[M&A Insights] 'Sale in Full Swing' 11st... The Future of Native E-commerce

E-commerce Platform Launched in 2008
Operating Losses for 4 Years... Competition from Ali and Temu C-Commerce
Valuation After FI Investment Drops from 2.7 Trillion to 500 Billion

11st, a first-generation domestic e-commerce platform, is seeking a new owner. An investment memorandum (IM) is scheduled to be distributed to potential buyers next month. If the sale succeeds, 11st will leave the SK Group after 16 years since its launch through SK Telecom in 2008.

On the 29th, M&A Alssul Sinjab explores how 11st's valuation is being assessed in the market and the background behind a well-known e-commerce company coming up for sale.

Declined Corporate Value Leads to Call Option Abandonment... FI, Not the Largest Shareholder, Leads the Sale

[Image source=11st]

According to the investment banking (IB) industry, this sale is being led by the financial investors (FI) of 11st, the Nine Holdings Consortium. The consortium, composed of the National Pension Service, MG Saemaeul Geumgo, and private equity fund (PEF) manager H&Q Korea, invested KRW 500 billion (18.18% stake) in 11st in 2018. SK Square, spun off as an intermediate holding company from SK Telecom in 2021, holds a majority stake of 80.26%.

Let's look at why the FI is leading the sale. Five years ago, SK Square promised the FIs an IPO of 11st within five years. There were several conditions attached. If the IPO failed, SK Square had the right (call option) to buy all of Nine Holdings Consortium's 11st shares at an 8% annual interest rate, and if this call option was not exercised, the FI had the right (drag-along) to sell SK Square's 11st shares together with theirs.

However, the much-anticipated IPO did not materialize. The corporate value of 11st, which was valued at KRW 2.7 trillion at the time of investment five years ago, plummeted to around KRW 1 trillion in 2022 due to factors such as deteriorating profitability. Ultimately, SK Square, unable to fulfill the IPO promise, gave up exercising the call option.

The FI plans to recover its investment through the drag-along right. Adding the majority shareholder's stake could include a 'control premium,' potentially raising the sale price. Citi Global Markets Securities and Samjong KPMG are managing the sale, and in February, they sent investment teasers to private equity firms and retailers.

The sale is expected to proceed in a waterfall manner, with the FI recovering its principal first. The FI reportedly hopes for a valuation of about KRW 500 billion to 600 billion for 11st. This is essentially at the level of recovering the invested principal. The reason why neither the FI nor SK Square can be overly ambitious lies in the reality faced by domestic e-commerce companies.

"From 'Price and Delivery Competition' to 'Customer-tailored' Services"

Since the 2000s, South Korea's e-commerce market has grown significantly, and 11st expanded its business competing with many companies such as Gmarket and Auction. However, since 2019, dominant portal operator Naver and Coupang, which built its own systems for fresh food sales and logistics, have formed a duopoly. Researcher Park Chohwa from Daishin Securities said, "Competing commerce operators had to provide all product databases to appear in Naver's product search," and "Coupang grew its business by realizing economies of scale through its direct purchase business and proprietary fulfillment (comprehensive logistics outsourcing) operations, which it began focusing on in 2014."

As a result, first-generation e-commerce companies inevitably felt limitations in their existing management methods. In fact, 11st recorded operating losses of KRW 69.3 billion in 2022 and KRW 125.8 billion last year. It has been in the red for four consecutive years since 2020. Researcher Lee Jae-mo from Growth Research noted, "E-commerce platforms greatly benefited from the rapid growth of the online shopping market during the COVID-19 pandemic, but the growth rate has slowed as the increase in domestic online shopping transaction volume gradually declines."

The offensive from C-commerce (Chinese e-commerce companies) represented by AliExpress (Ali), Temu, and Shein is also fierce. Researcher Lee said, "Ali first entered Korea in 2018, but since March last year, it has been increasing investments significantly, expanding the range of low-priced products typical of China." He added, "Temu distributed large discount coupons, such as about KRW 150,000 coupons for new app installs or about KRW 260,000 coupons for roulette winners, on already ultra-low-priced products." American Amazon has also been emphasizing benefits such as free shipping on orders over a certain amount since last month, knocking on the door of the Korean e-commerce market again.

Researcher Kim Hyun-yong from Hyundai Motor Securities mentioned, "Ali and Temu could shake the long-standing duopoly of Naver and Coupang in Korea." Kim said, "As of March, the monthly active users (MAU) were 30.86 million for Coupang, 8.87 million for Ali, 8.3 million for Temu, 7.4 million for 11st, and 5.48 million for Gmarket. Ali's direct purchase threatens Naver by leveraging low prices in clothing, automotive, sports, and leisure, while its local marketplace attracts strong Korean sellers in daily necessities and fresh foods through zero commission promotions, competing with Coupang."

Ultimately, existing e-commerce companies cannot avoid the challenge of securing profitability and improving their business structure. Researcher Cho Sang-hoon from Shinhan Investment Corp. said, "Retail companies that invested in e-commerce over the past few years found it difficult to generate profits through active business activities, so from the second quarter of 2022, when rapid interest rate hikes began, they have made efforts to survive by cutting unnecessary costs and reducing indiscriminate promotions," adding, "Lowest prices and fast delivery have become too commonplace in the industry, and differentiation among operators has disappeared. Companies need to focus on analyzing customer data and binding consumers with high-quality services tailored to them rather than competing on price or delivery."

There is also analysis that domestic and foreign conglomerates engaged in e-commerce may covet 11st to strengthen competitiveness. Although no aggressive buyer has emerged immediately, 11st is continuing efforts to become an attractive asset. Since the end of last year, it has conducted workforce efficiency measures, including voluntary retirement, twice. It also reduced operating losses in the first quarter of this year by about 40% compared to the same period last year. An 11st official explained, "This is due to actively promoting profitability-centered structural improvements amid fierce competition." Attention is focused on the ripple effects 11st's M&A will have on the domestic e-commerce market, which is on the verge of new changes.