Explains how Kakao won a takeover battle against HYBE for K-pop pioneer SM Entertainment

The SM Entertainment logo can be seen at the Seoul headquarters
SM Entertainment’s logo is seen at its headquarters in Seoul, South Korea, March 9, 2023.
Reuters

South Korean K-pop pioneer SM Entertainment Co Ltd is on the verge of falling for social media giant Kakao Corp after HYBE Co Ltd, the agency that represents boy band BTS, received a bid on Sunday to acquire the dropped control.

WHY IS SM ATTRACTIVE?

Founded in 1995 by South Korean folk singer Lee Soo-man with just 50 million won (US$37,600) in capital, SM pioneered the K-pop industry and preceded two competing agencies – JYP Entertainment and YG Entertainment – the later years.

For more than two decades, the trio dominated the K-pop industry until BTS rose to global fame in recent years, turning its agency HYBE into the country’s largest music label.

Branded with Lee’s initials, SM is credited with laying the foundation for K-pop’s global success, including its initial breakthrough in 2002 when SM artist BoA topped the Japanese music charts.

After BoA’s success in Japan, other South Korean pop groups began serious overseas activities, beginning in Asia and later in the United States and Western Europe.

SM is home to popular K-Pop groups such as Girls’ Generation, HOT, EXO, Red Velvet, Super Junior, SHINee, NCT Dream and Aespa.

With a market value of US$2.8 billion, it is the second largest entertainment conglomerate in South Korea, followed by HYBE, which is valued at US$5.5 billion.

FAMILY FEW WITH “EMPEROR LEE”

Considered the “godfather” of K-pop, the larger-than-life Lee, 70, hasn’t accepted an official title at SM in years.

Instead, he exerted his influence through a private company he founded to support the industry’s global expansion and to provide management and training services.

Activist fund Align Partners, which owns about 1% of SM, began last year urging its management team, led by Lee’s nephew and protégé Lee Sung-soo, to sever ties with the founder, citing governance issues and high stakes Fees paid to Lee’s private company.

Frictions between SM and Lee came to the fore last month when his nephew dubbed the founder “Emperor of SM Empire” in a YouTube video, criticizing him for demanding unfavorable revenue-sharing arrangements and undermining SM’s leadership.

The nephew, 43, a 17-year SM veteran, said he informed Lee on Jan. 17 that he would be making decisions as CEO instead of serving as a “stamp.”

In response, Lee said he was “hurt” by his nephew’s words.

TAKEOVER BATTLE

To weaken the founder’s influence, SM management last month announced a $173 million stock sale deal with Kakao that would make the tech group the second-largest shareholder after Lee, who remained the largest with an 18% stake.

Lee filed a request for an injunction to block the deal, which was approved by a court, and sold a 15 percent stake in SM to rival agency HYBE, starting a takeover battle.

HYBE launched a public takeover bid to buy an additional 25% stake, but received little support from shareholders.

Kakao, which owns around 5% of SM, upped the ante this month and launched a bid at a higher price to acquire up to 35% for 1.25 trillion won ($946.80 million).

HYBE on Sunday said its decision to halt the takeover bid came after the stock market showed “signs of competitive overheating”.

HOW DOES THE ACQUISITION HELP COCOA?

SM is perceived as a rare quality commodity due to the management dispute and Lee’s decision to give up his stake.

Kakao, the most popular social media platform in South Korea, is aggressively expanding into the entertainment industry, where it already owns a smaller K-pop agency, Starship Entertainment.

In January, Kakao Entertainment announced a 1.2 trillion won ($966.27 million) investment from Singapore’s GIC and Saudi Arabia’s Public Investment Fund, giving it more firepower for its SM offering.

Taking control of SM would strengthen Kakao Entertainment’s plans for an IPO, analysts said.

($1 = 1,327.9200 won)

K-pop boy band NCT Dream will perform during the concert
K-pop boy band NCT Dream performs during the “SMTOWN LIVE 2022” concert in Suwon, South Korea, August 20, 2022.
Reuters

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