[Public Companies at a Crossroads] KiwiPlus, Preparing for a 'Backdoor Listing' via EWK?

[Asia Economy Reporter Jang Hyowon] Geothermal power plant company EWK is acquiring Kiwi Plus, a kids' phone development company previously owned by Kakao. The acquisition funds will be raised through convertible bonds (CB), which could lead to a change in the largest shareholder upon conversion to shares. Notably, the CB includes a call option allowing EWK to designate the buyer, raising the possibility of a backdoor listing for Kiwi Plus.

◆ 70% Call Option Attached to CB... Preparing for a Backdoor Listing?

According to the Financial Supervisory Service's electronic disclosure on the 1st, EWK postponed the payment date for the 3rd series CB worth 50 billion KRW from the 19th of last month to the 20th of this month. The purpose of the fund raising is 10 billion KRW for operating funds and 40 billion KRW for acquiring securities of other companies. It is expected that 21.5 billion KRW of the raised funds will be used to pay the remaining balance for acquiring Kiwi Plus.

Earlier, on February 5th, EWK acquired 64.14% of Kiwi Plus shares from Kakao and Kiwi Plus CEO Seo Sangwon for 38 billion KRW. As of the 23rd of last month, 16.5 billion KRW had been paid, and the transaction will be completed upon payment of the remaining 21.5 billion KRW on the 23rd of this month.

After deciding to acquire Kiwi Plus, CEO Seo was appointed as co-CEO of EWK at the regular shareholders' meeting held on the 13th of last month. Lee Donghyun, Vice President of Kiwi Plus, was also appointed as a director.

However, the appointment proposals for Jin Seongwook, head of Kiwi Plus R&D Center, and Byun Cheolhun, head of Kiwi Plus headquarters, who were also included in the appointment list, were rejected. This indicates that the existing management and largest shareholder have not fully transferred management rights to Kiwi Plus. Currently, there are three internal directors and two directors from Kiwi Plus.

Once the 3rd series CB is paid and the remaining balance for acquiring Kiwi Plus is settled, it is expected that additional directors from Kiwi Plus will be newly appointed.

If Kiwi Plus gains control over EWK's management rights, the path to a backdoor listing will open. This is because the 3rd series CB includes a call option. The CB grants the issuer (EWK) or a party designated by the issuer the right to purchase up to 70% of the entire CB from six months to twelve months after the issuance date. The 70% of the CB is a scale that could change the largest shareholder upon conversion to shares.

If CEO Seo and the Kiwi Plus side, who hold EWK's management rights, exercise the option to acquire this CB and convert it into shares (assuming no re-pricing), they will hold approximately 6.2 million shares (30.28%). Currently, the largest shareholder, Sportsworks, holds 20.57%, so the largest shareholder will change.

In this case, Kiwi Plus can cleverly bypass the Korean Exchange's backdoor listing requirements and proceed with a backdoor listing. The Exchange reviews backdoor listings when the largest shareholder changes to the largest shareholder of an unlisted company through a merger, or when the largest shareholder of a listed company changes to the largest shareholder of an unlisted company within one year of a merger or acquisition announcement.

◆ ‘Overvalued’ Kiwi Plus... Does Not Meet Direct Listing Criteria

Kiwi Plus is a children's smartwatch manufacturer founded by CEO Seo Sangwon and was acquired by Kakao in 2018. Its main products include the ‘Kakao Kids Phone’ and ‘Kakao Little Friends Phone’.

Although it was acquired by Kakao and released products utilizing Kakao's characters and intellectual property (IP), the scale of losses increased. Operating losses were 1.6 billion KRW in 2016 and 1.5 billion KRW in 2017, and after acquisition by Kakao, losses continued with 4.5 billion KRW in 2018 and 3 billion KRW last year.

Ultimately, Kakao sold Kiwi Plus after two years. The sale price to EWK was 14,915 KRW per share, which is 125% higher than the 6,624 KRW per share Kakao paid in 2018. According to an external valuation report, EWK estimated Kiwi Plus would turn profitable this year and grow more than double annually, which was reflected in the valuation.

However, until last year, Kiwi Plus's performance and financial status did not meet the KOSDAQ market listing criteria. Typical KOSDAQ listing requirements include equity capital of at least 3 billion KRW and net income of at least 2 billion KRW in the most recent fiscal year.

Backdoor listing reviews are conducted with standards equivalent to general listing reviews to prevent unqualified unlisted companies from gaining listing benefits through backdoor listings.

An industry insider said, “Backdoor listing itself is not necessarily bad, but if a company without listing qualifications uses the status of a listed company to raise funds and harms shareholders, it can be problematic.”

Meanwhile, EWK recorded an operating profit of 560 million KRW last year, down 72.9% from the previous year. Net loss also turned to 1.2 billion KRW.