(ATTN: CHANGES dateline, headline, lead; UPDATES with more info throughout)
By Kim Han-joo
SEOUL/TOKYO, Nov. 18 (Yonhap) -- Japanese messaging app provider Line Corp., controlled by South Korea's No. 1 internet portal, Naver Corp., and internet portal Yahoo Japan Corp. said Monday that they have reached a basic merger deal, in a move to form a leading artificial intelligence (AI) company to compete with global behemoths.
Under the agreement, Line and Japanese telecom giant SoftBank Group Corp. -- a holding firm of Z Holdings Corp. that operates Yahoo Japan -- will each hold a 50-percent stake in a new joint venture named Z Holdings, the companies said in a joint statement.
"Our goal is to leap forward as an AI technology company that is based from Japan and Asia to eventually lead the global market by combining resources from both companies," the companies said.
The two sides are scheduled to ink a formal contract next month, after further negotiations, officials said. The deal, which requires approval from Tokyo's fair trade agency, is scheduled to be completed by October 2020.
Naver currently holds a 73 percent stake in Line, and SoftBank owns 45 percent of Yahoo's parent company, Z Holdings.
Under the merger proposal, Z Holdings, Line, Softbank and Naver will spend a combined 340 billion Japanese yen (3.6 trillion won), to buy a 27.4-percent stake held by retail investors in Line, the officials said.
The combined entity will hold shares in Z Holdings, which will maintain its listing on the Tokyo bourse, with Yahoo Japan and Line as wholly-owned subsidiaries, they said. Line will be delisted after the stock buyout.
The new joint venture will be co-headed by Kentaro Kawabe, CEO of Z Holdings, and Line CEO Takeshi Idezawa.
Naver said the decision for the business integration will bring together the operators of two of Japan's biggest payment apps amid the "cashless" era.
Line is the most popular chat app in Japan, with 80 million users, far ahead of global platforms, such as Instagram and Facebook, in Japan. The company posted 207.1 Japanese billion yen in sales in 2018.
It is also the dominant messenger app in Taiwan and Thailand, where it has 21 million and 45 million users, respectively.
Yahoo Japan, which has been struggling to bolster services, such as mobile payments and e-commerce, has 50 million users and generated 954.7 billion yen in revenue last year.
If completed, the merged entity could become Japan's biggest internet platform with chat, search, e-commerce and payment apps with over 100 million users, surpassing e-commerce giant Rakuten Inc.
"The merger between the two rivals -- Yahoo Japan and Line -- is expected to open a new chapter in the Japanese market," said Kim Chang-kwon, an analyst at Mirae Asset Daewoo, adding that the new entity will eventually eye not only the Japanese market but beyond.
Market watchers further forecast the new joint venture to bolster developing artificial intelligence (AI) technology, considered a new growth engine, in the face of Google Inc., Facebook and other global leaders.
"(The deal) is expected to create synergy and increase future growth, bringing Z Holdings to the new tech firm based on AI that could compete against global platform operators," Naver said in a press release.
Naver, which has heavily invested in AI technology, currently provides a lineup of AI-based service as well as AI-powered products such as speakers.
Last month, Seok Sang-ok, CEO of Naver LABS -- a R&D subsidiary of Naver -- said the company plans to create the "Eurasia AI research belt" by investing in AI technology.
Shares of Naver closed 3.46 percent higher at 179,500 won on the Seoul bourse. Shares of Z Holdings and Line Corp. also gained 1.2 percent and 2.2 percent, respectively, on the Tokyo bourse. The announcement was made before the markets opened.
Seoul-Tokyo trade row averts worst case
Luxury fashion powerhouses rush into S. Korean market
With Asiana acquisition, construction-centered HDC eyes biz diversification
Telco-cable TV mergers to reshape S. Korean media market
Possibility of S. Korean rate cut looms after U.S. rate reduction