YG reduces IPO size as marijuana use adds risk to Korea pop

Posted October 20, 2011 by

[For those intimidated with the business terms, just check out the summary at the end of the post :)]

Oct. 19 (Bloomberg) — YG Entertainment Co., which manages the Korean boy band Big Bang, lowered the amount it’s seeking in its initial public offering after the band’s leader tested positive for marijuana use.

G-Dragon’s drug use could be a “constraint” for the band’s activities for a while, YG said in a revised prospectus submitted to Korea Exchange Inc. yesterday. Big Bang’s concerts may be delayed and revenue from commercials could fall, the company said. Big Bang and its members accounted for more than half of the company’s total sales in 2010, YG said.

YG is seeking as much as 35.9 billion won ($31 million), less than the 39.9 billion won it had earlier sought as Big Bang played to full stadiums in Japan and fans flocked to female quartet 2NE1, which is also managed by the company. Shares of listed rival S.M. Entertainment Co. more than tripled this year, even as the benchmark Kospi Index slumped 9.5 percent.

“A short-term impact on earnings is inevitable given that G-Dragon was YG’s flagship artist and helped lift the company to the top ranks in the Korean music industry,” Choi Woong Pil, a Seoul-based fund manager at KB Asset Management Co., which manages $23 billion in assets, said in an interview. “It won’t end interest in the IPO because its main rival S.M. continues to perform really well and YG’s potential is intact.”

Deep Regret

YG declined to make G-Dragon, whose off-stage name is Kwon Ji Yong, available for comment. The singer unwittingly accepted what he thought was a regular tobacco cigarette from a fan during a tour of Japan in May and took “two or three puffs” before throwing it in a toilet, the company said in a statement on Oct. 5.

“Prosecutors decided not to indict G-Dragon as he didn’t have intention to smoke drugs and extremely small traces of marijuana were detected from tests,” YG said in that statement. “G-Dragon and the company deeply regret and apologize for not being more careful.”

YG plans to set up an “artist risk management” team, the company said in yesterday’s prospectus. An artist’s image tends to affect revenue of entertainment companies, YG said.

Orders for stock in the IPO will be taken on Nov. 14-15, compared with the previous schedule of Oct. 12-13, the sale document said. The company is seeking to sell almost 1.25 million shares at 22,100 won to 28,800. It earlier offered them at 24,600 won to 32,000 won.

Music Charts

YG’s stock price was 64,000 won on Oct. 18 in the over-the- counter market, according to the website of online equity exchange pstock.co.kr in Seoul. That’s down from 69,000 won on Oct. 5.

South Korean pop, or “K-pop,” acts promoted by S.M. Entertainment dominate the nation’s music charts. S.M.’s biggest boy band, Super Junior, and main female group Girls Generation were the top album sellers last year, according to South Korea’s Hanteo music chart.

Girls Generation’s videos, including “Run Devil Run,” and Super Junior’s “Mr. Simple” have generated tens of millions of views globally on Google Inc.’s YouTube. Shares of smaller label JYP Entertainment Corp. have climbed 163 percent in 2011 on the chart strength of its bands such as Miss A.

It was that kind of success that made YG decide to go public, Chief Operating Officer Choi Sung Jun said in a phone interview on Oct. 10.

Winter Sonata

“K-Pop is definitely getting attention these days,” he said. “Even if investors aren’t fans of the music, their teenage kids may buy the music and hum the songs. We hope that familiarity means they’ll feel comfortable making bets on our potential.”

K-Pop is now the main force behind the so-called Korean Wave of popular culture, which started to spread across Asia in early 2000s with television dramas such as “Winter Sonata.” Japan, which has its own home-grown music industry known as J- Pop, is the biggest market for Korean music, accounting for 69 percent of exports, the Korea Trade-Investment Promotion Agency said in a June report.

Next is Southeast Asia with a 21 percent share and China with 8 percent. The YouTube video site and other social- networking services are helping to promote K-Pop in Europe, which accounted for just 1 percent of Korean music exports, the Seoul-based agency said.

Cultural Icons

In France, hundreds of fans gathered in front of the Louvre on May 1, demanding S.M. hold another showcase of its artists in Paris after about 7,000 tickets for a June concert sold out in 15 minutes.

YG plans to use the proceeds from its share sale, arranged by Daewoo Securities Co., to increase its pool of new artists, add production staff and open offices abroad.

The company is headed by Yang Hyun Suk, a former member of Seo Taiji and Boys, a 1990s trio that mixed pop, rap, rock and techno to become cultural icons in Korea. Yang, 41, is YG’s biggest shareholder with a 48 percent stake. The company posted net income of 7.2 billion won in the first six months of this year, from 5.6 billion won a year earlier.

“In the past, we may have been too conservative in promoting our bands overseas,” YG’s Choi said. “With the proceeds from the IPO we can make a push to get them recognized.”

Note: IPO = initial public offering. This is basically how much the company will be selling its stocks during its first public sale. YG’s first sale was supposed to be last October 12 to 13 but it’s now moved to November 14-15. After the incident, they lowered the price per share (of stock) from 24,600 won to 32,000 won to 22,100 won to 28,800. They’re looking at selling a total of 1.25 million shares.

Major points from the article (or short version):
– YG’s reasons for going public are: to invest on new artists, additional staff, and more overseas activities/promotions (thanks to the Kpop boom).
– In 2010, more than half of YG’s revenue came from Big Bang’s activities.
– Because of G-Dragon’s marijuana issue, Big Bang’s concerts might be delayed and the group’s activities might be limited for a while.
– They’re predicting a drop in the revenue Big Bang gets from endorsements.
– GD’s issue will have a short-term impact on the YG’s earnings but interest in the company will still be there since YG’s potential is seen as “intact”.
– YG will be setting up an “artist risk management” team seeing how their artists’ public image has/will have an effect on their revenue.

Excerpt from another article on the IPO from 10Asia:

Interview with YGE:

“The incidents revolving around our artists Daesung and G-Dragon of Big Bang may serve as constraints for the group’s activities for the time being and affect business performance.

It is hard to determine when G-Dragon or Big Bang will be able to pursue their activities normally due to G-Dragon’s marijuana-related incident which could affect the activities of Big Bang, G-Dragon alone and GD&TOP.”