Naver CEO Choi Soo-yeon, left, and SoftBank Chairman & CEO Masayoshi Son / Korea Times file

Naver is in a dilemma over what to do with Line, its mobile messenger app that dominates the Japanese market, as it faces growing pressure from the Japanese government and local business partners to sell its 50 percent stake in a joint venture that controls the messenger, according to industry officials and experts, Friday.

Many say that Naver may sell a portion of its stake in Line's operator, LY Corp., to resolve the situation, which has escalated to a diplomatic issue between Korea and Japan due to the possible loss of a service nurtured by a Korean company to a Japanese one.

"The most likely scenario is for Naver to sell a stake of about 20-30 percent in A Holdings, the controlling shareholder of LY Corp. Although Naver could use legal or political means to try to hold on to its 50 percent stake in A Holdings, we believe this scenario is less likely due to potential backlash from the Japanese government," said Douglas Kim, an analyst at Smartkarma, Singapore-based investment research firm.

The largest portal service company in Korea has been under pressure to divest its stake in LY Corp., as Japan's Ministry of Internal Affairs and Communication said it asked LY Corp. to reconsider its capital relationship with Naver, twice in March and April.

Line is a service developed through Naver in 2011. Naver formed a business integration with SoftBank in 2019 and established the joint venture, A Holdings, in 2021. A Holdings, equally owned by Naver and SoftBank, is the largest shareholder of LY Corp., which operates Line and the popular portal site Yahoo! Japan, with a stake of 64.5 percent.

The administrative guidance from the Japanese government came after LY Corp. experienced a data breach last November that affected about 519,000 cases of personal data through Naver Cloud's server.

Logos of mobile messenger app Line and Yahoo! Japan / AP-Yonhap

In response to the pressure from the Japanese government, LY Corp. CEO Takeshi Idezawa said Wednesday that the company will gradually dissolve their consignment relationship with Naver and pursue technological independence. LY Corp. also removed its only Korean board member, Chief Product Officer Shin Jung-ho, from its board on the same day, filling the board entirely with Japanese members.

Following LY Corp.'s announcement, SoftBank also began to pressure Naver to divest its stake by July. "Following LY Corp.'s request, we are in discussions to review our capital relationship with Naver," Junichi Miyakawa, CEO of SoftBank, said during a press conference, Thursday. "We are aiming for early July to negotiate, but no agreement has been reached yet."

On Friday, Naver also made its first official statement, saying it has been in talks with SoftBank, keeping all possibilities open including selling its stake in LY Corp.

"We are open to all possibilities, including the stake sale, and are in sincere discussions with SoftBank," the company said in a statement. "We are continuing to strategically consider and review the utilization and investment of our resources to enhance our future growth potential and maximize shareholder value. We ask for your understanding that we cannot disclose further details until the conclusion is reached."

The Korean government also said Friday that it has been in close communication with Naver on the matter, and that it respects Naver's position and will take strong action against what it sees as unfair pressure on Korean companies' overseas activities.

"If Naver is in a position to maintain its stake and business in LY Corp., we will support it in taking appropriate measures to strengthen information security," Kang Do-hyun, second vice minister of science and ICT, said during a briefing at Government Complex Seoul.

People enter the Tokyo Garden Terrace Kioicho building, which houses LY Corp. in Tokyo, Thursday. Yonhap

Line is the most popular instant messaging app in Japan, with 96 million monthly active users. With this popularity, Line has been expanding its business into various fields such as fintech and e-commerce.

Considering Line's popularity in Taiwan, Thailand and Indonesia, Naver's divestment of its stake in A Holdings could impact its business not only in Japan but also in Southeast Asia.

However, experts forecast that even if Naver were to sell its stake in LY Corp., the value of the company would remain unchanged as Japan's share of Naver's sales last year was around only 7 percent, amounting to 679.9 billion won ($497 million).

"Although Naver is likely to sell its stake in A Holdings, it is unclear how much of its 50 percent stake it is likely to sell. We think that although Naver could sell part of its stake in A Holdings, it may try to retain a minority stake (20-30 percent)," a Smartkarma research report said.

Ahn Jae-min, an analyst at NH Investment & Securities, also believes that Naver is likely to decide to sell only part of its stake. "Partial divestment is likely, allowing Naver to step down to the second-largest shareholder while maintaining its ties with LY Corp. If Naver secures several trillion won in cash to pursue share buybacks, dividends or additional M&As, the stock price of Naver is expected to be positive," the analyst said.