LY Corp (Line Yahoo) is set to take Kakao Games under its wing. On the surface, it is about "targeting the global market", but a closer look suggests a structure closer to shedding problems each party has carried.

According to the industry on Tuesday, a transaction was disclosed that would see LAAA Investment, an investment-purpose entity set up by LY Corp, take the position of Kakao Games' largest shareholder.

The deal is worth about 300 billion won and targets completion in May. It is intertwined with the financial burden related to Line Games, Kakao's affiliate reshuffle and variables around a Lionheart Studio initial public offering (IPO).

LAAA Investment will acquire some of Kakao Games' existing shares from Kakao, while also purchasing newly issued shares and convertible bonds issued by Kakao Games. The new share issuance totals 17,458,354 common shares, worth about 240 billion won based on an issue price of 13,747 won per share. The convertible bonds total 60 billion won, with conversion rights exercisable from May 2027. Payment is scheduled for May 29, and the new shares are set to list on KOSDAQ on June 12. Once completed, LAAA Investment will become the largest shareholder and Kakao will fall to second place.

WHY LINE, AND WHY NOW

The market is focusing on the financial situation of Line Games, a game company under Line Yahoo, as one factor behind the transaction.

Line Games was established in June 2017 with 100 percent investment from LINE Corporation. The following year it expanded through the acquisition and merger of NextFloor, which developed the mobile game DragonFlight. In 2018, Hong Kong-based private equity firm Anchor Equity Partners invested about 125 billion won through an SPC. In 2021, investors including Tencent made an additional 114.8 billion won investment through redeemable convertible preferred shares (RCPS). Tencent's participation is reported at about 50 billion won. RCPS issued in a 2021 pre-IPO investment is reported to include a condition requiring redemption at the issue price plus 4 percent simple annual interest if an IPO is not completed within 5 years.

But no hit title emerged as expected. In 2024, Line Games posted revenue of about 43.5 billion won and an operating loss of 16.1 billion won. As capital impairment persisted, it repeatedly took short-term loans from affiliate Line Plus to fund operations.

Financial pressure is also evident in disclosures. Line Games decided on Feb. 13 on a shareholder-allotted rights offering worth about 40.9 billion won. The purpose was operating funds. A month later, on March 13, it held a board meeting and extended by 1 year the maturity of 32 billion won in convertible bonds issued in 2022. The original maturity was March 16. The interest rate applied during the extension period was 8 percent per year, higher than before. With the rights offering payment date (March 18) overlapping the CB maturity extension disclosure (March 16), the Kakao Games acquisition transaction was announced on March 25, just days later.

Meeting IPO requirements under capital impairment is realistically difficult. The investment industry also sees growing management uncertainty around Line Yahoo as a factor weighing on Line Games' valuation.

The official party to the transaction is LAAA Investment, an investment-purpose entity funded by LY Corp. Whether Line Games and Kakao Games will merge is not a confirmed fact at present. Still, the investment industry offers an interpretation that the transaction is not unrelated to the burden of financial investors exiting Line Games. The view is that, with a standalone IPO blocked, an exit route using a listed company could open. The market also sees the disclosure that LAAA Investment's funding method is specified as "acquisition financing and employee contributions" as one basis for interpreting the transaction as more than a simple financial investment.

There is also an interpretation that, from LY Corp's perspective, the transaction ties to the need to bolster content assets within its platform. With technological cooperation with Naver reduced and discussions on governance restructuring continuing after changes in the management environment around Line Yahoo, one view is that LY has stronger incentives to expand independent assets in games and content. Another analysis says synergy could be expected if development assets held by Kakao Games, including Lionheart Studio, combine with LY's touchpoints on Japanese platforms.

KAKAO AND KAKAO GAMES ALSO HAVE REASONS

The transaction could proceed because Kakao's circumstances also aligned.

Kakao has recently maintained a "selection and concentration" stance of shedding non-core businesses. A sale of Kakao Games has also been mentioned several times in this flow, but negotiations with potential buyers did not materialise. In this transaction, Kakao chose to secure liquidity by selling part of its existing shares, rather than a full sale, and to remain the No. 2 shareholder by reinvesting part of the proceeds. The structure hands over the decision-making burden while still capturing part of the gains from any future value increase.

Kakao said the decision is "to focus on AI and technology and platforms centered on KakaoTalk, while Kakao Games focuses on the essence of games to maximise each side's expertise". It added it judged that cooperating with Line Yahoo, which has global infrastructure, would help Kakao Games' long-term growth.

For Kakao Games, securing cash was urgent. It recorded cumulative revenue of 366.1 billion won and an operating loss of 26.5 billion won through the third quarter of 2025, making a return to profitability pressing. It plans to deploy the about 300 billion won secured through the transaction sequentially from 2027. The disclosure stated it is reviewing "securing major new title IP and investing to expand the global market". Kakao Games plans to release new titles including Odin Q and ArcheAge Chronicle within this year.

LIONHEART IPO, A STRUCTURAL VARIABLE

One more variable in this transaction is not visible on the surface but is structurally important. It is the Lionheart Studio IPO issue.

Lionheart Studio, the developer of Odin: Valhalla Rising, has Kakao Games as its largest shareholder with about a 55 percent stake. Lionheart pushed for a KOSDAQ listing in 2022 but halted the process due to worsening market conditions and opposition from Kakao Games shareholders. The core was controversy over "piecemeal listings" within Kakao affiliates. After revisions to the Commercial Act passed, the burden around IPOs of unlisted subsidiaries within Kakao affiliates grew further.

When Kakao Games acquired Lionheart, it signed a shareholder agreement with shareholders including founder and chairman Jae-young Kim (김재영) on the premise of pursuing an IPO. The agreement includes a put option clause allowing stakeholders to request that Kakao Games buy all or part of their holdings if an IPO fails because Kakao Games does not consent. Depending on the conditions and scope of exercise, the structure could create a payment burden from several hundred billion won to more than 1 trillion won.

The market also sees the possibility that if the largest shareholder changes to an LY Corp-affiliated entity, the intensity of objections framed as a Kakao-affiliate piecemeal listing could weaken, changing the environment for discussions on a Lionheart IPO. If Lionheart's IPO is realised, the value of Lionheart shares held by Kakao Games could also be reassessed.

A DEAL THAT SWAPPED EACH SIDE'S PROBLEMS

In the end, the transaction is closer to an exchange of problems each party has carried than an aggressive investment aimed at growth.

The market also offers an interpretation that LY Corp could ease the burden of financial investors exiting Line Games through the transaction. Kakao hands over decision-making burdens in its game affiliate and secures liquidity while remaining the No. 2 shareholder. Kakao Games secured 300 billion won, and the market sees the possibility that a change in the largest shareholder could also alter the environment for discussions on a Lionheart IPO.

A Kakao Games official said, "This strategic investment and restructuring of the shareholding structure is an important turning point to raise global competitiveness by another step and lay the foundation for sustainable growth." The official added, "Based on cooperation with partners including Kakao and LY Corp, we will expand new growth opportunities in the global market."