A competition regulator has approved Delivery Hero’s proposed $4 billion takeover of Woowa Brothers, which owns top South Korean food delivery app Baedal Minjok, but only on condition that the German group divests from its South Korean arm Yogiyo.

The Korea Fair Trade Commission (KFTC) said on Monday (December 28) that Delivery Hero must sell its entire stake in Yogiyo to a third party within six months from the date it receives the final written approval. Delivery Hero accepted the ruling and said it expects to close the deal in the first quarter of 2021.

Industry watchers are not surprised Delivery Hero chose Baedal Minjok – commonly known as Baemin – over Yogiyo, as it clearly dominates the South Korean online food delivery market. According to data from the KFTC, Baemin held about 78% of the market share by total transaction value in 2019, as well as 68% on a revenue basis and 56% based on the number of internet users. Yogiyo was a distant second.

Baemin recorded revenue of 927 billion won ($852.2 million) for the three years through 2019 with operating profits of 71.7 billion won. Yogiyo reported revenue of 316.7 billion won and operating losses of 69.4 billion won in the same period.

Delivery Hero is also keen to have Kim Bong-jin, chief executive and founder of Woowa Brothers, in its leadership team. The 44-year-old marketing veteran has built Baemin into the most popular food delivery app brand since it was launched in 2010.

The deal involves the establishment of a Singapore-based joint venture that will manage the operations of Delivery Hero in Asia and Woowa Brother’s regional units. Kim will be chairman of the board and executive director of the joint venture.

Yogiyo sale may not be straightforward

Yogiyo is estimated to be worth about 2 trillion won, but it is uncertain whether there will be domestic industry players willing to acquire the company, observers said.

Naver has been named as one potential suitor. The internet portal giant has a 4.7% stake in Woowa Brothers, which will be sold to Delivery Hero for a mix of cash and stock, but signed an agreement that contains a one-year non-competition provision.

Kakao, another internet player, has been taking a cautious approach to its expansion of food delivery services and may pass up the opportunity. SoftBank-backed e-commerce company Coupang, with its own food delivery brand Coupang Eats, is also said to have shown little interest in Yogiyo, while smaller players in the market may not be capable of buying the unit because of the large scale of the deal.

Some observers said the company could attract interest from the South Korea’s retail conglomerates, such as Lotte, Sinsaegae and Hyundai Department Store Group. However, others were less certain, noting that these firms wouldn’t want to enter a market where the vast majority of clients are small and mid-sized businesses.

The antitrust regulator said it might extend the time limit for offloading Yogiyo for a further six months if necessary, but Delivery Hero faces a fine if it misses the deadline. This means potential buyers could be at an advantage in negotiations.

Although it is a distant second behind Baemin, Yogiyo held a market share of about 20% by total transaction value in 2019. Other players, including Baedaltong, Foodfly and Coupang Eats, together had a share of less than 4%. (Reporting by Ha-na Suh)