March 8, 2019 / 9:08 AM / 8 months ago

Nexon battle puts Korea in play

* Loans: Lenders eye US$3.5bn–$4bn financing for record acquisition

By Prakash Chakravarti

HONG KONG, March 8 (LPC) - A giant takeover of online gaming firm Nexon could smash more records in Asia’s expanding leveraged finance arena as lenders circle South Korea’s biggest acquisition.

A mix of private equity firms and strategic buyers are in the race to buy the 98.64% stake in NXC Corp held by Nexon founder Kim Jung-ju, his wife and other related parties.

NXC owns 47% of Tokyo-listed Nexon, which has a market capitalisation of around US$14bn, and market participants expect competition for NXC to drive the price as high as W15trn (US$13.3bn). A deal of that size would be South Korea’s largest M&A on record, and comfortably the biggest leveraged buyout in the country.

Bankers are expecting a debt financing of at least US$3.5bn–$4.0bn. The large size and the complex structure, however, are challenging for financiers as NXC is a holding company without majority control of Nexon.

“Banks would prefer the winning bidder to have greater control over the operating company (Nexon) so that dividends can be more easily upstreamed to service the debt that finances the LBO,” a leveraged finance banker in Singapore said.

It is not yet clear whether a change of control at NXC would trigger a general offer for the rest of Tokyo-listed Nexon. That could swell the deal size to around US$18bn, bankers said, assuming a reasonable premium over the Tokyo stock price.

Leveraged finance bankers see a potential general offer for Nexon as positive as it would overcome structural hurdles for the financing, potentially allowing a private equity firm to raise debt against the gaming company’s cashflows.

Whatever the structure, bankers do not expect the senior debt financing to go much above US$4bn. At the Nexon level, that would imply a leverage multiple of 3.5x–4.0x, based on Ebitda of ¥104.81bn (US$938m) for the fiscal year ending December 31 2018.

On that basis, bankers estimate that a buyout of Nexon would require a large equity contribution of as much as US$14bn – a daunting amount for any bidder.

Five bidders have been shortlisted, including Chinese tech giant Tencent Holdings, South Korea’s biggest messaging app operator Kakao, Bain Capital, MBK and another unidentified private equity firm, according to the Korea Economic Daily.


The South Korean deal is attracting interest from lenders given the lack of a sizeable buyout deal from the country for a three years.

Korea’s largest buyout loan was in December 2015, when 10 of the country’s banks and financial institutions snapped up a W4.3trn (then US$3.63bn) financing backing homegrown PE firm MBK Partners’ US$6bn LBO of British retailer Tesco’s South Korean unit Homeplus.

Around 18 months earlier, in June 2014, Korean banks, financial institutions and institutional investors took nearly all of a W1.345trn (US$1.32bn then) LBO loan supporting Carlyle Group’s acquisition of security solutions provider ADT Korea.

The all-senior Homeplus loan had a leverage multiple of 5.69x, while ADT Korea’s LBO financing, which also included a W360bn mezzanine portion in what was the largest such loan at the time from Asia, had total leverage of 7.47x.

International lenders have been short of lending opportunities in Korea, and Nexon’s buyout could be no different if domestic banks dominate the financing.

“Structuring a classic LBO loan against the cashflows of Nexon is going to be difficult for international banks,” said a senior leveraged finance banker at an international bank in Hong Kong.

“Korean lenders might be more accommodating given their familiarity with Nexon’s business, but for international banks the makeup of the sponsors is also critical especially as the situation does not involve total control of the underlying asset.”


Tencent holds the key to the deal given its strategic interest, people familiar with the situation said.

Tencent is the world’s largest online gaming company by revenues and owns the exclusive licence to operate Nexon’s Dungeon & Fighter in China. Around half of Nexon’s revenues come from China, the world’s largest gaming market.

Nexon suffered a 22% slide to its China business in the quarter ending December 31 and has forecast a percentage decline in the low to high-teens for the first quarter this year.

Nexon’s drop in revenues from China in 2018 followed a regulatory freeze on approvals for new games in the country, which also hurt Tencent’s stock price.

Tencent brings financial firepower to the table. As of September 30 2018, it had cash of Rmb144.77bn (US$21.57bn) on its balance sheet. Tencent also owns a 17.66% stake in Netmarble, another gaming firm in South Korea which also bid for NXC, but was not shortlisted.

“Without Tencent this deal is not possible at all. The Chinese tech giant could be a crucial partner to any winning bidder as the equity contribution required is huge,” the banker in Hong Kong said.

Tencent has played the acquisition game before. In October 2016, it raised US$3.5bn through a debut M&A loan to fund its acquisition of up to 84.6% of Finnish mobile game developer Supercell for US$8.6bn.

Twenty-four banks participated in that loan, including seven mandated lead arrangers and bookrunners.

Reporting By Prakash Chakravarti; Editing by Tessa Walsh and Steve Garton

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