By Hyunjoo Jin and Miyoung Kim
SEOUL (Reuters) - Kakao Corp, the dominant messaging app firm in South Korea, has agreed to buy Internet portal company Daum Communications <035720.KQ> in a $3.3 billion stock deal, circumventing a potentially time-consuming IPO process with a back door listing.
With the deal, Kakao is seeking to mount a serious challenge to Naver Corp (KS:035420), the country's biggest Internet portal operator and owner of Line - the dominant messaging app in Japan and which has been more successful expanding overseas.
"The deal will give Kakao the fire power to aggressively expand its business here and overseas, while Daum will have a mobile messaging service as its new growth engine," said Kim Mi-song, an analyst at Hyundai Securities.
Kakao had originally planned an initial public offering in 2015.
The agreement was born from a sense of crisis with a flurry of deals this year increasing the stakes for the industry. Facebook Inc (O:FB) acquired mobile messaging startup WhatsApp for $19 billion and Japanese e-commerce company Rakuten Inc <4755.T> bought Viber for $900 million.
"We agreed that organic growth has its limits," Lee Sir-goo, Co-Chief Executive of Kakao told a news conference.
"It would take us too long for us to grow as overseas rivals are expanding rapidly. We were concerned that we would fall behind in the global race," he said.
Daum will issue 43 million new shares to Kakao which based on the Daum's last traded price of 78,100 won takes the deal value to 3.35 trillion won ($3.3 billion). Daum did not disclose the value at which the new shares, which include both common and preferred stock, will be issued.
Kakao shareholders, which include Chinese Internet firm Tencent Holdings Ltd <0700.HK>, will own about 60 percent of the enlarged company. The new company will have two chief executives, Lee Sir-goo and Daum CEO Choi Sae-hoon.
"Kakao is taking over Daum to help Kakao leverage Daum's infrastructure to expand into advertising, shopping and other new businesses in Korea, while expanding in overseas markets," said S.T. Hwang, an analyst at Hana Daetoo Securities.
Kim Beom-su, who chairs Kakao's executive board, will become the largest shareholder of the new company with a 22.23 percent stake, according to a filing by Daum to the local stock exchange.
Shares in Naver tumbled over 4 percent on Monday as investors fretted about increased competition, though the new company, which will be called Daum Kakao, is expected to have a market value of around 4 trillion won - a minnow compared to Naver's 25.6 trillion won.
Kakao has some 145 million users globally compared to Line's 450 million. Kakao reported a near 8-fold increase in 2013 net profit to 55.6 billion won last year as it increased sales from games and "stickers" - large emoticons used in messaging apps.
(Additional reporting by Se Young Lee and Sohee Kim in Seoul and Denny Thomas and Umesh Desai in Hong Kong; Editing by Edwina Gibbs)