The rehabilitation of Watcha, a first-generation Korean content streaming company, has fallen into uncertainty. Watcha entered court-led rehabilitation proceedings following an application by some convertible bond (CB) investors and is now seeking to sell its management rights. If no acquirer emerges, the court could determine that rehabilitation is not viable and declare the company bankrupt. The main bidding round that closed last month failed after no qualified candidates came forward. The content industry views downsizing the organization and writing off remaining debt as key factors for a successful sale.
According to investment banking (IB) industry sources on Wednesday, the main bidding for Watcha's sale, which concluded on the 22nd of last month, was unsuccessful. CJ ENM and content startup Kinolights participated in the preliminary bidding in March, but both withdrew from the main bidding, leaving no qualified candidates. In rehabilitation M&A deals, a failed bid occurs when no buyers participate in the main bidding, or when participants cannot be considered valid acquisition candidates.
At the time of the preliminary bidding, the submission of a letter of intent (LOI) by domestic content giant CJ ENM was interpreted as raising Watcha's chances of rehabilitation. A letter of intent is a document in which a buyer formally expresses their intention to acquire in an M&A transaction, containing key content such as the proposed acquisition price, deal structure, and major conditions. Watcha has built curation know-how, data, and brand recognition through its long-standing content streaming service. However, after entering rehabilitation, its growth momentum weakened and remaining debt became a burden, leading CJ ENM to abandon the acquisition.
Kinolights' withdrawal was reportedly for similar reasons. Kinolights operates a video content recommendation platform and has recently been expanding its business into film intellectual property (IP) distribution. While acquiring Watcha could create synergies by allowing Kinolights to own and distribute IP favored by film enthusiasts, the company decided not to participate in the main bidding given current industry conditions and financial risks.
The content industry believes Watcha should pursue self-rescue efforts such as downsizing its organization before exploring a sale. Although Watcha has recorded operating losses for an extended period, it is reported to currently employ close to 100 people. Acquirers, who would be required to take over the workforce, may find it burdensome to inherit a large organization amid continued losses. In addition, some creditors are opposing debt forgiveness, making it difficult to restructure the company after acquisition, which also stands as an obstacle to completing the sale.
Watcha, founded in 2011, led Korea's domestic content streaming market before Netflix's entry into the country. After prolonged cutthroat competition with major domestic and international OTT services, its corporate value, once exceeding 300 billion won, has fallen to around 10 billion won. After entering court rehabilitation proceedings in July last year following an application by some CB investors, the company has been pursuing a sale through open bidding.
The seller side may consider adjusting acquisition terms and launching a re-bidding process going forward. Other options include limited competitive bidding narrowed down to qualified candidates, a "stalking horse" process in which a preferred acquirer is selected before competitive bidding, or a private contract through negotiations with individual investors. The deadline for Watcha to submit a rehabilitation plan to the Seoul Bankruptcy Court is the 20th of this month. If the court determines there is no possibility of corporate rehabilitation through a sale or other means, it may decide to terminate the rehabilitation process and ultimately declare bankruptcy.
