SoftBank Aims to Combine Yahoo Japan With Line Messenger

(Bloomberg) — SoftBank Group Corp. plans to combine its Yahoo Japan internet business with the messaging service Line Corp. in a bid to expand its online influence and create a viable global competitor in artificial intelligence.

In the complex transaction, SoftBank and South Korea’s Naver Corp. will first take Line private through a tender offer at an estimated 5,200 yen per share. Z Holdings Corp., a unit of SoftBank’s telecom arm formerly known as Yahoo Japan, and Line then aim to merge in October 2020. The final price for the tender offer is still under discussion and the memo of understanding is non-binding. The transactions require shareholder approval.

SoftBank Corp., the domestic telecom arm of Masayoshi Son’s business empire, holds a roughly 44% stake in Z Holdings, while Naver owns 73% of Line. Z Holdings and Naver plan to spend 170 billion yen ($1.56 billion) each on the Line bid. The offer price, a 13% premium to Line’s share price before news of the talks, values the Tokyo-based company at $11.5 billion.

The companies have been in talks about a possible alliance since June and settled on the idea of a merger in August, according to the statement. After taking Line private, SoftBank and Naver will undertake a reorganization that will eventually result in a 50-50 ownership of the new company. The combined entity will hold stock in Z Holdings, which will remain public with Yahoo Japan and Line as wholly-owned subsidiaries.

SoftBank and Line have increasingly competed in fields such as digital payments, and an alliance may allow them to save money on expenses like subsidies. Both companies have also been investing in artificial intelligence to improve their services. While the announcement didn’t say how the mobile payment rivalry will be resolved, it said the resulting company aims to spend 100 billion yen annually on development of AI-powered products.

“Big data is key for the future of both companies,” said Koji Hirai, the head of M&A advisory firm Kachitas Corp. “The merger will enable them to create a massive repository of client data.”

Steps to the planned merger:

Step 1 – Final signing of the deal planned for DecemberStep 2 – Naver and SoftBank to buy out Line’s public shareholders and create a new 50-50 joint ventureStep 3 – SoftBank moves its stake in Z Holdings to the JV, while Z Holdings issues 2.8 billion new shares to the JVStep 4 – Line and Yahoo Japan become fully owned subsidiaries of Z Holdings, which will be owned by the JV. The companies plan to complete the deal by October 2020

Silicon Valley giants like Google, Amazon.com Inc. and Facebook Inc. and Chinese startups have taken the lead in both pushing AI development and turning the research into commercial products. That has left most other companies scrambling to attract scarce talent and collect the data necessary to conduct research in fields like deep learning.

Line and Yahoo Japan are betting they can leverage local knowledge to stay in the race in their home country and markets where their services are popular, including South Korea, Taiwan, Thailand and Indonesia. Line rose as much as 3.2% on Monday in Tokyo, while Z Holdings gained as much as 5%.

Yahoo Japan was once the country’s leading search engine, web portal and major e-commerce player, but has lost ground as users migrated from PCs to smartphones. The company’s online shopping offering has been squeezed by Amazon and Rakuten Inc., while smartphone-native newcomer Mercari Inc. lured customers from its auction service. Yahoo Japan counts some 48 million daily active users across its portfolio of more than 100 mobile phone apps.

Line’s origins date back to the turn of the century, when Naver dispatched Shin Jung-ho to Japan to promote its search engine technology. Shin led the company through its first decade in relative obscurity, distributing online games and dabbling in social networking services. In 2010, Line acquired Livedoor Inc., a once high-flying Japanese web portal that had fallen on hard times after its founder was thrown in jail for accounting fraud. It launched Japan’s dominant messaging service in 2011 and went public in 2016.

Shin, who shares the CEO title with Takeshi Idezawa at Line, will become the newly created entity’s chief product officer. The post will give him control over the 100 billion yen AI budget and oversight of service development for both Line and Yahoo Japan.