Big Hit captured the imagination of the music world on Wednesday when it raised 963 billion won ($840 million) in its initial public offering on the Korea Exchange, making it South Korea's largest IPO in three years.
The IPO illustrated the global popularity of K-pop -- and especially of BTS, the genre’s most popular act. It gave Big Hit founder and co-CEO Bang Si-hyuk, who owns just under 35% of the company, according to Forbes, a first-day net worth of $3.2 billion. Bang gave the group's seven members 478,695 of his own shares in the company (more than 68,000 each), guaranteeing their multi-millionaire status.
Analysts attributed the drop partly to foreign investors and corporations quickly selling off their shares within the first two days. Corporations that bought shares at the initial price sold 3 billion-won worth of shares within the first two days, whereas individual investors still bought 1.6 billion-won worth of shares even on the second day.
Interest in Big Hit was frothy on its first day, with shares trading at 80 times EBITDA (earnings before interest, taxes, depreciation and amortization), which is atypical for a media company other than Netflix, especially during a global pandemic that has decimated the touring business. In the music world, Chinese company Tencent invested in Universal Music Group at 33 times EBITDA, considered a high multiple. Big Hit’s initial price-to-earnings ratio of 65.13 (a measure indicating investors' expectations of a company's future earnings growth) was two to three times that of rival Korean music companies JYP (30.36) and SM (23.56).
Unlike Bang, who became a newly minted billionaire with the IPO, the company's fourth and fifth largest investors, Mainstone and Well Blink Ltd, as well as other major shareholders, are able to sell at any given time. Bang, Net Marble and Stick Investment, who acquired more initial shares, agreed to hold onto their shares for at least six months.
Investors were keen to invest in BTS and to tap into their massive global network organized by their fan group, dubbed the BTS ARMY. The group -- consisting of members J-Hope, RM, Suga, Jungkook, V, Jin and Jiminwhich -- launched in 2013 and has since performed sold-out shows across the world, breaking numerous Billboard chart records in the process. BTS became the first K-pop act to top the Billboard Hot 100 last month with "Dynamite," their first all-English song.
Yet while BTS gives Big Hit a competitive advantage, the company may be overly reliant on the band’s revenues, analysts say, and uncertainties surround the group’s future earnings potential.
Although Big Hit has five other acts, BTS accounted for 97% of Big Hit's sales last year. (The figure dropped to 88% for the first half of this year.) Due to South Korea's mandatory military service duty of 18 months for all men between 18 and 28, BTS's oldest member, Jin, will have to begin his service before the end of 2021, pending a deferment or a change in the law. (On Wednesday the country's Military Manpower Administration said that they will consider a deferment for BTS members.)
As a result, the company’s profits are likely to “hit a plateau” next year due to issues pertaining to the re-signing of artist contracts and required military service, Hyojin Lee, an analyst at Meritz, tells Billboard. Big Hit’s other acts “have not achieved a high global profile,” he says.
The IPO should signal to other investors that the music business is an attractive investment, through more so for labels and publishers like Warner Music Group in the U.S. and Hipgnosis in the U.K., than for live music. Investors in Big Hit’s case likely felt that with stock prices soaring, the time was right to cash out on BTS’ global success. Big Hit is exposed to the pandemic’s unpredictable nature and the uncertainty around live music in many of the world’s most profitable countries. Shares of live music stocks, including Live Nation and Madison Square Garden Entertainment in the U.S., and CTS Eventim in Germany, have dropped precipitously over the last seven months.
South Korea Abuzz With Big Hit IPO
Yet for many fans, owning a piece of BTS is an act of fandom. On Thursday, South Korea was overwhelmed with K-pop IPO fever.
Expectations were building weeks ahead of the IPO, with news programs devoting segments explaining the meaning behind the lyrics to BTS songs, and lawmakers discussing whether BTS members should be exempt from the mandatory military service. With thousands of pre-orders for every share, Big Hit, which reported a profit of $86 million last year and is valued at $4 billion, raised over $800 million by offering investors some 20% of the company.
BTS Gives ‘Dynamite’ Performance at the 2020 Billboard Music Awards | Billboard News
Sitting on a park bench with a poodle on a leash, Young Joo Jeon, a 69-year-old grandmother from Daegu who pre-ordered two shares in Big Hit, had her eyes glued to her mobile phone, intently staring at the stock market chart. “I could have sold my shares right after trading started, but BTS made No. 1 on the Billboard chart again,” she said. “I'll make more if I sell later. They have too much potential, these boys.”
Seung Joon Lee, a 29-year-old tiler from Gwangju who bought three shares, said she "wasn't a fan of BTS nor did I know much about their music, but they have become huge around the world, it would be stupid not to follow what they're doing. It makes financial sense to invest in them.”
The prospect of BTS members going away for military service didn't seem to faze their fans. "In Korea, young couples go through the boyfriend's military service situation and many say it's a test of true love,” said Ah-Young Jung, a 37-year-old mother of two sons and a member of The Army. “If a couple cannot survive the separation, then it wasn't meant to be and it wasn't really love.”
Jung, who bought two shares, doesn't have plans to sell them. "The shares are a connection between myself and BTS,” she said. “I don't care about making or losing money with them. I plan to pass them on to my sons, one each."