Line Yahoo accelerates separation from Naver

[Photo by Yonhap]

Line Yahoo Corp., jointly operated by South Korea’s Naver Corp. and Japan’s SoftBank Corp., announced plans to sequentially terminate Line Pay, which currently has 44 million users, by April 2025. The company will transfer its services to PayPay and is seemingly hastening its efforts to break away from Naver.

According to multiple sources from the information technology (IT) industry on Sunday, Naver and SoftBank are in behind-the-scenes contact regarding Line Yahoo’s future but are currently at an impasse.

The significant drop in the value of the Japanese yen decreased Line Yahoo’s valuation. Strong opposition from the Korean government and labor unions also caused the Japanese side to step back, with Line Yahoo speeding up its separation efforts in response.

The move also aims to reduce dependence on Naver and allow SoftBank to secure maximum control. A prime example is Yahoo Japan’s announcement on May 30th, 2024, to incorporate Anthropic’s Claude 3 into its Yahoo Encyclopedia’s AI response function. While it integrated OpenAI’s GPT-4 for AI responses in November 2023, it excluded Naver’s Clova X. Line Yahoo also liquidated Line Biz Plus, which oversees overseas fintech services, and transferred its related business to Line Pay Plus, which is headquartered in Taiwan.

The IT industry views the abrupt termination of Line Pay as hasty, even as a merger was anticipated since Line Pay, a Naver Line affiliate, and SoftBank’s PayPay were competitors. The integration process was expected to be slow due to the need for mutual ID integration, but Line Yahoo abruptly ended Line Pay services.

Analysts suggest that Line Yahoo’s rush to separate from Naver is a strategic move as it anticipates difficult negotiations moving forward. The Japanese Ministry of Internal Affairs earlier demanded Naver sell its shares for security governance reasons.

As SoftBank expedited the negotiations, the Korean government, led by the presidential office, countered by ensuring the share sale was not included in the administrative guidance report due to be submitted to the Japanese government by July 1st, 2024.

Negotiations are expected to resume, however, with Line Yahoo due to hold its regular shareholders’ meeting on Tuesday and SoftBank on Friday. Line Yahoo is expected to clarify its position on separation from Naver and share sales at its meeting.

The problem lies in the decreasing valuation of Line Yahoo, which is the negotiations’ core issue. A Holdings, the parent company of Line Yahoo, holds 64 percent of its shares, which Naver and SoftBank each control half.

[Graphics by Song Ji-yoon and Lee Eun-joo]

Line Yahoo’s market capitalization is currently 2.79 trillion yen ($17.7 billion), with the value of Naver’s and SoftBank’s shares at 892.8 billion yen each. If Naver sells its entire share now, it would receive less than 8 trillion won.

In contrast, in November 2021, Line Yahoo’s stock price was 826 yen per share, 2.2 times higher than the current 365 yen, and the Korean won’s value against the yen was 950 won per 100 yen, 1.15 times higher than the current 826 won. The company’s market capitalization at the time was 6.14 trillion yen and Naver’s shares were worth over 18.6 trillion won.

Mergers and acquisitions also typically include a 20 to 40 percent management control premium. With the simultaneous decline in stock prices and the yen, the maximum amount that could be earned from the sale dropped from 26 trillion won to 10.9 trillion won and created an impasse in the negotiations.

For its part, SoftBank effectively controls Line Yahoo currently, and Line Yahoo’s parent company, A Holdings, is jointly owned and managed by Naver and SoftBank. However, the board composition favors SoftBank 3 to 2, and all the current Line Yahoo board members are Japanese.

Insiders noted that Line Yahoo is determined to terminate all consignment relationships with Naver except for a few minor businesses. This is despite the high dependency on the Korean company for system construction, which Sankei Shimbun highlighted as a significant barrier to the separation from Naver.