It’s being reported that luxury goods conglomerate LVMH is planning to request their past investment back from YG Entertainment, at seemingly a significant loss for the K-pop company at a particularly sensitive time.
Many have already been talking about this, but judging by the questions I’ve been fielding recently, many are also still confused by what is going on and what it could mean.
Well, back in September of 2014, LVMH were reported to be investing up to $80 million in YGE.
LVMH’s private equity branch L. Capital Asia will invest 61 billion won ($60 million) in 1.35 million convertible preferred shares, priced at KRW 44,900. And, according to a YG report, the entities are in negotiations to acquire another $20 million of shares from YG founder and largest shareholder, former K-pop star Yang Hyun-suk. If that deal goes through, it will be YG’s second-largest shareholder.
At the time it seemed like a relatively safe bet, but even before the Burning Sun scandal happened, the outlook of their investment was already looking grim back in May of 2018 as YGE shares fell to almost half the value of when LVMH invested in the company.
L Catterton Asia’s investment in YG was its first investment in Korea. The deal included a redeemable convertible preference shares tranche of US$60 million. L Catterton Asia has rights to sell its 1.4 million shares for 48,000 won apiece on Oct. 16, 2019, or convert them into regular shares at the market price at any time. But it looks like the firm won’t have much of an incentive to convert soon, given YG’s sagging share price. Further, it looks like the money wasn’t spent too wisely by YG, which bought a 39.5 percent stake in Phoenix Holdings for 50 billion won. The firm was renamed as YG Plus, a subsidiary dealing in cosmetics, fashion and food, and is in the red for the past six years.
So the potential of YGE having to repay those stocks held by LVMH loomed large regardless.
But then the Burning Sun scandal hit and the concerns have only been amplified exponentially, making it all rather predictable that recent reports have YGE preparing to repay LVMH’s investment.
According to sources, YG is preparing to make the payment using their own cash flow as they’re having difficulties converting their own stock due to the recent stock price plunge. The reason for this difficulty is because of YG’s declining stock price of over 40% in 6 months as a result of the ongoing prostitution scandal and tax investigations involving its former executive, Yang Hyun Suk as well as ‘Burning Sun gate’ involving artist and Big Bang member ‘Seungri.’ YG Entertainment received a total of 61.15 billion won from Louis Vuitton in October 2014 with a promise to convert the shares to stock or cash 5 years later. The 135,99688 shares will be converted at a price of 44,400 won. If LVMH chooses not to convert the shares and requests a repayment, YG will have to repay 67 billion won plus 2% annual interest.
So yeah, factoring in the interest, YGE will have to repay in excess of $60 million to LVMH in about three months time.
Thus, YGE is reportedly raising money to cover what they owe, and are also essentially begging LVMH to do them a solid, though I’m not sure why LVMH would. Regardless, YGE have to come up with the cash to pay LVMH.
According to an investment banking (IB) expert on the 11th, “YG Entertainment announced that they’re raising funds for LVMH’s convertible preferred stock and have reportedly began the process. YG Entertainment is reported to be looking for a redemption
request and not a stock conversion after an official request from Louis Vuitton due to the stock price decline.” He stated, “even if Louis Vuitton executives decided against redemption and went for a conversion instead with a request for damages, YG will nonetheless be subject to a felony penalty at that point and as a result end up having to repay the investment anyway so this repayment requirement was only a matter of time.” According to the IB official, “YG has been struggling to deal with the investment ever since the beginning of the year when ‘Burning Sun’ scandal broke. As a result of the constant news in the media and the declining stock price, Louis Vuitton sent YG Entertainment a preliminary letter requesting a repayment if the situation doesn’t improve. The actual official repayment request is expected to be sent to YG Entertainment by the end of July or August as is customary.”
Despite that apparent doom and gloom report, YGE is saying that it won’t impact their financial position.
YG Entertainment has stated that even though they’re required to pay back this investment this will not affect the company’s financial condition.
That obviously runs in contrast to reactions from others to the news.
So why are they confident given their seemingly dire situation? Partially because they can probably come up with the cash, partially because their conglomerate stockholders could prop them up, and partially because one of their largest stockholders is the Korean government through the National Pension Service.
The YG head also declined to answer questions about financial losses of the National Pension Service, a YG shareholder, caused by the company’s falling stock prices. “(I) will do the utmost for the interests of shareholders. Efforts will be made to increase the shareholder value through planned schedules in the future,” he said. YG’s market capitalization dived 25.47 percent from 863.8 billion won (US$765 million) on Feb. 25 to 643.8 billion won on Thursday. The National Pension Service currently holds 6.06 percent of YG shares.
The NPS has already lost tens of millions thanks to YGE, and while that is a drop in the bucket for NPS, I doubt the government wants to take a loss on the scale of nine digits due to the PR hit if nothing else. And it’s not just them, as YGE’s other major investors are the aforementioned conglomerates who don’t seem likely to just take their lumps and go away licking their wounds. Something will definitely get done one way or another.
Thus, YGE seems unlikely to be at any risk of legal repercussion or ending up having to shutter because of this. Quite frankly, I would honestly be surprised if anything major happens at the end of this at all, but they are likely to have to seek another loan or get a bailout or liquidate assets in order to make the repayment.
So despite what they say, and I’m sure they’ll try their best to keep everything looking hunky dory on the surface, this mess is something to remember as one watches YGE’s activities going forward because they desperately need to rebound and get back on track somehow. While this one investor withdrawal won’t destroy them, other major investors believing their money in YGE is a sunk cost and opting to cut their losses is something that could actually doom them if it ever gets to that point.