Kakao shares down 80% from peak as company plans biggest-ever restructuring

Kakao is undertaking the largest corporate restructuring in its history, splitting into a newly established entity called Kakao AI and a surviving entity called Kakao X. The move comes as the company's share price, which once surged to around 170,000 won ($122) about five years ago, has been languishing in the 30,000-won range — raising hopes that the overhaul could finally resolve the prolonged discount on the stock's valuation.

Korea Exchange said Friday that Kakao had filed a preliminary review application for a split re-listing of its shares on the KOSPI market.

Founded in February 1995 and listed on the KOSPI in July 2017, Kakao has expanded from its KakaoTalk messenger service into commerce, mobility, payments and music. As of the filing date, founder Kim Beom-su and 96 other shareholders collectively hold 23.99 percent of common shares.

Kakao reported total consolidated assets of 27.78 trillion won and equity of 15.22 trillion won last year. Operating revenue came to 8.1 trillion won for the year, with operating profit of 732 billion won.

Korea Exchange said the applicant plans to spin off its KakaoTalk-based AI business and advertising operations into the newly listed entity, while the surviving company will continue to run its fintech, content and mobility businesses.

The split ratio, based on net asset book value, is 0.36 for Kakao AI and 0.64 for Kakao X. Existing shareholders will receive shares in both companies in proportion to that ratio. The company plans to complete the split on Jan. 1 following an extraordinary shareholders' meeting on Dec. 17, with Kakao AI's re-listing and Kakao X's change of listing both targeted for Jan. 27.

Kakao cited structural limitations as the driving force behind the split, saying that as its business has grown in scale and complexity, a single decision-making framework has made it increasingly difficult to execute strategies for each unit with the speed required.

Over the past two years, Kakao has streamlined non-core operations and sharply reduced the number of affiliates, reorganizing its governance around growth businesses. The company described the split as the formal starting point of that effort and a springboard for growth in the AI era.

A longstanding valuation gap also underpins the decision. Based on the average sum-of-the-parts consensus from domestic and foreign brokerage research centers this month, the Kakao Group's potential value stands at 34.2 trillion won, while its average market capitalization over the past three months was only 16.8 trillion won — a gap of more than 17 trillion won.

The blending of multiple business lines under one roof has allowed risks from affiliates to spread across the group as a whole. The company's return on equity for the second quarter of this year also stood at 4.6 percent, persistently below its cost of equity of 8.4 percent — another factor behind the restructuring.

The market's initial reaction to the spin-off was negative. On Friday, when the announcement was made, Kakao shares closed down 7.49 percent at 35,800 won — nearly 80 percent below the all-time high of 173,000 won recorded on June 30, 2021.

A spin-off of this type distributes shares in the newly created company to existing shareholders in proportion to their current holdings, and is generally viewed more favorably than an asset carve-out in terms of preserving shareholder rights. Even so, investors appeared broadly concerned about the volatility and uncertainty that could accompany the business reorganization and governance changes at both companies.

Kakao also unveiled plans to expand shareholder returns alongside the announcement, leading some analysts to express cautious optimism about the share price outlook. Kakao AI will allocate 20 to 35 percent of its standalone adjusted free cash flow to shareholder returns from 2027 through 2029. Kakao X plans to buy back and retire 300 billion won worth of its own shares after the split, funded by gains from selling its stake in Dunamu. It will also direct 30 percent of dividends received from subsidiaries and 30 percent of investment gains toward shareholder returns.

"In the mobile era, Kakao was the first to venture into uncharted territory, driving innovation and transforming the daily lives of users," founder Kim said. "The AI era demands a different level of agility, and we will redesign our growth structure with two engines — Kakao AI and Kakao X — so that the results can be shared with shareholders, users and crew alike."