By Alexander Lee

Krafton, the renowned developer behind PlayerUnknown's Battlegrounds (PUBG), has recently filed for an initial public offering (IPO), a move that could potentially position it as South Korea's most valuable game developer and the 12th largest company on the country's primary stock exchange, Kospi.

The success or failure of Krafton's IPO hinges largely on its valuation. In its initial securities registration statement submitted last month, the company proposed to offer 10,060,230 shares at a price range between 458,000 won ($399) and 557,000 won per share. At the upper end of this range, it would have marked a staggering 5.6 trillion-won sale, surpassing the existing record set by Samsung Life Insurance's 4.88 trillion-won IPO in 2010. It would have also bestowed upon Krafton a market capitalization of 29 trillion won, nearly on par with South Korea's largest steelmaker, Posco, which boasts a market cap of 30 trillion won. Within the gaming industry, NCSosft has a market cap of 18.6 trillion won, Netmarble 11.3 trillion won, and Kakao Games 4.2 trillion won.

'Mysteries Unknown: Birth of the Battlegrounds,' a documentary film about how its hit first-person shooting game PlayerUnknown's Battlegrounds was created [KRAFTON]

Krafton's initial registration statement included global entertainment giants Walt Disney and Warner Music Group in a list of comparable companies, alongside both local and international game developers. The company based its IPO pricing on the price-to-earnings ratios of these companies. Krafton explained that it included companies like Disney because they operate as intellectual property-based content businesses. Additionally, Krafton stated that it intends to expand its content business model and acquire more intellectual property through the funds raised during the IPO.

However, following a request from the Financial Supervisory Service (FSS), Krafton decided to lower its price band to a range of 400,000 won to 498,000 won per share earlier this month. The company also reduced the number of shares offered from 10,060,230 to 8,654,230. The FSS clarified that it did not mandate the price reduction but sought clarification and justification for the high pricing in the initial registration statement.

In the amended statement, Krafton revised its list of comparable peers, removing Disney and Warner Music Group, and instead citing local game developers such as NCSoft, Netmarble, Kakao Games, and Pearl Abyss.

Despite the price adjustment, Krafton's IPO remains significant. With the revised price band, the company could still raise up to 4.3 trillion won, resulting in a market capitalization ranging from 19 trillion won to 24 trillion won. Even at the upper end of this market cap, Krafton would still be larger than rivals Nexon, NCSoft, and Netmarble.

One potential concern for Krafton is that its situation bears similarities to the IPO of Big Hit Entertainment, now known as HYBE, last year. Before going public, Big Hit included major tech companies, Naver and Kakao, as part of its peer group. Market analysts viewed it as an entertainment industry play, despite the company primarily representing the mega K-pop group BTS. Following its listing, Big Hit's shares initially surged but later experienced a significant decline.

Krafton faces a similar situation, as PUBG remains its flagship product, contributing 96.7% of its operating income in the first quarter of this year. This concentration on a single title implies that a sharp decline in shares could result if the company fails to meet market expectations with new game releases.

However, there is hope for Krafton. HYBE shares recently rebounded to around the 300,000-won level, driven by the company's expansion efforts, such as merging its online fan community platform Weverse with Naver's V-Live service, as well as BTS continuing to produce hits.

Krafton has diversified its portfolio by capitalizing on PUBG's international popularity. PUBG Mobile and its Chinese version, Game for Peace, generated $2.6 billion in revenue in 2020, becoming the highest-grossing mobile game of the year. The company's most anticipated upcoming release is PUBG: New State, a mobile title set in the near future of 2051, which garnered more than 20 million pre-registrations on the Google Play Store.

Krafton aims to expand the PUBG universe into a transmedia franchise, similar to Marvel, by releasing comics, short stories, documentaries, and a short film based on the game. The company has also made strategic investments, becoming the second-largest shareholder of Hidden Sequence, acquiring interactive content production company Thingsflow, and leading the first round of funding for Indian game streaming platform Loco.

However, Krafton faces potential risks due to its association with Tencent, which has ties to the Chinese government. PUBG Mobile was banned in India last year amid diplomatic tensions between India and China. While Krafton has taken steps to relaunch the game as Battlegrounds Mobile India by severing ties with Tencent, concerns persist about similar issues emerging in India and other regions.

Tencent is Krafton's second-largest shareholder, holding 15.35% of total shares through its investment subsidiary, Image Frame Investment HK. The company's chairman, Chang Byung-gyu, is the top shareholder with a 16.24% stake. Krafton acknowledged its connections with Tencent's Game for Peace in its IPO preparations, revealing this information officially for the first time.

Krafton has also faced allegations of a toxic work environment, including claims of abusive management, unpaid overtime, and job insecurity. In June, several Krafton employees filed complaints with the company's HR department, alleging abuse by middle managers since the previous October.

In light of these factors, Krafton's IPO journey presents both opportunities and challenges. The company's ability to diversify its portfolio, expand its offerings, and navigate potential risks will play a crucial role in determining its future success on the public market.

Reporter Alexander Lee alexanderlee_24@newsyn.co.kr