Korean entertainment giants face challenges in U.S. businesses

[Photo by Yonhap]

South Korean entertainment powerhouses such as Hybe and CJ ENM are facing hurdles in managing their U.S. subsidiaries. Both companies have invested significant sums to acquire local entities, aiming to establish global systems, but the underperforming U.S. businesses are now posing a burden on the parent companies’ overall financial health.

According to financial disclosure documents released by the Financial Supervisory Service on Monday, CJ ENM USA Holdings reported revenues of 91.2 billion won ($69 million) in the first half of 2023, a significant decline of around 73 percent compared to the previous year’s 341.7 billion. During the same period, CJ ENM USA Holdings saw its net loss widen from 33.8 billion won to 93.5 billion won. The performance of CJ ENM USA Holdings includes results from some 50 subsidiaries, with Fifth Season (formerly known as Endeavor Content) a central focus.

Fifth Season is a U.S. film and drama production company that CJ ENM acquired for around 930 billion won last year. It earned acclaim for producing well-received works such as “La La land” and “Call me by your name,” establishing itself as a capable player in the production industry. However, despite its potential, Fifth Season’s losses have not improved and have adversely affecting CJ ENM’s overall financial performance. Considering the situation, Hana Securities recently issued a report titled “CJ ENM’s Expected Annual Operating Loss for This Year,” which revised its projection for CJ ENM from an operating profit of 45.4 billion won to an operating loss of 43.3 billion. “The biggest variable is Fifth Season. Unfortunately, it coincides with the first strike in the United States in 63 years by actors and writers nationwide,” said Hana Securities’ research center analyst Lee Ki-hoon.

Similarly, Hybe has not seen the expected synergy effects materialize after its acquisition of U.S. entertainment firm Ithaca Holdings. Ithaca Holdings reported revenues of 74.2 billion won in the first half of this year, down 19 percent from 91.4 billion won a year ago while net profit plummeted from 16.3 billion won to 3 billion won during the same period.

Beyond financial challenges, there are concerns about artist management. Reports have surfaced that top stars managed by Ithaca Holdings, including Ariana Grande, are parting ways with the company. Billboard recently reported that Grande has decided to sever her remaining ties with longtime manager Scooter Braun and Hybe. If artists such as Grande and Justin Bieber do depart, Hybe’s 1 trillion won investment made in the much-touted M&A deal could lose its significance.

Some in the investment industry suggest that Korean entertainment companies may have underestimated the challenges in integrating their U.S. subsidiaries from the outset.

“What was considered a one-time expense in due diligence for the Fifth Season acquisition seems to be a large part of the current loss,” a market watcher said.