break rope,” Wi Jong-hyun, a professor at Chung-Ang University Business School, told The Investor. “Even if the deal happens, it might want to just use Korea and Japan to unload games that failed to get past the Chinese red tape.”

Tencent took a lot of heat last year amid concerns from Chinese authorities on the gaming industry due to criticism that children and adolescents in the world’s biggest gaming market are prone to addiction and violence.

Beijing has been restricting the number of new online games since August. It also announced plans to control the time underage kids spend on electronic devices. For the first time, Tencent posted a quarterly drop that month. The market cap of Tencent Holdings shrank by over a fourth through the year as of Jan. 7. Tencent’s online games were also missing from China’s licensing of 80 games in December.

The takeover would add to the firm’s growing list of foreign gaming companies that include Los Angeles-based Riot Games that released “League of Legend” and Finnish firm Supercell, known for “Clash of Clans.”

But doubts are rising about Tencent’s liquidity in the aftermath of such blockbuster deals.

“Even if (Tencent) does push through with the deal, it would be too risky to go in alone,” said Kim Jeong-soo, an assistant professor of industrial engineering at Myongji University, adding that in which case Nexon could get ripped apart.

“Nexon could be completely transfigured both in terms of portfolio and management, while (NXC) will end up being a scapegoat.”

NXC co-founder Kim Jung-ju (NXC)

Bleak outlook

Kim has always said that he would sell some day, but industry watchers believe that the current bleak domestic situation drove him to make a decision earlier than he wanted.

Largely fettered by the online game “shutdown law,” game developers in the export-driven nation are turning their attention to overseas markets, only to find none of the Korean games on China’s recent license list. The acquisition of Korean firms by Chinese publishers like Shanda Games, Longtu Game and Tencent are also weighing on the local industry.

A saturating market is making matters worse, according to Lee Min-a, an analyst at KTB Investment & Securities.

“Competition is intensifying, and it’s becoming harder to achieve genre diversification,” he told The Investor. “The industry is now at its height.”

The selloff of NXC shares, therefore, may be a timely decision, at least for the founder.

Experts also note that the company will be subject to fresh taxation starting this year, giving Kim another reason to exit.

“Neople, an indirect subsidiary of NXC and publisher of “Dungeon Fighter Online” had been given a five-year exemption from corporate and income taxes until 2018 when it moved its headquarters to Jeju Island in 2014,” noted Wi of Chung-Ang University who also heads Korea Academic Society of Games. 

By Son Ji-hyoung and Choi Ji-won (

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