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[KH Explains] Proxy fight heats up to acquire SM

SM founder teams up with Hybe to hinder Kakao’s K-pop ambition

By Im Eun-byel

Published : Feb. 12, 2023 - 15:38

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A proxy fight looms large over the ownership of K-pop agency SM Entertainment. Its founder Lee Soo-man, affectionately called the godfather of K-pop, has teamed up with Hybe, the K-pop agency behind the global sensation BTS, while SM executives join forces with internet giant Kakao.

Hybe announced Friday that it has signed a deal with Lee, the former chief producer at SM, to buy 14.8 percent of shares in the company from Lee for 422.8 billion won ($332.78 million). It further plans to buy an additional 25 percent stake in the company from minority shareholders by March 1 at 120,000 won per share.

“We aim to combine the prowess of both companies and take another big leap as a game changer in the global pop music market,” Hybe said in a statement following the regulatory filing.

On the heels of the massive success of BTS, Hybe has expanded its presence in the K-pop scene by acquiring smaller rivals and their artists. With the upcoming SM deal, the company is expected to further diversify its business portfolio as well as take advantage of SM’s decades-old business know-how and extensive global network.

Hybe’s latest bid comes just days after SM and Kakao signed a separate deal Tuesday, under which Kakao is to acquire a 9.05 percent stake in the K-pop powerhouse through a paid-in capital increase of 217.2 billion won, buying newly issued shares and convertible bonds.

Kakao, the operator of the nation’s No. 1 messenger app KakaoTalk and other popular platforms services, including the Melon music streaming service, has also sought to secure a wide range of intellectual property to broaden its business spectrum. In working with SM, Kakao’s vision to become a global entertainment firm could gain fresh momentum, industry watchers say.

The feud between top K-pop agencies was fired up by activist fund Align Partners Capital Management, which owns a 0.91 percent stake in SM.

In recent years, Align Partners has raised concerns against the company’s governance structure, questioning Lee’s role and influence in the company.

It called for the agency to terminate business contracts with Like Production, a production company wholly owned by Lee, arguing SM Entertainment had paid a significant amount of capital every year in royalties to the production company for album consultation and producing.

With Align Partners appointing an auditor for the agency through a regular shareholder meetings last year, the contract with Like Production was eventually terminated in October.

Though Lee was to receive more royalties through Like Production for three years even after the deal had been terminated, Lee decided to give up on the royalties in an agreement with Hybe.

Meanwhile, Lee has applied for an injunction against Kakao acquiring a stake in SM Entertainment, saying it is illegal for the board to issue new stocks and convertible bonds to a third party for reasons other than company governance.

The key showdown is likely to take place on March 6, when the next regular shareholders meeting is set to take place.

Market experts view that the battle between K-pop agencies could benefit minority shareholders of SM Entertainment, increasing the company's value and raising the share price.

The forecast for the battle alone was enough to raise the stock price for SM Entertainment. It closed at 114,700 won on Friday, up 16,200 won from than the previous trading day. It was the highest price recorded since the firm was listed.

Hybe closed at 195,300 won, higher than the usual price set in the 180,000 range of the past few days.

Shares of Kakao, on the other hand, fell from 70,900 won to 67,600 won from Thursday to Friday.

“To create synergy with SM, Kakao would have to own more shares than Hybe. To do so, it may try to purchase more shares owned by minority shareholders at a higher price than the 120,000 won suggested by Hybe,” analyst Lee Sun-hwa at KB Securities said.

However, if the injunction is granted, Hybe’s suggested acquisition price will be the peak price for SM Entertainment.

“If the court grants an injunction, Kakao is likely to search for another company, causing SM Entertainment shares to peak at 120,000 won,” Lee said.