KTV merger raises fears of monopoly

"The merger will allow Holiday to monopolize local KTV outlets with strong bargaining power over music distributors."

Lin Wei-ju, an executive of MDS Multimedia Corp

Local music distributors for karaoke parlors yesterday expressed their concerns over the proposed merger between the country's two largest karaoke chains, saying that the deal would crimp their business opportunities.

On Tuesday, Holiday Entertainment Co (好樂迪娛樂事業) announced its plan to merge with Cash Box KTV (錢櫃) by the end of the year. The new company, with NT$4.2 billion (US$120 million) in capital, will operate as Holiday Entertainment.

"The merger will allow Holiday to monopolize local KTV outlets with strong bargaining power over music distributors," said Lin Wei-ju (林謂如), an executive of MDS Multimedia Corp (弘音多媒體).

MDS is a Taiwanese karaoke music distributor that has ties with record labels such as Warner Music, Rock Record Music, EMI and Sony Music.

According to Lin, the merged company will have 20 Cash Box and 62 Holiday outlets under its umbrella, 8 percent of the total, accounting for about 58 percent of the KTV market in terms of sales.

Cash Box and Holiday began negotiations late last year after competition between them undermined profits. The competition has also seen both KTV companies sign exclusive karaoke deals with different music distributors.

To end the standoff, Holiday initiated a public auction in early January to sell 58,811 shares, with Cash Box scooping up 46,000, or 32 percent, of its rival.

The merged company will be able to reduce costs, according to Yang Chang-heng (楊昌恆), vice president of Holiday.

Each annually pays NT$400 million in franchise fees to music distributors, but that amount may fall to some NT$600 million if the merger proceeds smoothly, Yang said.

The company also aims to extend its business to China.

"Through the merger, we hope to set up 43 stores in China and generate NT$10 billion in sales from that market in the next five years," Yang said.

Details of the deal will be discussed in a shareholder meeting scheduled for June 27 and the deal is expected to become effective on Dec. 31, Yang said.

Shares of Holiday rose NT$1.3, equivalent to the daily limit, to close at NT$21 on the TAIEX yesterday. The company is expected to generate NT$3.17 billion in sales this year, compared with NT$3.4 billion last year, Yang said.

A market analyst said the deal was the right thing to do.

"The marriage can moderate the competition and save costs from price wars and franchise fees," said Edward Jeng (鄭宗豪), an investment officer at Taian Insurance Co (泰安產險).

"The local karaoke market is almost saturated," Jeng said. "Therefore major players in this industry have to expand overseas for future development."

Meanwhile, the Fair Trade Commission said that since Holiday is the market's largest player, the deal still needs government approval.

The commission will investigate if consumers or music distributors would be affected by Holiday's dominant market position.