Explainer: How Kakao won a takeover battle against HYBE for K-pop pioneer SM Entertainment

SM Entertainment Co

12/03/2023 22:00

(Repeats Sunday story with no changes to text)
    By Hyunsu Yim
       SEOUL, March 12 (Reuters) - South Korean K-pop pioneer
SM Entertainment Co Ltd  041510.KQ  is poised to fall under the
grip of social media giant Kakao Corp  035720.KS  after HYBE Co
Ltd  352820.KS , the agency representing boy band BTS, on Sunday
dropped a bid to take control.
    
    WHY IS SM ATTRACTIVE?
    SM, founded in 1995 by South Korean folk song singer Lee
Soo-man with just 50 million won ($37,600) of capital, was the
K-pop industry's trailblazer, preceding two rival agencies - JYP
Entertainment  035900.KQ  and YG Entertainment  122870.KQ  -
that sprang up in later years.
    For more than two decades, the K-pop industry was dominated
by the trio until BTS rose to global fame in recent years,
making its agency HYBE the largest music label in the country.
    SM, branded with Lee's initials, is credited with setting
the groundwork for K-pop's global success, including the first
breakthrough in 2002 when SM artist BoA topped Japan's music
charts. 
    After BoA's achievement in Japan, other South Korean pop
groups began overseas activities in earnest, starting in Asia
and later expanding to the U.S. and Western Europe.
    SM is home to popular K-pop groups such as Girls'
Generation, H.O.T., EXO, Red Velvet, Super Junior, SHINee, NCT
Dream and Aespa. 
    It is the second-largest entertainment group in South Korea
by market value at $2.8 billion, trailing HYBE, which is worth
$5.5 billion.
    
    FAMILY FEUD WITH 'EMPEROR LEE'
    Larger-than-life Lee, 70, considered the "godfather" of
K-pop, has not assumed any official title at SM for years. 
    He instead exerted his influence through a private company
that he set up to help the industry's global expansion and offer
management and training services.
    Activist fund Align Partners, which owns about 1% of SM,
last year began demanding its management team, led by Lee's
nephew and protege Lee Sung-soo, cut business ties with the
founder, citing governance issues and high fees paid to Lee's
private company.
    Frictions between SM and Lee came to the fore last month
when his nephew called the founder "Emperor of SM Empire" in a
YouTube video and criticised him for demanding unfavourable
revenue sharing deals and undermining SM's governance.
    The nephew, 43, a 17-year-veteran of SM, said he had
informed Lee on Jan. 17 that from now on he would make decisions
as CEO rather than serving as a "rubber stamp".
   In response, Lee said he was "hurt" by his nephew's words.
    
    TAKEOVER BATTLE
    In a bid to weaken the founder's influence, SM's management
announced a $173 million share sale deal with Kakao last month
that would make the tech group second-biggest shareholder after
Lee, who remained the largest with an 18% stake.
    Lee filed an injunction request to block the deal that was
approved by a court, and sold a 15% stake in SM to rival agency
HYBE, setting up a takeover battle. 
    HYBE launched a public tender offer to buy an additional 25%
stake, but got little shareholder support.
    Kakao, which owns around 5% of SM, upped the ante this
month, launching a tender offer at a higher price to acquire up
to 35% for 1.25 trillion won ($946.80 million).
    HYBE said on Sunday its decision to halt the takeover bid
came after the stock market had been showing "signs of
overheating due to competition."
        
    HOW DOES THE ACQUISITION HELP KAKAO?
    SM is perceived as a rare quality asset up for grabs because
of the management dispute and Lee's decision to relinquish his
stake.
    Kakao, the most popular social media platform in South
Korea, is expanding aggressively 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
the SM bid. 
    Control of SM would bolster Kakao Entertainment's plans for
an initial public offering, analysts said.
($1 = 1,327.9200 won)

 (Reporting by Hyunsu Yim; Editing by Miyoung Kim and Jamie
Freed)
 ((Hyunsu.Yim@thomsonreuters.com;))