@SMEntertainment Shares Soared 14% This Week As Markets Fell

SM Entertainment shares hit a record high this week as investors pushed the stock higher after receiving an offer from internet giant Kakao. This move, according to Reuters, may help current management stave off rival label Hybe's bid for control of K-pop's early global ventures.

Kakao’s Offer

SM Entertainment Shares Soar 14% This Week as Markets Decline

Kakao, South Korea's largest tech firm, entered into a battle for control of SM Entertainment with an offer that would give them an additional 35 percent stake, giving them 40% ownership. This move comes after HYBE - the entertainment agency behind global hit group BTS - failed to acquire its targeted stake through their tender offer that ended last month.

SM's management and investors are still uncertain as to the future of the company, which has long been mired in disputes with Lee Soo-man, its founder. The K-pop icon, renowned as a music mogul and rock star, has been at odds with SM's board of directors over various matters such as how much of the business should be sold to Kakao or HYBE.

As a result, SM's stock price has always been undervalued, even when the company has made profits. Furthermore, allegations have been leveled about paying producing fees to an affiliated subsidiary run by Lee that led several SM artists to leave in protest over what they perceived as harsh training and "slave contracts."

Though HYBE and SM's management team have indicated Lee's role will be diminished, his equity in SM allows him to contest the sale. This dispute presents a major setback for SM, which had planned on more than doubling their revenue from 850 billion won ($644 million) in 2022 to 1.8 trillion won ($1.8 trillion) by 2025 through partnerships and acquisitions such as purchasing a U.S. label and music publishing company, according to a video posted by SM.

In addition to investing in talent and production, SM plans to expand its business outside of Asia by partnering with a music publisher and label overseas that can grant them intellectual property rights for its artists. The company expects to spend 350 billion won ($266 million) on a music publishing firm and 300 billion won on record labels - two thirds of which will target the U.S.

Due to this ongoing battle, SM is likely going to face difficulty winning shareholder approval for the sale of most of its shares to Kakao or HYBE at SM's annual shareholders meeting on March 31. Analysts anticipate the deal could cost SM up to 1.25 trillion won and unlikely to appeal to minority shareholders given its complex and opaque structure.

Hybe’s Bid

SM Entertainment Shares Soar 14% This Week as Markets Decline

Kakao, a major technology company, entered the talent agency market with an offer to purchase majority ownership. Their move was intended to bolster their position within the industry and expand their entertainment business. Furthermore, they hope to help artists build global audiences and attract millennials' attention.

Hybe, the music label and production house behind superstars like BTS, has joined the agency with an investment of 1.14 trillion won ($900 million). The funds will be invested in acquisitions such as a music publishing company and record labels in an effort by SM to double its 2022 revenue to 1.8 trillion won by 2025, according to its co-CEOs.

Kakao also recently announced a partnership with SM, in which they agreed to distribute SM's albums, music and other content on Kakao's platforms. However, according to an SM statement, their relationship is only the beginning; they plan to discuss long-term strategies later this month.

SM is adamant that its new leadership, led by co-CEOs Park Ji-won and Tak Young-jun, will prioritize shareholder value as they propel the company into global expansion. To that end, it plans to make a series of strategic partnerships and acquisitions throughout the world, including in the US.

Lee Soo-man, SM's founder and largest shareholder with 18.4% of the firm's shares, will no longer hold a majority stake in the company. His role has been heavily criticized in regards to governance matters within SM, such as paying producing fees to an entity he controls. Furthermore, there was shareholder unrest that eventually led to government intervention.

SM's board and executives have declared their opposition to any hostile takeover attempts from outside parties. They seek to transform the company from one where authority rested solely with one person into one that prioritizes transparency and shareholder value. They stated they will work collaboratively with shareholders and other stakeholders on a vision for SM's future, which has been dubbed "SM 3.0."

SM’s Response

SM Entertainment Shares Soar 14% This Week as Markets Decline

As the battle between two major K-pop agencies intensified, shares of SM entertainment rose to their highest ever price. After HYBE and Kakao announced their plans to compete for management rights to SM last month, the stock ended Monday at 130,100 won per share (approximately $43) after hitting an all-time high of 134,900 won on Friday.

The market's volatility reflects the uncertainty around shareholder voting intentions, as well as the growing tension between SM and Kakao. With SM vying for management rights and Kakao looking to strengthen its position, it's difficult to tell which side will prevail in the end.

SM has responded to Hybe's offer with a strong statement on its website and in a letter to shareholders. The company called for several follow-up actions, such as blocking any actions that conflict with the court decision, canceling the business cooperation agreement signed with Kakao, and withdrawing the nomination of Kakao's recommended board candidate.

Additionally, SM has launched Save SM 3.0, a campaign designed to persuade its shareholders to back its strategic initiatives and global expansion plan. The effort consists of resource documents which outline the perceived advantages of growth under SM 3.0 as opposed to selling to Hybe which would allegedly utilize SM's resources for the benefit of its existing roster and bottom line.

The scandal has become a major talking point among SM executives, who are striving to maintain their positions on the company's board of directors. With many current directors facing retirement or expiration in March, Lee Soo Man and Tak Young Joon - SM's chief executives - have been working diligently to secure their long-term positions on the general assembly.

This drama has been unfolding at an alarmingly fast clip, with both parties striving to gain the upper hand in the proxy war. But it appears as if both parties have reached a deadlock - with SM now demanding an immediate response from Hybe Labels by Thursday of this week.

SM’s Future

Recently, SM Entertainment's board of directors and founder Lee Soo Man have been engaged in an intense power struggle. Despite this tension between them, the label continues to expand and is expected to generate over $10 billion in revenue this year.

The latest development occurs as HYBE, the world's largest K-pop agency, becomes SM's biggest shareholder. The firm which manages BTS and New Jeans acquired a 14.8% stake in the label last month and intends to purchase additional shares from minority shareholders to reach 40% ownership.

On Wednesday, SM's share price rose an impressive 9.5% to reach a record high of 127,900 won and surpass Hybe's offer of 120,000 won. Despite this increase in SM's stock value, HYBE has indicated it does not plan to raise its tender offer.

It is also possible that the market price may encourage investors to sell their shares through exchange trading, decreasing the amount of equity HYBE can acquire through its tender offer. Nonetheless, the company remains optimistic that it will be able to sway some of the minority shareholders who are wary about its offer.

Hybe is still seeking to acquire 25% of SM Entertainment from minority shareholders at its current offer price of 120,000 won per share. It implores SM shareholders to support both its board nominees and strategic vision as well as the management team.

However, Hybe is struggling to secure enough financial backing to take part in this costly battle. According to Kim, Hybe's chances for success are "extremely slim".

Another major player in SM's takeover battle is Kakao, which has offered to purchase up to 35% of SM for 1.25 trillion won (US$960 million). Kakao - which owns South Korea's most popular messaging app and social media network - says it needs a stake in SM in order to expand its platform business outside South Korea.

The fierce battle for control of the Korean stock market will continue to unfold until next month's annual shareholders meeting. SM executives say they will support Kakao's request to expand its platform capabilities, though the label has not yet indicated whether it plans to make a counteroffer.