EXCLUSIVE Why did Kyobo Book Centre invest in FIFTY FIFTY's controversial production company?
K-pop girl group FIFTY FIFTY members pose during a press conference in southern Seoul, April 13. Yonhap
Kyobo Book Centre at risk of ruining prestige
By Anna J. Park
Kyobo Book Centre's 10 billion won ($7.6 million) investment into The Givers, an outsourced production company of K-pop group FIFTY FIFTY, is attracting attention as a legal battle rages on between the girl group and its management agency Attrakt. In particular, questions have been raised about the odd presence of the country's largest book retailer in the middle of a K-pop conflict.
The controversy dates back to mid-June when FIFTY FIFTY members filed an injunction against Attrakt, seeking the termination of their seven-year contract. Given that the girl group debuted late last year and that their single “Cupid” achieved favorable results in various charts, including Billboard's Hot 100, market watchers are wondering what caused the girl group to file the lawsuit.
The girl group cited murky accounting practices by Attrakt, among other things, as reasons for filing the suit. But industry insiders raised doubts, suggesting that there may be an ulterior motive at the heart of the suit as it has only been four months since “Cupid” was released and that it can take several months for music streaming profits from the song to be deposited into the record label's bank account.
Meanwhile, the management agency Attrakt filed a criminal complaint with the police against The Givers in late June, on charges of obstruction of business, damage to electronic records, fraud and malpractice. Additionally, Attrakt filed a criminal complaint against Ahn Sung-il, the head of The Givers and the main music producer of FIFTY FIFTY's first album, over embezzlement and document forgery in early July.
The Givers' CEO Ahn Sung-il, left, and Attrakt CEO Jeon Hong-joon / Courtesy of each company
Attrakt argued that the outsourced production firm and its head allegedly attempted to tamper, or poach the artists while alienating the relationship between the group and its management agency. Attrakt also demanded an explanation from Warner Music Korea about its alleged involvement in the tampering attempt.
While the claims made by the two sides will be confirmed during future legal battles, the head of The Givers admitted that he registered false education records and erroneous work experiences on his resume. Disclosed records also showed that employees of The Givers rejected requests to feature the quartet in advertisements without consulting with the management company and deleted all email correspondences.
The headquarters of Kyobo Life Insurance in Seoul, which holds a 100 percent stake in Kyobo Book Centre / Courtesy of Kyobo Life Insurance
Against this backdrop, the public has begun to lose confidence in the credentials of The Givers and their claims. Moreover, this incident has unexpectedly entangled Kyobo Book Centre due to its questionable 2022 investment in The Givers.
The book retailer acquired stocks of the music production company ― 4 billion won in common shares and 6 billion won in preferred shares, totaling 10 billion won as of September 2022 ― according to the records of the country's official corporate registry office. As the shares account for 29.8 percent of the company's entire stock, it means that the book retailer assessed the corporate value of The Givers at around 33.6 billion won.
Nonetheless, The Givers only posted an annual revenue of 600 million won that year, with a net loss of 400 million. Thus, questions have arisen over why Kyobo Book Centre gave the music production firm such a generous corporate valuation in the first place. At the end of last year, The Givers' total capital stood at 9.7 billion won, meaning its total capital assets came entirely from the bookstore company's investments.
The investment agreement also states that Kyobo Book Centre could retrieve money spent to acquire the preferred shares at a 3 percent annualized interest rate if The Givers fails to go public within the next six years. Considering the meager amount of revenue the music production company earned last year, doubts are growing over the feasibility of the firm's IPO over the course of the next few years.
“A decision to invest 10 billion won is not an easy one to make, even for a subsidiary of a big business conglomerate,” a private equity investment expert told The Korea Times on condition of anonymity. “An investment in a startup company of this size at the earliest phase usually starts at around 1 billion won, not 10 billion. That's the average of the investment market,” the expert added.
The expert also pointed to the excessive corporate valuation of The Givers when the book retailer made the investment.
“Given the firm's minuscule revenues, it is very strange that the firm could be so highly valued,” he said.
Grand vision of digital transformation
Responding to the market skepticism, Kyobo Book Centre said its investment in The Givers was aimed at expanding its business models into music intellectual property rights (IP). As music IP investment firms are required to secure as many music catalogs and copyrights as possible, it takes a considerable amount of capital to begin, the book company said.
“Kyobo Book Centre's investment into The Givers was not aimed at the entertainment business, but was targeting the distribution profits utilizing music IP assets,” Kyobo Book Centre's investment team told The Korea Times via email.
“As seen in the case of Beyond Music's success in attracting a 200 billion won investment, 10 billion won is not considered an excessively large amount, even for a startup company,” Kyobo Book Centre stressed, adding that the music IP business is differentiated from other high-risk, high-return entertainment businesses in that a consistent and stable flow of profits is expected once a large amount of capital is spent on acquiring music copyrights.
In regards to questions over the excessive corporate valuation given to The Givers, the bookstore company said the assessment process took about a year, not only by Kyobo Book Centre, but also by the investment department of its parent company ― Kyobo Life Insurance, which holds a 100 percent stake in the book retailer ― as well as independent accounting firms.
About the questionable timeline of six years that has been set for The Givers' IPO plan, Kyobo Book Centre responded that it is just a general condition attached to similar investment agreements.
According to the company, the 10 billion won investment came from some 153 billion won raised during the firm's capital increase in 2021 aimed at pursuing innovation under a grand vision of digital transformation. To bolster competitiveness, Kyobo Book Centre has been trying to expand the scope of its operations, investing in various types of IP businesses, focusing on the art and cultural content industries. The move is also in line with its recent decision to incorporate Kyobo Hot Tracks as of July, which used to be a subsidiary of Kyobo Book Centre.
While it is understandable that Kyobo Book Centre's investment into The Givers coincides with its strategy to strengthen its IP business models, questions still remain as to why Kyobo's meticulous year-long investment process failed to identify some of the allegedly unlawful acts committed by the head of the music production company concerning his educational background and exaggerated work experience ― core criteria necessary to demonstrate a company head's competence and credentials. In addition, it still remains unclear why Kyobo Book Centre chose to invest in The Givers ― the only music IP company that Kyobo invested in so far ― out of many other music IP firms seeking investment opportunities.
Nonetheless, Kyobo Book Centre may not lose all of the invested money, as the investment agreement includes many safeguards, protecting the invested capital in cases of unforeseeable events. For instance, if the criminal charges against The Givers' key management are confirmed by a court ruling, the book retailer can retrieve a considerable amount of its investment.
“It is not appropriate to talk about things that have yet to happen. However, the agreement includes many safety articles that can limit the potential damage from the investment,” Kyobo Book Centre said.