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While Megabox JoongAng (left) applied to the court for corporate rehabilitation proceedings last week due to a liquidity crisis, director Na Hong-jin and actors Jo In-sung, Hwang Jung-min, and Jung Ho-yeon of "Hope"—a film invested in and distributed by Plus M Entertainment, the film division of Megabox JoongAng—gather ahead of its world premiere in the Competition section at the 79th Cannes Film Festival last month. / Photo by Yonhap News, Courtesy of Plus M Entertainment

Fears are mounting that a chilling effect may once again sweep through the Korean film industry, which had briefly regained its vitality in the first half of this year with a string of box office hits such as "The King and I." This comes after Megabox JoongAng (Megabox), a major major multiplex operator and the parent company of film investment and distribution house Plus M Entertainment (Plus M), applied to the court last week for corporate rehabilitation proceedings.

According to film industry insiders on June 22, most officials who were already aware of Megabox's liquidity crisis prior to the filing expressed bewilderment, remarking that "the inevitable has happened." The industry is keeping a close watch on the situation with bated breath, concerned that a major crisis capable of shaking the entire Korean film sector has erupted, starting with delays in theater ticket revenue payouts and potentially leading to the suspension of merger talks with Lotte Cultureworks (Lotte) and a contraction of investment in new films.

Currently, the greatest concern among filmmakers is the delay in theater ticket revenue payouts. After a film's theatrical run ends, theaters subtract the value-added tax (10%) and the Film Development Fund (3%) from ticket sales and split the remaining amount, usually on a 50-50 basis, with distributors within 30 to 45 days. This revenue then flows down to investors, production companies, and importers. However, following the court's preservation decision and comprehensive stay order issued on June 15, payouts from Megabox—the top tier of this structure—have been frozen.

"The current situation means that Megabox cannot pay box office returns to distributors of domestic and foreign films whose theatrical runs ended before June 15," said the head of a film PR agency with roughly 30 years of experience. "This implies a domino effect of damage hitting not just distributors, investors, production companies, and importers, but also PR agencies at the very bottom of the chain. While payouts are expected to be made eventually, albeit late, in accordance with court precedents once rehabilitation proceedings begin, it is difficult to rule out the worst-case scenario where companies fail to receive their shares if the company goes bankrupt."

The potential merger between Megabox and Lotte Cinema, which had been under discussion for over a year since last year, also appears practically dead in the water. The two companies, which signed a memorandum of understanding (MOU) for a merger in May last year, had extended the negotiation deadline under the MOU to June 30. However, Megabox's rehabilitation filing has made further negotiations difficult for the time being.

"For both Megabox and Lotte, securing new external investment to create fresh growth momentum and reduce deficits was the top priority. Rumors were rampant that outside capital was reluctant to come in because Megabox's financial health was so poor," an industry official analyzed. "With the rehabilitation filing occurring under these circumstances, previous negotiation terms have become void. It seems there are no options left other than a restart from scratch or a complete cancellation." Another insider projected, "As Megabox's management crisis materialized, conditions have been created for Lotte to push for terms more favorable to themselves. This is why we cannot definitively conclude that the negotiations are completely dead. However, this incident is highly likely to freeze sentiment toward the Korean film industry once again, making it difficult to foster an investment environment that was being painstakingly rebuilt." In response, Lotte briefly stated, "The fact that the MOU period for the merger extends until June 30 of this month remains unchanged, and we will issue a statement if any changes occur in the future."

Meanwhile, the release of this year's most talked-about film "Hope," which is invested in and distributed by Megabox's internal film division Plus M Entertainment, is widely expected to proceed without a hitch on July 15, contrary to some concerns. Observers note that for a blockbuster Korean film expected to achieve massive box office success, print and advertising (P&A) expenses—money spent on distribution, promotion, and marketing—can run as high as 3 billion won, making it unthinkable for the release to be canceled due to a lack of these funds. Furthermore, the film's invitation to the Competition section of this year's Cannes Film Festival has boosted overseas pre-sales, lowering its break-even point—once estimated at a cumulative audience of 20 million viewers—to the 7-million mark, which is cited as a reason to avoid extreme anxieties over a delayed release.

"Even looking at the group as a whole, 'Hope' is currently the only content capable of generating immediate revenue, so it would be extremely difficult to reconsider its release based on a shortage of P&A expenses," said a former executive of JoongAng Group who is well-acquainted with Megabox's situation. However, the executive added a note of caution, stating, "If the company continues to face difficulties securing loans due to a drop in its credit rating, there is no telling how the situation might change going forward."

                                                                                                            Cho Sung-jun